Brandes bruised in Bermuda

JARDINE CHAIRMAN Henry Keswick came close to losing his patrician cool at the group's annual meetings in Bermuda on Thursday. Minority shareholders, roundly defeated in their bid to wrest control of the group and force modernising boardroom reforms, at least had the satisfaction of getting a rise out of the redoubtable chairman.

Facing off for a second time in less than a year, the two sides resembled weary pugilists fighting a battle of attrition, both knowing neither had the knockout punch to floor the other.

Clearly, the results were a disappointment for the coalition of rebel shareholders led by San Diego-based Brandes Investment Partners. The coalition had bet on winning a moral mandate for change and laying the groundwork for a potential legal challenge in Bermuda. But it only managed to secure 13 per cent of the votes in a poll of Jardine Matheson Holdings (JMH) shareholders, of which Brandes itself accounted for 10.7 per cent. What comes next in this undeclared war is hard to tell.

The Jardine group's apparently 'takeover-proof' dual-holding-company arrangement sees JMH with 74 per cent of Jardine Strategic Holdings (JSH) and JSH, in turn, with 51 per cent of JMH. Despite only owning five to seven per cent of JMH, the Keswicks wield control through a board staffed with friends and remunerated by a private trust overseen by them.

Over the past year, JMH and JSH have intensified their mutual ownership in each other - their cross-shareholding - making the group even more impervious to change. Underneath the corporate fortress lies a sprawling global business empire centred on Hong Kong, where the group remains the largest private-sector employer, despite being largely invisible to international investors.

With US$64 billion (about HK$498.5 billion) in assets under management, Brandes specialises in buying undervalued assets with good 'fundamental' prospects. It likes Jardine's business prospects but, to put it bluntly, does not like the Keswicks.

Thursday's meeting revealed a profound clash of cultures. A visibly irritated Mr Keswick had no interest in debating corporate-governance principles and 'hypothetical' proposals from Brent Woods, a managing partner at Brandes. For his part, Mr Woods called on directors to focus on the 'big-picture point' of shareholder value and complained 'the board does not appear willing to consider in good faith a world without the cross-shareholding'.

Jardine directors seemed muddled by the motives of the clean-cut, 30-something Mr Woods. Some considered him to be on a moral crusade. Rodney Leach, a director of JMH and JSH, thought him 'obsessed with political correctness'. Others suggested he was out to make a name. But all were hard-pressed to categorise him as an 'ugly American' out to make a quick buck.

Mr Woods had arrived in Bermuda fresh from imposing radical change on another old colonial family, the Oppenheimers, of South African diamond-mining fame. Brandes was a key mover in an investor group that early this month forced the family to lead a privatisation bid for De Beers Consolidated Mines Limited and De Beers Centenary AG, which it controlled through a Jardine-style dual-holding company. Mr Woods noted that De Beers' chief executive Nicky Oppenheimer had admitted, 'cross-shareholdings systematically depress a company's share price'.

Mr Keswick, stiffening his upper lip at the comparison, replied: 'I think you're rather trying to boast about your success with the Oppenheimers. But what the Oppenheimers do is their business.'

The Brandes resolutions called on JMH to privatise the 26 per cent of JSH it does not own - at an above-net-asset-value price of US$4.25 to US$5.25 per share, almost twice the company's prevailing share price. The proposal was intended to put pressure on the JSH board, as it would have to vote its 51 per cent block holding in JMH against a proposal that, on the face of it, appeared an excellent value for JSH shareholders.

The previous day, JSH directors had unanimously voted to reject the proposal. Mr Woods wanted to know if the directors had taken independent legal advice and how they had reached their decision. But he was told to mind his own business. Directors must be free to manage the company's affairs without unjustified meddling from minority shareholders, Mr Keswick countered.

In an arcane game of legal cat and mouse, Brandes had set a trap that serious Jardine watchers have long considered the group's blind spot. The resolutions focused attention on the apparent conflict of interest the six directors JMH and JSH share in common face when making decisions that benefit one company but might adversely affect the other.

Brandes proposed JMH raise US$1.5 billion in debt, sell its 'non-core' 33 per cent holding in British insurance broker Jardine Lloyd Thompson Group Plc, and with the proceeds buy out JSH minority shareholders for cash.

