1. How would a stakeholder-oriented company differ from one with a shareholder focus? Explain....2
2. Thinking about the culture of your own home country, which aspects of culture have affected your corporate governance system?.......2
3. If you were devising a remuneration package based on corporate performance, what performance measures would you use?......4
4. Case study. L'Oreal: You're worth it, at least to Nestle'......4
Case Study
L'Oreal was founded by Eugene Schueller, a chemist who started making and selling
hair dye in Paris in 1909. It was originally known as Societe desTeintures
Inoffensives pour Cheveux, but became the more concise L'Oreal in 1939.The
company is probably best known today for its TV commercials which feature a string
of well-known models and actors; indeed it has always been innovative in its
approach to advertising, making the first sung radio commercial in 1931.The firm
made its first acquisition in 1928 and has continued to acquire companies and
brands since then. Many of you reading this book use its products perhaps without
knowing, since it owns Ambre Solaire, Lancdme, Maybelline, Helena Rubinstein,
Redken and the Body Shop, among others.
What is interesting about L'Oreal from the perspective of this chapter is its
ownership structure. As at the end of the 2008/2009 financial year L'Oreal's equity
was owned by the following groups:
Shareholder Proportion of equity held (%) :
Liliane Bettencourt and her family 31.0
Nestle 29.8
International institutions 21.3
French institutions 9.4
Individuals 5.4
Treasury stock 2.4
Employees 0.7
Source: L'Oreal Annual Report 2009
Liliane Settencourt is Eugene Schueller's daughter, so L'Oreal would look like a
family company if it were not for the stake owned by Nestle. In Switzerland, if a
company owns 33.3 per cent of the voting rights in another firm it must make a full
bid, so its holding makes Nestle look like a potential acquirer. Indeed in autumn
2009 there was speculation that Nestle might launch a bid for L'Oreal, but Nestle's chief executive was quick to describe the investment in L'Oreal as financial rather than strategic.
The investment has a long history. In 1974 the Bettencourt family and Nestle
entered into an agreement designed to help L'Oreal in its bid to enter overseas
markets (something Nestle had already achieved) while at the same time adding
stability to the shareholder base.Together they formed a company called
Gesparal, in which the Bettencourt family held a 51 per cent stake and Nestle held
the remainder of the shares. Gesparal owned 53.8 per cent of L'Oreal's shares,
which gave it 71.1 per cent of the voting rights under the dual-class share system.
Each of the two shareholders could nominate three members to L'Oreal's board
which, together with the differential voting rights, gave them control of the
company.The current board (as at the end of 2009) includes six non-executives,
thrеe members from Nestle, Mrs Bettencourt, her daughter and son-in-law
together with the chair, Sir Lindsay Owen-Jones, who was until 2006 the CEO and
executive chair, and the CEO Jean-Paul Agon. In 2004 the Bettencourt family and
Nestle agreed to a merger between L'Oreal and Gesparal, giving Nestle a direct
shareholding in L'Oreal.The two major shareholders agreed to eliminate the
double voting rights that had resulted in the divergence between cash-flow and
control rights in the firm and to retain their shares in L'Oreal for five years, after
which the two parties would grant each other pre-emption rights over their shares
in other words, if one chooses to sell their holding, the other has the right to buy.
This explains the speculation in the press during 2009 that Nestle might attempt a
takeover. A closer relationship could make business sense given that the two
companies have two joint ventures in the form of Galderma, a company that
makes treatments for skin problems and Inneov, a nutritional supplement also
designed to help with skin problems.
Given the level of control held by the two blockholders, you might imagine that the
individual shareholders who own 5 per cent of the equity would feel rather
vulnerable.The company is at pains to make them feel involved in L'Oreal's affairs
through shareholders' meetings and the shareholder panel. During 2009 LOreal
held ten shareholder meetings in different areas of France, which attracted 7300
shareholders. At these meetings shareholders are told about new developments
and have the chance to ask questions. In early 2010 the company replaced its
shareholder panel with a 16-member Individual Shareholder Consultation
Committee that feeds back information on L'Oreal's annual report and accounts in
order to help the company to develop its financial communications.
Two additional factors add to the human interest in the L'Oreal story.The first is that
Fran?oise Bettencourt-Meyers, a member of the L'Oreal board and granddaughter of
the founder, is married to Jean-Pierre Meyers, a vice-chair of LOreal and a non-
executive member of Nestle's board. L'Oreal has two vice-chairs, one representing
the Bettencourt family, the other representing Nestle; but both are members of the
Nestle board.The Bettencourt-Nestle relationship is clearly complex, having
business and personal elements, but it begins to look as if L'Oreal would be a very
different company if it were not for Nestle.
The second is that following her father's death, Mrs Bettencourt-Meyers became
increasingly concerned that her mother's old friend Frangois-Marie Banier was
taking advantage of her advancing age and generosity to unduly influence her to
give him expensive gifts. Following preliminary enquiries French prosecutors
dropped the case and Mrs Bettencourt-Meyers initiated a private prosecution in
early 2010. Given that both women sit on the board of L'Oreal this dispute must
affect the Bettencourt-Nestle dynamic which is so important in determining how
much L'Oreal is worth.
CASE-STUDY QUESTIONS
1 If you were an individual shareholder in L'Oreal, would you feel that the company
is safeguarding your interests?
2 Would you describe the board of L'Oreal as independent?
3 Would it make sense for Nestle to make a bid for L'Oreal?
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