Hans-Georg Bruns, head of investor relations at Daimler-Benz, recalls a trip he and members of the Daimler board made to the States at the time of the company’s mould-breaking listing in the US two years ago.
It was one of the first roadshows mounted by a German company for the international investment community and when they got to Boston – where they were giving a presentation to a handful of institutions – Daimler received a message from a large investor expressing a wish to meet the management while they were in town.
‘We found this difficult to understand,’ says Bruns. ‘We had come all this way and they still wanted us to go and see them!’
Today they are less abashed about taking the message to the investors. When the Daimler roadshow gets to Boston, company executives give a presentation to 80 leading investors and fit in four one-on-ones as well. The visit to Boston is just one of a rolling programme of visits to investors around the world. The roadshow now includes twelve cities in the US; Stuttgart, Frankfurt, Paris, Zurich, Edinburgh and London in Europe; and Tokyo and Singapore in Asia.
‘We practised investor relations in the past,’ reflects Bruns, who combines responsibility for accounting with his IR role, ‘but we did it passively, answering questions when investors came to us. It wasn’t done with any sense of gaining a competitive advantage over our peers.’
Although Daimler remains the only company to have a full stock market listing in the US, it is not alone in pursuing a proactive investor relations campaign.
Dirk, Germany’s official IR association, has seen a rapid expansion in its membership. The big chemicals companies, the big banks and companies such as Veba – the utilities-to-telecommunications group which is highly favoured by international investors – are all tramping around the world’s financial centres selling their stories to investors. Mannesmann, the engineering group, conducted 27 roadshows last year and plans 25 for 1996, as well as a number of detailed analysts’ conferences at head office in Dusseldorf.
Within the space of a few years, the investor relations industry in Germany has undergone a revolution. From being a peripheral and little understood activity, it is becoming a core discipline for Germany’s large banks and industrial companies. The revolution is not complete – many German companies either pay lip-service to IR or ignore it altogether – but there is no doubt that IR is being taken increasingly seriously across the corporate country.
According to Rainald Krumpa, whose Frankfurt-based headhunting firm has recently set up a division specialising in IR recruitment for the German market, there has been a blossoming in demand for IR professionals. Companies need specialists who understand the mechanics of business in the peculiarly German context, and are able to explain that story cogently to Anglo-American investors.
In especially strong demand are those with an investment analyst background. Petra Zamagna, for example, formerly a highly-rated chemicals analyst at Deutsche Bank, has recently moved over to a senior IR post at Hoechst. Juergen Ackermann, formerly a top banking analyst, has recently joined Commerzbank as head of IR. Kiran Bhojani had a successful career as an analyst before he moved to Veba four years ago.
And it is not only investment analysts who are seeing career paths opening up in IR. The discipline has clearly become fashionable with German business school graduates, too. According to Gillian Karran of Dresdner Bank’s IR department: ‘There are a depressingly large number of students doing doctorates on the subject.’
This suggests that the popularity of IR is somewhat faddish. ‘Some companies merely talk about IR when, in reality, the IR department is no more than a mail-service for the annual report,’ says Hans-Hermann Mindermann, head of IR at Deutsche Telekom. And Markus Will, European marketing and communications manager for Merrill Lynch, agrees that despite the rhetoric ‘there is no really sophisticated IR community in Germany right now – although there are some highly sophisticated IR individuals.’
But there are sound fundamental reasons for the growth of IR in the country. ‘It harks back to the still underdeveloped equity market and the lack of an equity culture in Germany,’ explains Will.
The facts are that Germany, Europe’s most powerful economy, has an equity market which is feeble in relation to the size of the economy. The number of quoted companies, at about 660, is paltry in comparison with other countries with smaller economies. In the UK, for instance, there are over 2,000 quoted companies. The market capitalisation of listed German companies is close to one third of GDP, small in comparison to the UK or the US where capitalisation is close to or even greater than GDP.
There is in addition a large, unquoted company sector, the so-called Mittelstand, whose owners prefer to finance their businesses with debt rather than equity. Their reluctance to list is matched by the Germans’ antipathy to shares as a form of investment. Moreover, the German corporate governance system has tended to put workers’ interests ahead of shareholders’. And the effectiveness of the equity market for capital-raising purposes has been hampered by extensive cross-holdings between financial institutions and industrial companies.
Accordingly, the prevailing attitude on the part of German management has tended to be that shareholders are ‘dumm und frech’ – stupid and impudent. Stupid, because they bought shares in the first place; and impudent for expecting to be paid a dividend thereafter.
In this environment, investor relations had no place. But while such benighted views have not been entirely banished from corporate Germany, the world has changed, reflected in a gradual opening up of a select group of German companies to the international investment community.
‘It is a two-way process,’ says Magdalena Moll, head of investor relations at the Mannesmann engineering group. ‘On the one hand, international investors are becoming more and more demanding – after all, the investors are the owners of the companies and they want an ever-deeper insight into their investments.’
‘On the other hand, German companies have a need for more capital than the domestic market can provide,’ Moll continues. ‘Naturally, if companies are going to have to depend on international capital markets, they need to have good relations with the international investment community. As for Mannesmann, if US and UK institutions have acquired more and more shares in the market they expect the kind of information and transparency they are accustomed to in their domestic markets. It’s a challenge for us to deliver.’
