BMW supervisory board plans reforms to ease investor concerns

FRANKFURT -- BMW’s supervisory board has given itself one year to reshuffle key assignments and rejuvenate its membership to prevent a rebellion by shareholders demanding improved oversight at the automaker.  

Concerned by developments including a 1.4 billion euros ($1.53 billion) provision for a likely EU cartel fine, fund managers warned the board's Chairman, Norbert Reithofer, a former BMW CEO, that he could lose their support if the board did not reform. 

Investors representing a fifth of the company’s capital refused to back his re-election at BMW's annual meeting on May 14, an unusually high number for a German company. Others, such as Hendrik Schmidt from the German retail fund manager DWS Investment, only voted in favor given promises of further reforms that Reithofer made under pressure.

“We agreed to support his re-election under the proviso that next year’s nominees re-establish majority independence on the board as he publicly has stated,” Schmidt told Automotive News Europe. 

The 20-member board’s primary task is to appoint and remove senior executives, monitor their performance, and independently review strategy and results. Its authority stems not just from investors but also from employees who are each entitled under German law to elect half of the delegates. Day-to-day operations are led by the automaker's management board chaired by CEO Oliver Zipse.

Institutional Shareholder Services, an influential governance advisory provider, was less forgiving than Schmidt. It recommended that clients actively oppose another five-year term for Reithofer at the annual meeting. 

In a report, the company gave BMW the second-lowest possible score for its quality of governance. Volkswagen Group scored even worse, however.

Questions surrounding BMW’s role in allegedly colluding with VW Group and Daimler to avoid competition in cleaner emissions technology prompted governance experts at Glass Lewis to advise investors to reserve judgement on the job discharged by directors.

“Shareholders do not currently have sufficient information to reasonably conclude whether the ratification of the supervisory board’s acts for the past fiscal year is in their best interests,” Glass Lewis wrote in a report seen by Automotive News Europe.

Fund managers say the board has concentrated too much influence in the hands of Reithofer and two long-serving members: Karl-Ludwig Kley, chairman of Lufthansa and German electric utility company E.ON, who has been called "Germany's most powerful director" by a shareholder rights group; and Stefan Quandt, son of the industrialist who rescued BMW in 1959. They have 40 years of experience on the board between them.

They are also the only directors appointed by shareholders who served on all four of the the board’s key decision-making bodies. Each sat in on more than 20 meetings last year, according to the company, whereas their colleagues on average attended only the five regularly scheduled plenary sessions.

Egan-Jones Proxy Services said in a report that if Kley and Quandt continued to serve on the audit, personnel and nomination committees in the future it would “recommend that clients withhold votes from them upon re-election.”

Reithofer has bought himself time by addressing some of their issues, replacing KPMG with PwC as auditor as well as eliminating performance-based compensation for non-executive directors.

Kley’s resignation as audit committee chairman following the May 14 shareholders’ meeting, after more than a decade in the position, was a further olive branch. The committee, which has oversight over the company’s financial figures as well as compliance in general, has been given the task of examining the EU’s cartel accusations. Government experts generally say that a more frequent rotation of members on such a committee can help minimize risks of impropriety. 

“An independently managed audit committee is extremely important for minority investors in the case of a company with two classes of stock, controlled by a shareholding family that sits on a board led by a former CEO,” said Schmidt of DWS. 

A major concern they cite is tenure: Once members spend more than 10 years on the board, they can be seen as unable to offer a critical, vigilant eye. A rejuvenation of its members would help re-establish independence in the eyes of money managers. 

In a move that might ease investor worries, Anke Schaeferkordt, a former Bertelsmann executive joined the board this month, replacing a director who had agreed to resign two years early. And Kley is expected to step down from the board next year when he reaches the cut-off age of 70 for BMW directors. 

He has already come under considerable shareholder pressure for accepting too many boardroom mandates.

Whether the will to reform ends with Kley’s expected departure is unclear, especially given that Quandt and Susanne Klatten, the billionaire siblings that control nearly half the company’s equity, continue to lay claim to the board seats they have held for over two decades. 

In an interview published last July, Quandt and Klatten took issue with the idea that they are company insiders and therefore not suited to serve on the board of directors. 

“It’s obvious that no one has a greater right to represent the interests of investors than a shareholder himself,” Quandt told Germany’s manager magazin. He described as “far-fetched” the idea that either he or his sister might influence boardroom decisions to the detriment of minority investors.

For now, Reithofer’s pledge to shake up the board in favor of new directors has placated fund managers.

“BMW shares the view that the board should be controlled by a majority of independent directors,” one manager, Union Investment, wrote in an email to Automotive News Europe, citing audit and compensation issues as its top priorities. “According to Chairman Reithofer, this will be reflected when filling new positions in the board and its committees, which we welcome.”

That could come early next year, when Reithofer said he will meet with Kley, Quandt and Klatten to discuss proposals for two new candidates to the board.