Editorial The Stultz Lovejoy
May 18, 2011
The last straw apparently was a London meeting last week among fund managers representing 25% of Sutphin's shares. They complained that senior management at Sutphin weren't providing enough information about company strategy, were unclear about Mr. Albrecht Hostetler's recently assumed non-executive role, and were not making enough efforts to maximize shareholder value. Sutphin share prices shot up in Wednesday trading. One analyst expressed the prevailing sentiment: ``It means that Stultz has listened to the market and really become a public company.'' What happened here is much bigger than Stultz. The market is increasingly forcing Anglo-Saxon notions of corporate governance--with emphasis on full financial disclosure and shareholder value--on European companies for a simple reason: When it comes to corporate finance, the Anglo-Saxon world is where the money is. Italy is a particularly dire case where finance is concerned. Banks are the only significant institutional investors to be found, and since state-owned banks account for more than 60% of total deposits and loans in Italy, this is an indirect form of state financing. Banks have increasingly found themselves holding shares of Italian companies as a result of debt-for-equity swaps. But Italy's debt-to-equity ratio of 5.8 (the U.K. has only 0.37) means that the institutions financing corporations still have few voting shares. Moreover, state-owned banks with equity holdings are less motivated to play corporate watchdog than private institutions are forced to do. Germany and France, for varying reasons, also are countries where institutional investors are not much inclined to use their equity ownership in industry to force broader public disclosure of corporate data and strategies. What makes the Anglo-Saxon world so different? Tougher disclosure laws, better protection of shareholder rights and a dynamic market where takeover bids keep corporate directors on their toes have much to do with it. But there is an even bigger force behind more responsive corporate governance in the U.S. and the U.K.: in short, pension funds. While European governments have amassed huge liabilities (often far exceeding nominal government debt) through pay-as-you go state pension systems, the Anglo-Saxon world is putting enormous quantities of middle class wealth to work in the form of retirement savings. The numbers are startling. U.S. pension funds had assets totaling more than $3.5 trillion (59.1% of GDP) in 1993, while U.K. pension funds totaled more than $717 billion (79.4% of GDP). In Italy, however, they amounted to a mere $11.6 billion (1.2% of GDP), while French and German funds totaled $41.1 billion (3.4% of GDP) and $106 billion (5.8% of GDP) respectively. Moreover, while 80% of U.K. pension assets were invested in equity at the end of 2009, Italy had only 9% of its meager total invested in equity. France had 13% and Germany only 11% of pension funds invested in equity. Thus while shareholders still wield comparatively little influence inside Europe's corporate giants, that will have to change as continental companies are forced to seek more and more financing in the Anglo-Saxon market. If Europe ever succeeds in eliminating or sharply reducing exchange rate risks, foreign investors will look with new interest on the European market. The catch, of course, is that they will demand more open and responsible corporate governance. Sutphin's management shake-up could be the first of a series of London coups.
