In what some governance experts have lauded as an innovative move, Swiss food manufacturer Nestlé, as part of a plan to overhaul its outdated statutes, circulated a questionnaire to its shareholders last month, seeking their opinions on five governance features included in the company’s bylaws.
The $76.7 billion food company asked for shareowner input on, among other things, its voting rights cap, which restricts anyone from voting more than 3 percent of the stock.
Brabeck-Letmathe
In a letter to shareholders that accompanied the questionnaire, Nestlé S.A. chairman and chief executive Peter Brabeck-Letmathe noted, “We will not make public the detailed results of the questionnaire, but the feedback will be reflected in our communication when we post the invitation to and our proposals for the 2006 General Meeting of Shareholders.”
Nestlé said that the measures are similar to those introduced by other major Swiss companies at that time, and were designed to prevent the majority of shareholders from becoming hostage to a surprise hostile takeover by company raiders.
Nestlé spokesman François-Xavier Perroud told Compliance Week that the decision grew out of discussions in the weeks preceding the company’s 2005 annual general meeting. “We noticed a series of questions, suggestions and desires from many shareholders,” he said, most of which involved the company’s 1989 articles of association.
“Since then, the corporate law in Switzerland has been extensively modernized,” added Perroud. “Quite frankly, in some regards, they [Nestlé’s articles of association] do not correspond to our changed legal environment.”
Perroud
“We are taking feedback from shareholders seriously, and we are going to respond to those wishes,” Perroud added. “We did that by making sure our shareholders had the opportunity to express themselves about what they thought is important and how they would like to see our bylaws change.” According to Perroud, the questionnaire enabled the company to get a wider range of feedback from investors who might not have been able to contribute in person. “We have a large number of shareholders, but only small percent turn up at our annual general meeting,” said Perroud, “So we decided to write to all of our shareholders and ask questions about the changes they might wish to see in our bylaws.”
Perroud declined to comment on what kind of response Nestlé received from shareholders, but he said the company’s board is in the process of looking at the results. “Our board will make a determination about the procedure, what needs to be changed and how best to go about it,” he told Compliance Week.
Innovative, Or Just For Show?
The move was both lauded and criticized by observers. Ethos, the Swiss fund that spearheaded the recent dissent over Brabeck-Letmathe’s appointment as both CEO and chairman, welcomed the move and posted its responses to the questionnaire on its Web site. A spokesman for institutional investor First Manhattan Co. said the company could not comment; none of the other institutional shareholders contacted by Compliance Week responded to requests for comment.
In an article in the Sept. 9 issue of corporate governance newsletter Global Proxy Watch, governance expert Stephen Davis called the move a flawed but “remarkable first” in corporate governance. “[Nestlé] has reason to build support first. Last April the board barely escaped unprecedented rebuke when nearly 50 percent of shareowners mutinied against its plan to concentrate chairman and CEO powers in one person, Peter Brabeck-Letmathe,” Davis wrote. “Investors are also restless at Nestlé’s chronically feeble earnings in the core food business.”
In addition, Davis and others questioned the timing of the survey, which was mailed Aug. 5 and asked for responses to be returned by Aug. 26. “Returns must have been few. Plus, it is not clear how many intermediaries ever passed the questionnaire on to underlying shareowners. If they did, it might well have been too late to matter. So some observers are questioning whether the exercise was mainly for show,” Davis added.
Baladi
Others agree with Davis’ assessment. “This is a first—it’s never been done by any company before that I know of,” says corporate governance expert André Baladi, co-founder of International Corporate Governance Network. Calling the decision “innovative,” Baladi added that, “Nestlé's chairman and CEO should be congratulated on his initiative to carry out a survey among his shareholders regarding the suppression of the company's 3 percent voting right caps.”
But Baladi, a former Nestlé executive of 15 years and a longstanding Nestlé shareholder, notes that some institutional investors “criticized the short time frame allocated to return the questionnaire…considering both the worldwide mailing delays and the summer holiday period.”
From an investor relations standpoint, Louis M. Thompson Jr., president and chief executive of the National Investor Relations Institute, acknowledged that the move was commendable, but agreed that the timing and distribution might have been handled somewhat better. “Putting something like that out, saying to shareholders, ‘tell us what you think,’ is a very important thing—it’s a good way of getting investor opinion,” said Thompson. However, he added that, “If they really wanted to get a strong return on something like this, the timing could’ve probably been better.”
In addition to questioning whether Nestle wanted extensive feedback from its shareholder base, others question whether global distribution of the questionnaire is even possible or replicable for U.S. companies. According to Thompson at NIRI, intermediaries need to make sure that investors get their shareholder reports and a proxy, but nothing else. In addition, there are transparency issues regarding the identification of investors. “The difficulty companies would have doing something like that in the United States is that they can’t identify most investors who are not registered shareholders,” noted Thompson. Coincidentally, Thompson notes that NIRI is meeting with SEC staff members next month to discuss a coalition effort urging the SEC to make shareholder identification more transparent than it is.
ICGN co-founder Baladi notes that Nestlé reportedly extended its deadline for investors to respond, because the questionnaires were not communicated on time to certain large institutional investors by their custodians.
In addition, he wonders why Nestlé did not consider relying on independent qualified experts and/or a major investor relations company to conduct the survey, which he noted, “could have contributed to resolve the aforesaid delay hurdles.”
The big question now, of course, is what Nestlé will do with the results; the company so far has not publicized the findings of the survey.
More importantly, Baladi wonders how the results could impact the company's voting structure, adding that it would be “very difficult” to change the bylaws. That’s because Nestlé’s current bylaws call for a specific quorum—75 percent of acceptance with a minimum of two-thirds of the capital present—for the amendment of some articles relating to the voting limitations framework.
The questionnaire and related resources are in the box above, right.
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