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Euro on Sunday Opinion: Property Obliged – also applies to Shareholders | News

Sunday, February 4th, 2018 | bitcoin updates

by Stefan Bielmeier, guest author in € uro on SundayStada, Gea, Grammer – these are German stock corporations, where "activist investors" made headlines in 2017: Investors, mostly hedge funds, buy themselves with minority interests of a few percent in companies and want to increase the value of the shares through changes in management, in the business model or in the group structure.
While in Germany so far mainly mid-caps have been affected, elsewhere large names such as Nestlé or Credit Suisse are already being targeted by the funds. According to the consulting firm Activist Investing in its annual report, 155 companies were attacked in 2016 – 26 percent more than in the previous year. Investment banks report that in 2017, too, a strong increase was recorded in Germany and expect this trend to increase.
Unfair deception to the detriment of other shareholders
As an advocate of an efficient and transparent capital market, we welcome, first of all, when institutional investors actively play their role as shareholders. Often the presence of activist shareholders is an indicator that something is wrong with corporate governance. Or, however, that earnings potentials are not optimally exploited. In this respect, there are indeed intersections between the so-called "activists" and "regular" asset managers: both want to increase the value of the companies in which they have invested.
But: The border between the perception of legitimate interests as an investor and the enforcement of harmful particular interests is fluid. According to the DVFA, the leitmotiv of any engagement should be the long-term and sustainable well-being of the company.
According to this maxim, once unfair methods of activists are forbidden in a first, practical level. The company law regulates disclosure requirements if an investment exceeds certain thresholds. This is a good instrument with which the legislator wants to ensure transparency. Unfortunately, there are tricks to avoid such reporting thresholds, and to "sneak up" to the company, so to speak. Or, conversely: The formation of special purpose communities makes it possible to suggest more vocal power to the outside than is actually available to the individual investor. Against such deception maneuvers, the legislature should tighten its instruments.
Another, in our view, unfair method that activists use is the uneven distribution of information. The information desk should be the same for all investors at all times. Those who deliberately play their demands and activities through non-official channels (such as certain media) create information asymmetry.
Another criterion we use to assess activist interventions is the relationship between public appearance and actual influence. If, as Credit Suisse recently observed, the volume of claims is grossly out of proportion to the number of shares, this is an indicator of how sustainable and serious the intentions of the activist investor are.
How does the majority react to the intentions of the minority? In this question of shareholder democracy, in our opinion – on a superordinate level – is the key to the defense against short-term motivated disruptive maneuvers. Just because the majority of shareholders are silent, the activists gain an influence that goes far beyond their voting power. The stock corporation law is a good way to defend activists, but it is not lived.
For example, the agenda items in the invitation to the Annual General Meeting clearly show the intentions of the activists. All shareholders must examine and decide whether these claims are in the sense of long-term corporate success. If this is not the case, the majority shareholder at the general meeting would actually have to vote against it.
But here comes another phenomenon that continues to increase: the triumph of passive investment. Index funds have an increasing share of companies; the fund company Blackrock is already the single most important investor in the DAX. However, passive investors generally do not take a position and do not exercise their voting rights. But even for them, property demands responsibility.
Investors who invest ETFs on a trust basis expect the index to perform well. A sustainable business model of each individual index participant is therefore in the interest of the trustor. In the current business model of ETF
Provider, however, the investor has no influence. Its trustee, the ETF provider, does not exercise its voting rights in the acquisition of the shares. And the investor himself acquires indirectly proportionate ownership through the fund, but does not receive the corresponding voting rights.
An interference of the ETFs in the strategy of the index companies is discussed, but not lived. With that we have a deficit of public opinion. If the masses have no opinion, minorities can assert themselves and potentially jeopardize sustainable price and dividend development.
Index funds should finally work for investor interests
Of course, the interests of activists and other investors can be congruent, and in fact, the price often rises when an activist gets involved. But the most important criterion for price development is sustainability. However, hedge funds are not aware that they are primarily concerned with long-term perspectives. That is why it is so important that their interests are questioned and discussed and the majority of the owners are not silent.
Managed funds are increasingly taking on their fiduciary responsibility and taking a position. Index funds should also find a way to effectively represent the interests of their investors – whether through feedback with the investors they ask for instructions, or through a pro-rata allocation of voting rights. Abstentions, however, can endanger the well-being of a company if aggressively represented particular interests.

short CV

Stefan Bielmeier Chairman of the Board DVFA
Bielmeier is CEO of DVFA e.V. and Chief Economist and Head of Research and Economics at DZ Bank. The DVFA e.V. is the
professional organization
all investment professionals in the German financial and capital markets. Its 1400 members represent the diversity of investment and investment banking
Risk management in Germany. Bielmeier is committed to professionalization
of investment
Image sources: Wonge Bergmann / DZ Bank AG, MichaelJayBerlin / Shutterstock.com


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