LONDON, Oct 23 (Reuters) - BAE Systems' biggest shareholder Invesco will need to drum up more support from other investors to force out senior board members at the UK defence firm after its failed $45 billion merger with aeroplane maker EADS.
Invesco Perpetual, Henderson Global Investors and Artemis - which together hold more than 15 percent of BAE - have sent a joint letter, seen by Reuters, to BAE's board demanding replacement of Chairman Dick Olver and Senior Independent Director Peter Mason.
They argued that both departures were necessary to restore credibility to the company. They want a new chairman to launch an urgent strategic review in the wake of the EADS deal, which would have created the world's largest aerospace and arms group.
The merger was derailed earlier this month by political opposition.
But other top shareholders contacted by Reuters on Tuesday said they were not calling for radical board level change yet.
"We've had a call with the chairman. The assurances we were looking for was that the guys were fully empowered and driven to get out on the road and start building up the business again ... and we were given that assurance," said one of BAE's 10 largest investors, on condition of anonymity.
"The Board of BAE Systems remains fully supportive of its Directors," BAE said in a statement. The company said it maintained a dialogue with all stakeholders on strategy, governance and performance.
The Invesco letter said the investors were prompted to act by the collapse of the merger that was "symptomatic of a wider and sustained failure by the board of directors to focus on strategies that create value for shareholders."
It also criticised management for 10 billion pounds of acquisitions and capital expenditure since 2004 when the total market value for the company currently stands at little over 10.6 billion pounds.
"We believe there should be accountability at Board level for such a poor record of capital allocation over such a long period," the letter said, highlighting a "lost decade" for investors with the share price languishing at 2002 levels.
But frustration over an underperforming share price is tempered for some investors by a healthy dividend yield of more than 6 percent.
"I can understand the frustrations. They (rebel investors)clearly they feel the business hasn't re-rated under the tenure of the current guys. My feeling here is we're being paid to wait," the first investor said.
Some big shareholders said they were waiting to see how management steered the company strategically before lobbying for board level shakeup.
"I would still be in the 'wait and see what happens next' camp, rather than jumping up and down for change," said one fund manager at an investment firm that is one of BAE's 10 biggest shareholders.
A third source at one of BAE's 20 largest institutional shareholders said they had some questions about the company's strategy and outlook but they would convey those and any additional concerns directly to Olver and his colleagues, before making any decision on withdrawing support.
While not yet actively supporting the push for management change, a fourth investor at one of the 40 largest BAE shareholders said at least one of BAE's top brass was likely to lose their job after such a high profile strategic mishap as the failed tie-up with EADS.
"To have led the company down such a strategic blind-alley and then not have some senior board level fall-out would amaze me," the fund manager said.
The copy of the letter seen by Reuters did not identify signatories but a source close to Invesco said its senior fund manager Neil Woodford was joined by two investors in pushing for change, together making up nearly a fifth of BAE's ownership. A source familiar with the letter said Henderson and Artemis were also signatories. Invesco owns 13 percent of the company, Artemis has 1.5 percent and Henderson holds close to 0.5 percent, according to Thomson Reuters data.
A spokeswoman from Henderson confirmed Henderson was a signatory. Artemis declined to comment. Invesco did not respond to a request for comment.
Invesco was opposed to the proposed BAE/EADS merger from the start and published a long list of objections, including concerns over state interference, poor terms and a lack of strategic rationale.
Supporters of BAE's proposed merger with EADS argued it was an essential diversification into civil aviation and away from its focus on defence at a time when cash strapped governments are cutting arms budgets.
Some investors were frustrated at a lack of information on the deal during negotiations between the company and governments, prompting speculation at the time that Olver would come under pressure to step down.