TURIN - The arrival of Jack Welch as a non-executive member of the Fiat SpA board shows European automakers may finally be getting serious about shareholder value.
In more than 18 years as chief executive of General Electric Co., Welch has become a legendary leader - famous for generating a steady stream of profits and enriching his shareholders.
Welch joins Fiat Chairman Paolo Fresco on a board committee with responsibility for personnel and executive compensation, a key issue in the shareholder-value equation. The two men have worked together before, when Fresco was Welch's deputy at GE.
European automakers have been paying closer attention to shareholder-value issues lately, particularly since the 1998 merger that created DaimlerChrysler.
That merger exposed the European industry to American-style business practices, including highly-lucrative American executive pay packages. Top American executives are generally paid more than their European counterparts, and those pay packages are closely tied to the performance of a company's stock.
But European companies have been paying closer attention to shareholder value for a variety of reasons, analysts say.
'Having a decent share price is very much a part of working effectively in an industry environment where mergers are going on,' said John Lawson, analyst for SalomonSmithBarney in London.
'From an investment perspective DaimlerChrysler is half the European auto industry,' said Lawson. Indeed, DaimlerChrysler's market capitalization, the total worth of all its shares, was nearly euro 85 billion ($89 million) based on share prices last week.
Robert Speed, London-based analyst for Commerzbank, said traditional European business practices have not placed the same priority on shareholder value as those in North America.
For example, 'German accounting is completely at odds with running a business for maximum public returns,' he said. 'The German accounting system is so incredibly conservative.'
Eckhard Zanger, Spokesman for DamilerChrysler, said the ascension of Welch devotee Jurgen Schrempp at the former Daimler-Benz AG in 1995 signaled the beginning of a change in attitude.
Not only have performance-based incentives become more wide-spread, but Daimler-Benz adopted American-style Generally Accepted Accounting Principles in 1996, he said.
Zanger said Schrempp has been able to instill a shareholder value culture at DaimlerChrysler by changing traditional German worker perceptions that increasing profits means decreasing jobs.
Stephen Reitman, auto analyst at the London office of Merrill Lynch, said auto companies still had a long battle to convince the investment world they provide good returns.
'By historical precedent, auto companies been very good at destroying shareholder value,' he said. 'They tended to invest very poorly as part of boom-bust cycles. The problem auto companies face now is changing that rather deep-seated perception.'
The poor perception of auto companies by investors is one reason Ford Motor Co. is refashioning itself as a consumer company providing automotive products and services, Reitman said. Equity markets tended to value consumer goods and services companies more highly than auto companies.
Mel Stephens, director of corporate communication for Ford Motor Co. in Dearborn, Michigan, USA, said: 'The average consumer spends $60,000 over a 15-year-period on automotive products and services. Today as producer of the vehicle, we participate in about one-third of that. We're trying to extend into the other two-thirds.'
The arrival of American-style compensation plans is seen as one way to focus more attention on the share price. DaimlerChrysler has proposed a new pay plan for about 120 top company executives. The company will implement a share-option plan next year, after executives adopt a proxy plan this year using phantom shares.
Fiat introduced a share-option plan for about 700 top executives in January to 'further involve and motivate' executives, Chairman Paolo Fresco said.
Volkswagen created a plan for stock options in 1998 which applies to all employees. Board members and top management may take up to 10,000 options; managers and non-union employees 1,000 shares each; and the unionized workforce 100 shares each.
But the incentives remain small compared with lavish share option programs among US companies, including General Motors and Ford. In most European companies where stock options are issued, they are only one part of top executive pay, and far from dominant.
'It has been a bit of a non-issue for European companies,' said Keith Hayes, an auto analyst at Goldman Sachs in London. 'But there is a desire on the part of shareholders to see the remuneration of managers tied to the share price.'