Discharge reject at Philips: will management stay in place?
The shareholders of Philips have just rejected, by 76%, the discharge given to the management for its management. The discharge is unnecessary, optional, but the result exposes the rift between shareholders and management. The few previous ones have been followed by a change of management team. What will Philips do?
This approval is becoming increasingly rare in the agenda. In fact, it has been useless in law for almost 100 years. It was rendered meaningless as soon as the stock market crisis of 1929, when legislators in all countries wanted to protect savers by placing the law above the decisions of general meetings of shareholders – in 1932 in the United States, in 1934 in Germany, in 1937 in France, for example. Before this, the discharge resolution was leading to the company waiving possible claims for damages against the managing director, at least to the extent that the underlying facts were known at the time of the discharge resolution. Today, no director nor executive can invoke the discharge to avoid being sued by his shareholders. Nevertheless, a handful of directors still apply for this discharge every year, as a symbol of their irreproachable management. Fewer and fewer of them are taking the risk: 25% of companies in 2015, 15% in 2020, 12% this year, out of the 1,200 companies monitored by Scalens in 13 countries.
Philips’ directors were among those who continued to submit their actions to discharge, and boasted in post-AG press releases that they had very good scores, which they believed proved their good management. Unfortunately, they have just been rejected. After the ‘Respiratorgate’ affair, for which Philips is being sued I, several countries, the shareholders are refusing discharge to the managers, even if it is only symbolic. The Philips Board of Directors has acknowledged this potentially life-threatening error for patients with respirators and has already set aside €575 million for the US litigation alone.
What to do now? Philips cannot afford to standi by and do nothing. The companies that have continued to put discharge on the agenda have all, so far, taken the shareholders’ vote into account. A plebiscite, and the executives share their satisfaction; a narrow-score approval, and they put corrective actions in place; a negative vote …then the executives, so far, have left soon after.
The first narrow-score discharges came with Airbus, voted at only 75% in 2020, in protest at its decarbonisation policy, which was deemed too slow (and corrected the following year), then the German car manufacturer Mercedes Benz at 78% in 2022 following several disputes, the Swedish telecoms leader Ericson at 75% in 2022, following heavy losses, and the Swiss energy company ABB, in the spring of 2023, at 72%, in the context of the contestation of its strategy of splitting up the group. It is interesting to note that each time, the companies concerned took immediate corrective action and came back to their shareholders to obtain, the following year, a discharge at the maximum score. Even if it is always, in reality, both not compulsory and legally without effect. It was a reputation matter.
When “narrow score” becomes “negative score” though, consequences are different. Although it is still only a reputation matter. These cases are extremely rare, always associated with very serious facts, and often trigger profound managerial changes. The first case happened in Europe in 2007, at UBS. The shareholders voted 53% against, arguing that the management was responsible for the bank’s overexposure to subprimes. The management team was then thoroughly renewed. The next negative vote on quitus was 15 years later, in 2022: Credit Suisse. The shareholders voted 62% against a discharge to the management. We now know what happened next, the bank was rescued by the Swiss government; the management team was dismissed. This spring 2023, before Philips, came the negative vote on the discharge for the Finnish pharmaceutical giant Orion. Without the score being made public, this rejection was part of an insider trading case involving the Board of Directors. Orion’s management has indicated that it is waiting for the court’s decision before making a statement, in the name of the presumption of innocence.
While waiting for Philips’ management to speak, this week shareholders will vote on another discharge, to Deutsche Bank. Usually voted each year with almost 100% approval.
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