It was easy to see how the JMH board could vote against the proposal, but could JSH directors knock back such a resolution? After all, the suggested price was far above the market price of its shares.

But in a well-rehearsed defence, Mr Keswick claimed the Brandes' proposal was 'a hypothetical effort to create a bid'. In short, there was no 'real thing', merely the alluring promise of a bid. Because much could go wrong to derail the bid from taking place, JSH directors voted 'no', considering the scheme a waste of money and valuable management time.

Gauging exactly what the directors thought was difficult, however, as Mr Keswick refused shareholders the opportunity to address them directly. And his brother and fellow director, Simon Keswick, did not make the trip to Bermuda.

Mr Woods demurred, arguing: 'If the cross-shareholding had been voted in favour of the resolutions, each of them would have received support from more than 77 per cent of the shares voted and would have passed.' That threshold could be significant, as special resolutions need only a 75 per cent majority to be binding on the board. In short, the privatisation would have been a done deal had JSH voted its block vote.

In voting 'no', Mr Woods argued, directors had acted to 'frustrate' a potential bid. Frustrating a bid is a serious matter and if proven could cause the JSH vote to be overturned by the market regulator - in Jardine's case, the Bermuda Monetary Authority. But Mr Keswick declined to reveal whether the JSH board had sought the authority's opinion before deciding how to vote.

Should Brandes seek to disallow the JSH vote on these grounds, it will face a bruising legal battle. Jardine could appeal any decision all the way to Britain's Privy Council. Mr Keswick said the JSH board took the best legal advice (from Linklaters & Paines) and was given the green light. What is more, it is debatable whether Brandes could muster 75 per cent support, even if the JSH block vote was disallowed.

As such, the second prong to Brandes' strategy was forcing more independence in the boardroom. So long as directors remain principally beholden to the Keswicks for their position and remuneration, they cannot be considered truly 'independent', Mr Woods claimed. The Brandes resolutions call for directors' appointments and remuneration to be decided by independent, non-executive directors alone.

An agitated Mr Keswick had, by this stage, tired of the Brandes interrogative and allegations of bad corporate governance. Charges that the directors' lack of independence 'made a mockery' of claims to follow good corporate governance were met with: 'Well, that's your view. It's certainly not mine.'

No one was suggesting the Jardine team was playing dirty, but the floor microphone did appear placed suspiciously low on its stand, and Mr Keswick's often repeated: 'please speak up, Mr Woods, you're mumbling' did little to foster a meaningful dialogue.

Certainly, the Jardine chairman's reasoning for rejecting London's best-practice codes of boardroom governance seemed highly selective. Jardine companies had dropped their Hong Kong listings because, as a group of British origin, they wanted to be subject to a 'British final court of appeal'. However, as Bermuda-incorporated companies, they saw no reason to adopt a British code of corporate-governance principles that included directors' nomination and remuneration committees. In any case, he said, Jardine was a company principally with Asian operations, where different codes of practice applied.

Mr Leach admitted Jardine's practices might be old-fashioned, but the company's Presbyterian values and culture ensured directors did the right thing. He pointed to excesses in the United States, where executives' share-option schemes produced obscene wealth transfers at the expense of shareholders.

'Jardine is far from being a scandal. In fact, it's an anti-scandal,' Mr Leach said. 'You can have wall-to-wall nomination committees, but without a strong boardroom culture what difference do they make?'

For Mr Keswick, the issue seemed simpler and boiled down to a family's right to protect its dynasty. 'Other people have similar arrangements. Voting shares and non-voting shares, big family holdings, pyramids, all kinds of structures,' he said. 'Look at the Ford Motor Company. The Ford family has six per cent of the shares and 40 per cent of the votes.'

After the meeting, I sought Mr Keswick's reaction to the outcome. Impeccably polite in his response, he said: 'You know, I'm a director of The Daily Telegraph and used to be on The Spectator board, but I've always had a policy of not commenting to journalists.'

Whether such aloof values will hold the test of time remains to be seen, but the guardian of the Keswick inheritance has survived another year with his control intact.

Simon Pritchard ( [email protected]) is a staff writer for the Post's Business Desk