(FORTUNE Magazine) – If you dropped into the lunchroom of any European company these days, you'd hear, in a weird, deja vu kind of way, the sort of talk common in America about two decades ago. Mixed with stock market banter would be talk about protecting employees and the community. Under their breath, some executives would be muttering about the short-term folly of "trying to please the bloody Wall Street analysts." Others would be grumbling about pressure to boost profit margins to 20%: Why isn't 12% good enough?

They can grouse all they want, but the truth is that whether Europe likes it or not, the ethos of Wall Street has arrived. The combined forces of deregulation, globalization, and recession in the early 1990s had already laid bare Europe's productivity shortcomings. Now the liberalization of financial markets, $200 billion worth of privatization, the demand for capital, and the dawn of the euro are forcing European CEOs to justify their strategies to fresh-faced money managers. Significantly, more and more of these hail from America. Since 1990 the number of European companies listed on the New York Stock Exchange has quadrupled, to 137; of these, 35 have hit the Big Board since 1997. Listing in the U.S. helps raise money, of course, but doing so also means having to meet the standards of America's demanding investors. Gone is the era when it was enough for a company to meet its payroll and pay its bills.

The culture shock has been considerable. In the 1970s and 1980s shareholders were mostly ignored as governments coddled major industries to preserve jobs. "Shareholder value was put on the shelf," says Jorma Ollila, who took over as CEO of Finland's Nokia in 1992. This airy disregard for one's investors might have been part of a genuine regard for larger social concerns. But it was also an excuse for skirting accountability and building cozy empires for management. Nokia, for example, found it easy to make a series of bad acquisitions in the 1980s, in part because it didn't feel the need to justify its decisions to its shareholders.

Nokia, for sure, now has shareholder-value religion. Not everyone does. Many European companies would like to create a hybrid corporate culture that combines American management techniques with social concerns such as job security and environmental cleanup. There's much support for this softer approach to capitalism--a kind of corporate analogue to the political third way.

That said, shareholders' interests are, in general, being taken seriously. And a handful of pioneering companies are adopting the ethos of shareholder value to correct the laid-back attitudes that landed Europe behind the competition. DaimlerChrysler, the darling of the German stock market, is Europe's best-known advertisement for restructuring, but it is hardly alone. Veba and Hoechst in Germany, Elf Aquitaine and Danone in France, BP in Britain, ENI in Italy, and Nokia in Finland are just a few of the outfits attempting to cater to shareholders instead of--or at least in addition to--politicians and unions.

Like making a sausage, the process can be ugly to watch, however tempting the results. Announcements of layoffs at blue chips like Siemens, Philips, and Shell are part of the price Europe is paying. Heads are rolling at the top too. Daimler and ABB Asea Brown Boveri fired the head of their transport joint venture in September after he failed to meet profit projections for three years running. Norway's Kvaerner, an engineering outfit, ousted its CEO, Erik Tonseth, in October after institutional shareholders complained that he wasn't restructuring fast enough. "We didn't say, 'Fire Tonseth,' " says Nigel Wilson, the managing director of Odin, a Norwegian money manager that owns 10% of Kvaerner. "But we made it clear we were not satisfied with the stock price."

With shareholders like Wilson running around Europe, it's no wonder CEOs are pushing the limits of Europe's laws and corporate character by restructuring, changing management incentives, overhauling their culture, and courting investors like never before. In the past four years, Hoechst Chairman Jurgen Dormann has sold nearly $8 billion of operations and bought $12 billion in a daring bid to transform the company from a collection of chemical and drug factories into a sleek life-sciences concern that creates medical and agricultural products based on technological advances in genetics and chemistry. Dormann's most far-reaching move is the proposed spinoff to shareholders of Hoechst's basic chemicals and polymers business, the first time such a transaction has been attempted in Germany (tax laws make spinoffs expensive). That has set up Dormann for a $20 billion merger with France's Rhone-Poulenc.

A short drive northwest of Hoechst, along the Rhine in Dusseldorf, Veba's CEO, Ulrich Hartmann, says he's also feeling the heat from shareholders. Hartmann's plans are far less radical than Dormann's. Borrowing a strategy from GE's CEO Jack Welch, Hartmann says he wants to remain a conglomerate, using cash from Veba's real estate business to make chemicals, energy, and telecommunications each first or second in their respective markets.

In 1998 he solidified Veba's top position in certain specialty-chemicals businesses through his merger with Germany's Degussa. Hartmann has sold off a few divisions and plans an IPO of Stinnes, a distribution and logistics subsidiary. He has also taken advantage of deregulation in the electricity business faster than other German monopolies by selling electricity outside Veba's traditional territory in the north and east. But losses from a downturn in demand for silicon wafers and bigger than expected startup costs in telecommunications meant that Hartmann broke his promise of double-digit earnings increases for 1998. He hopes he can get earnings going again--analysts estimate 1998 earnings fell 15%--so that investors will get off his back. "As long as we earn money and display increasing levels of growth," he says, "the criticism about being a conglomerate becomes obsolete." That criticism comes from far and wide. More than 43% of Veba's shares are held by foreigners, with 10.5% in the hands of U.S. investors.

