Bayer CEO Faces a Shareholder Reckoning Over the Monsanto Deal

April 24, 2019, 9:30 AM UTC
Bayer Bilanzpressekonferenz - Annual press Conference
LEVERKUSEN, GERMANY - FEBRUARY 27: Werner Baumann, Chief Executive Officer (CEO) of Bayer AG, looks on during the annual press conference of Bayer AG on February 27, 2019 in Leverkusen, Germany. (Photo by TF-Images/Getty Images)
TF-Images Getty Images

Bayer AG is facing mounting opposition ahead of what’s shaping up to be its most contentious annual meeting in years, with influential shareholders faulting management for failing to foresee the risks of the company’s biggest deal ever.

A growing number of shareholders have said they won’t support executives and supervisory board members in a no-confidence vote at Friday’s annual meeting in Bonn, Germany. Though the vote has no legal weight, a low enough approval rating would throw into question the future of Chief Executive Officer Werner Baumann and other leaders who orchestrated the $63 billion acquisition of U.S. agriculture giant Monsanto.

Buying Monsanto was supposed to secure Bayer’s position in the rapidly consolidating agrochemicals market and deter outside forces from trying to split up the company, which sells everything from aspirin and cancer medicines to shoe inserts and soybean seeds. Instead, lawsuits linked to Monsanto’s contentious weedkiller Roundup sparked the biggest and quickest loss of value in the history of Germany’s blue-chip DAX Index.

“In all good conscience, we can’t exculpate management if so much shareholder value is destroyed,” said Ingo Speich, chief of sustainability and corporate governance at Deka Investment, one of Bayer’s top-10 shareholders with a stake just shy of 1%. Deka will vote against discharging both Bayer’s management and supervisory boards for their actions last year, Speich said.

Reputational Risk

An approval rating below 80% would be “damaging to the reputation” of Bayer’s management, Speich said. “If you have 20% of shareholders against you, that’s a lot.”

The shares fell 1.4% at 9:26 a.m. in Frankfurt. Bayer has lost 38% since it closed the Monsanto deal last June, wiping away some 35 billion euros of market value.

Bayer’s biggest shareholder, BlackRock Inc., intends to abstain from the vote, according to a person familiar with the plan, who asked not to be identified because the discussions aren’t public. The fund manager, which controls 6.4% of Bayer’s shares, declined to comment. Reuters earlier reported BlackRock’s plans.

Deutsche Bank AG’s asset manager DWS, another large shareholder in Bayer, also plans to abstain from voting on management approval, according to people familiar with the situation. DWS declined to comment.

To help rally votes in its favor, Bayer is working with its usual outside advisers D.F. King & Co., people familiar with the process said. Bayer declined to comment on individual shareholders’ votes or on its advisers. A representative from D.F. King didn’t immediately return a call seeking comment.

The company has defended the Monsanto deal, saying that its executives diligently reviewed the risks connected with Roundup and that there’s no scientific proof the weedkiller’s main ingredient, glyphosate, causes cancer.

Bad Timing

Deka and other top shareholders stopped short of calling for the replacement of CEO Baumann, one of the Monsanto deal’s main architects. With the company facing challenges on several fronts beyond the Roundup litigation, a new leader from outside the German giant would need too much time to get oriented, Speich said.

German shareholder association DSW, which advises small investors on proxy issues, called for Friday’s vote to be postponed. Deciding on discharging management now would “ strain relations” between the company and shareholders, the association said.

Smaller holders including the California State Teachers’ Retirement System, the Florida State Board of Administration and Australia’s Local Government Super have voted against management, filings show.

Friday’s results depend in large part on how many shareholders follow the recommendations of influential proxy advisers Glass Lewis & Co. and Institutional Shareholder Services Inc. Both called for a vote of no confidence in Baumann and other senior executives, while Glass Lewis called for supervisory-board members also not to be discharged of responsibility.

‘Turbulent Meeting’

More than 70% of the top 100 investors in Germany work with recommendations from large proxy advisers, data provider Ipreo said in a note last year. That’s no guarantee they’ll follow the advisory groups: shareholders can change their voting instructions until the day of the meeting, and many get a tailor-made recommendation based on their fund statutes.

Institutional investors have typically followed an ISS recommendation against a company proposal 78% of the time and a Glass Lewis recommendation 59% of the time, said George Moody, a senior analyst at Proxy Insight. The data is an estimate, compiled from past votes across Germany’s blue-chip DAX and most of the companies in the mid-cap index MDAX.

“There will definitely be a turbulent shareholder meeting,” said Markus Manns, a fund manager at Union Investment, one of Bayer’s top 15 shareholders. The critical question is whether Bayer’s management team correctly evaluated the legal risks before doing the deal, Manns said. “We’ve become a bit more critical.”