It was originally JMM or J2M, a simple shortening of Jean-Marie Messier. It became JM6 - which stood for Jean-Marie Messier, moi-meme maitre du monde, or me, myself, master of the world.
Messier may have had more justification for his view than some others whose over-confidence took their companies to the brink or beyond. He graduated from two of France's elite educational institutions, the Ecole Polytechnique and the Ecole Nationale d'Administration. At 29, he became the youngest chief of staff of a French government ministry in recent memory. He became the youngest ever partner in Lazard Freres bank. Then in 1996, he took over as CEO at a water company, Compagnie Generale des Eaux, and set off on four years of empire building.
In 1998, he relaunched the company as Vivendi. In 2000, Vivendi, its French television subsidiary Canal+, and the Canadian Seagram Company merged to become Vivendi Universal. After shedding Vivendi's utilities and Seagram's drinks operations, the group was made up of film and television production, music, television channels, telecoms and internet businesses.
Less than two years later, Vivendi Universal was collapsing under the weight of debt, which was costing EUR1,333bn a year to finance. From a peak of EUR142 in March 2000, the company's shares slumped to EUR10 at their nadir in August 2002.
With his brilliant mind and a personality described as 'flamboyant and pugnacious,' Messier did not go quietly when forced out by shareholders.
When he resigned in July 2002, he was reported to have walked away with $20m compensation, later stripped off in settlement of an action by the US Securities and Exchange Commission (SEC).
The man chosen to restore Vivendi Universal's finances and reputation was Jean-Rene Fourtou, then vice chairman of pharmaceutical giant Aventis' supervisory board. Fourtou is also a graduate of the Ecole Polytechnique and a member of the supervisory board of AXA, while Claude Bebear, formerly CEO of AXA and now president of its supervisory board and another old boy of the Ecole Polytechnique, serves as administrator to Vivendi Universal.
Fourtou has taken an aggressive approach to restoring the company's standing, refinancing and selling assets to reduce debt and debt payment, and robustly countering rumours with bluntly worded statements and, if necessary, legal action. From the start of his appointment, he has made improved transparency a keystone of the rehabilitation of the group. It is disappointing, then, that Vivendi did not respond to StrategicRisk's questions, but we have been able to use publicly available documents.
So far, the market's view is that Fourtou is succeeding. The shares have shown a gentle but steady recovery and are now trading at around EUR22-23.
In October 2004, Moody's raised its rating on Vivendi Universal's senior unsecured debt to an investment grade category. It was the first time since the summer of 2002 that the company's paper achieved such a rating.
When its third quarter 2004 revenues topped analysts' expectations, Reuters summed up, 'Vivendi is returning to stability after a financial crisis brought it near to collapse two years ago, and the music industry is showing early signs of recovery after four years of pounding from pirated compact discs and illegal song downloads.'
Today the company describes itself as 'a leader in media and telecommunications, with activities in television, film, music, interactive games and fixed and mobile telecommunications.'
SOX and LSF
Vivendi Universal is a French company, with its ADRs listed on the New York Stock Exchange. Since 2003, it has reported under the new French law on financial security: Loi de Securite Financiere (LSF), which created a new supervisory body, l'Authorite des Marches Financiers (AMF). Because of the New York listing, Vivendi also comes under the SEC, and from 2005, will comply with the US Sarbanes-Oxley Act, although the company has already incorporated elements of Sarbanes-Oxley into its procedures and reporting.
Both the French financial security law and Sarbanes-Oxley aim to help restore confidence in financial markets following destruction of shareholder value in just such cases as Vivendi, WorldCom and Enron. To this end, says Vincent Trevisani of the Paris office of the law firm Winston & Strawn, the law on financial security is divided into three sections, dealing with the following areas:
- modernisation of the supervisory authority
- reinforcement of investors' protection
- modernisation of the auditing of company accounts and improvement of corporate transparency.
"The reform provides specifically for an increased level of corporate reporting to the directors, shareholders and the public in French joint stock companies," Trevisani adds.
He explains that the law on financial security requires that the president of the board of directors or supervisory board under France's dual board system of all corporations (societes anonymes) prepare a separate report on the internal control of the company in addition to the board's annual management report. This report is to indicate preparation and organisation of board meetings, internal control procedures and the limitations placed upon the powers of the chief executive officer by the board of directors.