The forthcoming Deutsche Telekom privatisation, which is expected to raise DM15 bn through a domestic and international offering, is the most spectacular example of German demand for capital to date. There is no way that the group would be able to raise that much capital from the domestic market alone. Other big German corporates which have tapped international equity markets in recent times include Daimler-Benz and Dresdner Bank and more recently SGL Carbon, Adidas and Merck.
Even those companies which have no immediate demand for capital can see the need to develop proactive investor relations programmes. ‘Strategic evolution drives the company but it has to be effectively communicated to the financial community,’ says Moll at Mannesmann. ‘The better investors are able to understand the strategy, the better they can evaluate the risk and return of future investments.’
Investor relations professionals are modest about the impact of their activities, recognising that investor interest is driven more by fundamentals than by slick communication. ‘What we do is 5 per cent of the whole thing,’ says Bhojani at Veba. ‘It is a management story – we act as the bridge between the capital markets and the company’s senior management.’
‘Good investor relations helps facilitate the flow of funds,’ observes James McKee, investor relations officer at Bayer, acknowledging that it is not the principal reason why investors buy shares in one company or sector rather than another.
Modesty aside, effective IR serves to stimulate investor demand and can help lower the cost of capital. And it is noticeable that those companies which have been proactive in IR terms have seen foreign shareholder interest rise steeply. Some 43 per cent of Veba’s shareholders are now non-German and US investors have quadrupled to 12 per cent, a significant increase over 1992 when Bhojani started his job.
Since Daimler-Benz listed in the US two years ago, US ownership has more than trebled, from 2 per cent to 7 per cent. At Mannesmann, US ownership is now 27 per cent, compared to 13 per cent when Moll took up her job there in 1992. McKee reckons that US ownership of Bayer stock has nearly trebled between the late 1980s and the mid-1990s.
In each case, there are specific reasons why foreign investors might have wanted to come on board – for example, the development of a telecommunications business at Mannesmann, or the recent restructuring at Daimler-Benz under new chairman Juergen Schrempp. But good communications has helped stimulate the flows from the world’s largest capital market to Europe’s largest economy.
Commitment to IR has often gone hand in hand with greater corporate openness in other respects, notably in terms of financial disclosure. Daimler-Benz is still the only German company to produce its accounts under investor-friendly US Gaap, but Veba has declared that it will follow suit and Deutsche Telekom is expected to do the same later this year.
Others, such as Bayer, Deutsche Bank and Heidelberger Zement, have moved to International Accounting Standards (IAS). These may be not as demanding in terms of disclosure as US rules, but still give significantly more data than German accounts, which are oriented to the requirements of creditors rather than investors.
Investor relations is part of a broader trend towards shareholder friendliness, which encompasses greater disclosure and a willingness to take the interests of shareholders far more seriously than in the past. A further example is Daimler-Benz’s plan to create a share option scheme for senior executives. This will be the first such scheme in Germany and is likely to be followed in the near future by other large companies eager to align management’s interests with those of shareholders.
In part, this reflects German companies’ need for foreign capital, but it is simplistic to see the changes as a direct result of pressure from the international investment community. ‘Greater openness has not been forced on Germany by foreign investors,’ comments one IR executive. ‘But exposure to the US investment community in recent years has changed the way managements think and the way companies communicate with investors. It is also a generation issue – there is a new breed of German managers taking senior positions at German companies. They are younger than the old guard, have often lived in the US, and can speak the language of international investors.’
This helps explain why ‘shareholder value’ has become a fashionable phrase in the boardrooms of corporate Germany, even if the concept is at odds with the traditional notion that employees and the community should come first. ‘We believe that creating shareholder value automatically brings benefits for other stakeholders,’ says Bhojani at Veba. ‘It leads to job creation, not job elimination, although I suppose it is true that some German managers are not fully convinced of this.’
The strategic reorientation of Daimler-Benz – which has involved an emphatic retreat from former chairman Edzard Reuter’s vision of an ‘integrated technology group’ – is but one powerful example of a management committed to enhancing shareholder value.
Veba and Hoechst are two other prominent companies which have actively managed their business portfolios with a view to maximising shareholder value. ‘Restruct- uring and cost-cutting will be a permanent feature at Veba,’ says Bhojani, ‘together with measures to optimise portfolio investment and resource allocation.’
Such companies, while growing in number, are still in a minority in the German market. For many quoted companies, the costs of establishing an IR programme and maintaining contact with institutional investors would more than outweigh the benefits in terms of higher international profile and reduced cost of capital.
For family-controlled German companies in particular, shareholder value is an alien concept – and investor relations an irrelevance. Executives at such companies will explain that a rising share price is to be positively discouraged, as it leads to a higher tax bill for the majority owners under the German tax code.
However, as Mindermann at Deutsche Telekom puts it, an increasing number of larger German companies have realised that ‘you have to treat your owners in a proper fashion.’ That might be a truism in the Anglo-Saxon business world, but it has only just started to take root in Germany.
