How is Europe dealing with the lagging of its indices?

Public telephones of Telecom Italia inMilan. Many companies that lag behind others in business are considered takeover-proof because they are deemed important to national interests or because of owners of blocks of shares, such as family foundations or inheritances, that prevent change.

I have just finished teaching a course on corporate governance to a group of senior European directors. As part of the reading assignment, I included my paper on companies in the S&P 1500 index that have remained in the market for more than 10 years and have not even managed to achieve the total stock returns that could be achieved from an investment in a U.S. bond ETF over the same period.

It is clear that European directors wanted to''to know how Europe is manifesting itself. I told them I would study the data and let them know.

First, I focused on the S&P Europe 350 index. The S&P Europe 350 reflects the performance of 350 large market capitalization companies listed and floated in 16 major developed European markets, including the United Kingdom, France, Germany, the Netherlands, Norway and Sweden. So the arguments against me have already accumulated, as these companies must be the crème de la crème in Europe.

Then I looked at their total returns (price growth and dividends) over the last 10 years. Measured in euros, the index has shown a reasonable cumulative return of 105% over the last decade. However, we know that the pound and euro have declined by about 25-30% against the US dollar over''for the last 10 years. When measured in dollars, it turns out that annualized returns fall to about 61% cumulatively over the decade. As expected, the stock price gains in dollars are only 11% for the entire decade. It seems that the exchange rate gains have largely been absorbed by currency devaluation.

The more important governance issue here is this: in theory, are you running a European company to meet the return expectations of your U.S. or European shareholder base? In other contexts, especially when considering environmental, social, and governance issues, we often discuss how European regulation will apply to U.S. companies operating there. This is the flip side of that question,''as many of us U.S. retail investors and several U.S. institutions own indexes reflecting companies headquartered in Europe.

Retirees in the S&P Europe 350 index

Let's now analyze the definition of "stragglers" by index. If you are a European investor, presumably you can buy U.S. government bonds. Therefore, it is inappropriate to consider U.S. government bond yields as the best option for you as an investor. Standard & Poor'\''s U.S. Treasury Bond Index has returned 0.93% per year or about 9.7% over the past 10 years.

I checked to see how many companies in the S&P Europe 350 Index have not earned cumulative returns in dollars''Consider Deutsche Bank, Telecom Italia, BT Group, Alstom, Telefonica and even Stan Chart and Vodafone as potential examples to support the national strategic interest theory.

As always, there is a governance question concerning these stragglers: where are their boards? How does this performance justify CEO pay? I looked through publicly available documents on the five worst offenders to find at least some indication of a challenge to management or board decision-making. Here's what I found.

What does governance look like at five of these stragglers?

Let's start with the ownership structure. S&P Cap IQ reports that the two largest blockholders - Vivendi SE, controlled by the group''Bollore, holds a 17.13% stake in the company, followed by Cassa Depositi e Prestiti SPA, which holds 7.08%. Small stakes are held by other institutions such as Vanguard (2.93%), Norges Bank (2.21%) and BlackRock (1.52%). Vivendi, which is a French company, seems to have held the same stake in Telecom Italia since 2017. Cassa Depositi seems to have bought a stake in March 2018 and increased its stake in December 2020 and stayed with it.

That's what stake holders have to do here, as is often the case with most European companies.

Part of Bayer's problem is the possibly ill-considered acquisition of Monsanto in 2018 and all the legal issues surrounding the deal. Bayer's ownership structure looks like a typical U.S. firm with dispersed investors. The largest block holder is BlackRock (4.9%), followed by Vanguard (3.86%) and several other large institutions such as Massachusetts Financial Services Company (3.04%), Harris Associates (2.99%) and Norges Bank (2.94%).

I found at least two recent call attempts, possibly triggered by catastrophic litigation related to Monsanto. By the way, Monsanto is''a model for advocates of environmental, social and governance issues who have always said that a product that is toxic to the ecosystem will sooner or later come back to bite you.

Union Asset Management Holding, a subsidiary of DZ bank in Germany, owns 0.7% of the company. Jan 22, 2023 He criticized Bayer AG Chairman Norbert Winkeljohann for a lack of engagement, such as exploring the possibility of spinning off the company's consumer healthcare unit. On January 10, 2023, Bluebell Capital Partners Ltd. announced that it was seeking to split Bayer AG after another investor, Jeff Ubben, urged the company to consider strategic options. Bluebell Capital said it is pushing for Bayer to divest its agricultural' business'sciences with a unit of pharmaceuticals.

I haven't seen recent developments in the form of investor activism. The last significant attempt seems to have been in 2019, when Riebeck-Brauerei von 1862 AG announced that it had submitted a motion for the resignation of Paul Achleitner, chairman of Deutsche Bank AG, at the company's annual general meeting. Riebeck-Brauerei denounced the chairman in its request for bonuses and official payoffs, as well as because of money laundering issues at the bank. Glass Lewis subsequently announced that he is recommending that Deutsche Bank AG shareholders vote against approving Paul Achleitner's actions at the annual general meeting on May 20. Deutsche Bank Aktiengesellschaft subsequently held its annual meeting on May 20, 2020, and its shareholders re-elected Paul''М. L. Achleitner to the board.

The ownership structure of Deutsche is spread out, with BlackRock owning 5.5%, Her. S. Sheikh Hamad bin Yabor bin Yassim al-Thani of Qatar owns 4.7%, and Vanguard owns 3.89%. Deutsche seems like a good candidate for a closer look at CEO pay, board composition, etc.

The largest shareholder in the Swatch Group is NG Hayek's inheritance (23%), followed by a 2.15% stake held by Naila Hayek. Blackrock owns 4.22%, Vanguard has 2.83% and UBS has 2.53%. Because it's largely a family-owned company, investor activism is probably harder to pull off.

25% of BT is owned by private investor Patrick Drahi, with Deutsche Telekom holding 12.27%. Presumably''s related entity BT Group plc Shareview Clients owns 5.25%, followed by Vanguard (3.2%) and BlackRock (2.7%). The last formal activism event I could find was in 2018 when Greenlight Capital, led by celebrity investor David Einhorn, acquired a stake in BT and noted that a possible demerger of Openreach's infrastructure division could free up value. BT Group plc subsequently announced that it was considering selling part of its broadband infrastructure division to Openreach. I have been unable to find any formal activist developments since then. Is this another case where block holders will coordinate their actions to release value? "

Findings:

The study of the five cases led to the following''Preliminary findings on differences between retirees in developed Europe and the US:

• I was surprised to find so many instances of investor activism in Europe, relative to what I expected before examining the data. In contrast, I found far fewer instances of activism among the 37 retirees in the S&P 500 index.
• The Big Three institutions (Vanguard, BlackRock and State Street) collectively own far fewer stocks in developed European markets and arguably have less influence than in the U.S.
• The companies are likely owned by significant blockholders in Europe. Depending on the case study, they may serve both as enablers of change (e.g., Telecom Italia) and as potential obstacles to change (e.g.,''family-owned Swatch group).
• Governments and their desire to protect stragglers who may be hiding behind the umbrella of 'strategic national security' may also deserve the blame for Europe's index stragglers.

Of course, one can always ask for both Europe and the US: what are such persistent non-performers doing in closely watched stock indices? As always, constructive comments are welcome.