The French law appears to be wider in scope than Sarbanes-Oxley, according to Pierre Planchon, a partner of Ernst & Young, in terms of documentation and number of processes. Speaking at a Financial Executives International (FEI) conference in Paris, he said that under the financial security law the chairman's report must deal with all internal controls, while under Sarbanes-Oxley the requirement for the management report is limited to internal controls relating to financial procedures. A comparison of the company's key documents for 2003, the 20-F SEC filing and the annual Reference Document in French, confirms this somewhat different emphasis between the two approaches.
Risk management and insurance
The company states in each report: 'Shareholder value is fostered by adherence to the principles and procedures that guide the group's policies regarding investment, indebtedness, public and shareholder communications, employee share ownership, and risk management.'
Both reports discuss the risk factors affecting the company in some detail.
The company states that by the end of 2004, it should have completed a process, begun in 2003, of identifying 'procedures that have an impact on the preparation of financial reports and other financial information, as well as the key risks and controls relating thereto.'
The risks affecting the company's performance fall into several groups:
- general economic climate
- general business conditions
- risks related to the assets and business disposals and restructuring under way
- the impact of intellectual property infringement
- financial risks, such as exchange rate fluctuations. Other than for financial risks, the 20-F for 2003 says little about risk management, but the French report sets out the key processes of the company for which there must be effective internal control and the internal control procedures, including risk assessment. It also contains essential details of the company's insurance programme.
A third document, the company's annual report on sustainable development, which covers social, economic and environmental responsibilities, goes into more detail about how Vivendi deals with the considerable threat of piracy to its intellectual property.
We know from the StrategicRisk Eurofocus discussion in Paris in July 2004 that French risk managers have wrestled with the most appropriate way to inform shareholders about operational risks and insurance. The French reference document reveals that Vivendi has a Dublin-based captive, Gulfstream, which retains $5m to $25m according to the type of risk. The company's insurance programmes for the year were:
- PROPERTY AND BUSINESS INTERRUPTION: $500m global property coverage, plus a special $225m programme to cover Universal Studios in California against earthquake risk. Insurance also covers the exposure of Universal Studios and Canal+ Group to productions they are financing.
- LIABILITY: maximum protection of $400m maximum per claim or year. This policy is a supplement to the policies of subsidiaries, which range from $/EUR2-15m.
Intellectual property
The importance of intellectual property risks is clear from all three company documents. Vivendi is sometimes described as the world's biggest holder of intellectual property rights. It is, by a clear margin, the largest player in the global music market, with its share estimated at 29%. Its artists include Elton John, Guns N' Roses, Eminem, latest hiphop star Nelly and tenor Andrea Bocelli.
As a result of technological advances and the decreasing cost of electronic and computer equipment and related technology, it has become much easier for pirates to make unauthorised versions of audio and audiovisual products such as compact disks, videotapes and DVDs. As a result, Vivendi says its Universal Music Group has been losing, and is likely to continue to lose, sales due to unauthorised copying and piracy.
Vivendi's sustainable development report explains that as a content producer and distributor the company is tackling the issue on several fronts by:
- developing technology to prevent piracy
- creating strict procedures in studios and duplication facilities
- developing paid online services that respect intellectual property
- appealing to governments to reinforce the legal framework
- explaining the dangers of piracy to consumers
- suing infringers.
Figures from the International Federation for the Phonographic Industry (IFPI) indicate the scale of piracy: it was a $4.5bn market in 2003, global sales of illegal music discs rose 4% in 2003 and the global average piracy rate increased to a record 35%. The ratio of illegal to legal CDs sold continued to increase: in 2000, one in five CDs was a pirate copy; in 2003 the ratio was one in three, and rising.
Vivendi's costs of protecting its intellectual property are not specified, but are clearly considerable, especially in terms of technology and legal action. The company is also taking a leadership role across the industry.
In his role as chairman of the International Chamber of Commerce, Fourtou in October 2004 announced the launch of a 'worldwide industry offensive' against intellectual piracy.
Such sustained efforts are finally having an impact. According to the IFPI, 'Music disc piracy in 2003 grew at its slowest rate in four years, indicating that enforcement efforts by industry anti-piracy teams, and by some government enforcement agencies, are now having a significant impact.'
Lee Coppack is a risk management and insurance writer, E-mail: lee@coppack.co.uk