No transformation can be successful, however, without setting tough performance targets. Danone CEO Franck Riboud, who is pulling off one of Europe's most surprising restructurings, understands that better than most. Riboud's 1996 appointment to chairman and CEO was met by a 5% drop in the share price: The 43-year-old son of the founder was viewed as a windsurfing dilettante who got the job through nepotism, though his family owns less than 1% of the company. In practice, he has turned out to be something of a business genius. Within a month of taking over, he figured out that Papa had paid too much for too many insignificant brands. Riboud the younger quickly pared the company to three lines of business with strong brands that could dominate their markets globally: bottled mineral water (Evian), fresh dairy products (Danone and Dannon in the U.S.), and biscuits. Out went pasta, sauces, ready-to-serve dishes, and candy.

More telling, Riboud put in place rigorous financial goals--something his father hadn't bothered to do. Each business now has set targets for return on capital and operating profit. Until 1996 the company hadn't earned its cost of capital for years. "I do it because I am 43, and I am living in the modern world," says Riboud. "I don't see why I will not drive Danone as my colleagues are driving their American companies or their Italian companies or their U.K. companies. If we want to be a worldwide player, we have to play by the rules. We are going to create positive value year after year." Since listing its American depositary shares in New York in November 1997, Danone stock has risen about 65%, outperforming Unilever, Procter & Gamble, Coca-Cola, and the S&P 500.

Getting the share price to pop is one thing. Motivating managers to stay focused on performance is another. That's why Danone pays its managers bonuses (of between 25% and 70% of their salaries) that are based in part on economic value added, a return on capital concept promoted by consultants Stern Stewart & Co. Riboud believes this is the best way to link management performance to share value.

Stock options are also beginning to be used in Europe but are much more problematic. Such instruments were not legal until 1998 in Germany and Finland, and taxes on them can be onerous. For instance, Dutch executives at Shell have to pay big taxes up-front on their options. They take a personal loss if their options expire out of the money. Finland had no legal entity called a stock option, so Nokia devised a bond with a warrant attached to purchase shares. Daimler-Benz and Volkswagen have both been sued by shareholders who have complained that company stock-option plans don't set tough enough performance targets or aren't fully disclosed.

Moreover, with unions viewing stock options as a way for managers to enrich themselves, companies are loath to make them as lucrative as U.S. plans. Hoechst says it designed its program to pay out about half what an American program would, under the somewhat dubious theory that Europeans aren't as greedy as Americans. "You can only incentivize even top management with money to a limited extent," contends Jens Dornedden, head of Hoechst investor relations. "The first piece of cake usually has the highest value for you. If you eat the sixth or seventh piece, you are already fed up by it."

Whatever the theory, the practice gets sticky when Europeans link up with those cake-loving Americans. DaimlerChrysler's German co-chairman and eventual chief, Jurgen Schrempp, in 1997 got paid about one-seventh of the $20 million co-chairman Robert Eaton made. "It's a major problem," says Schrempp. "We want to introduce world-competitive compensation."

BP, which is taking over Amoco, is bringing its British executives closer in line with their American counterparts but won't close the gap entirely because it's too expensive. The oil giant figures that if British executives make just a little bit more than their American subordinates, they won't mind so much if they make less than their American peers, whose stock-option plans will be phased out anyway.

To really boost share prices in the long run, European chieftains must figure out new ways to boost growth. Thus they are working hard at changing company cultures, hoping that innovative ideas will bubble up. Royal Dutch/Shell has hired scads of consultants to transform employees from plodding bureaucrats into decisive leaders who will fulfill the company's new corporate purpose to "make the world a better place." Riboud at Danone talks of wanting a company with "enthusiasm, openness, and humanism." Ollila at Nokia talks of the "Nokia way," referring to his co-workers as fellow "Nokians" who eschew hierarchy, complacency, and corporate politics, and strive for achievement and mutual respect.

At Hoechst, Dormann's success will hinge on the company's ability to come up with blockbusters. Dormann says he'll make acquisitions and create alliances with small biotech firms to boost Hoechst's R&D firepower against big guns like Pfizer and Glaxo. The merger with Rhone-Poulenc also greatly increases the company's size and scale. Internally, the company is betting on its drug subsidiary, Hoechst Marion Roussel, to deliver the goods. That won't be easy. The unit itself is a cultural hodgepodge, cobbled together from Hoechst's $7.1 billion purchase in 1995 of Marion Merrell Dow in the U.S., the buyout of the rest of France's Roussel Uclaf, and the old Hoechst drug division in Germany. As R&D chief, Dormann has installed Frank Douglas of Marion Merrell Dow, a 55-year-old native of Guyana whose goal is to get approval for at least two drugs a year that are each capable of generating $350 million in revenue annually.

Frankfurters derided the appointment at the time--Douglas didn't even speak German. He's learned since then--and he's taught his critics a few things. He has torn down the old R&D power bases, for the first time holding product reviews with outside experts to kill off dead-end research, such as a 16-year-old project to develop a cholesterol drug. He scrapped an organizational structure that allowed the head of a disease area to decide which drugs to research without any input from marketing or development. Research sites have been consolidated to five from 15, cutting employment 25%. In 1998, German employees demonstrated against the moves. So many threats were made against Douglas that he moved into a hotel for a few days.

Building wealth in this tough global environment requires nimbleness, something at which Finland's Nokia excels. Coming out of nowhere, the 133-year-old former conglomerate has risen phoenix-like to become the world's biggest seller of mobile phones. Profits jumped 98% in 1997 alone. Sari Baldauf, Nokia's head of telecommunications infrastructure, says the company's open atmosphere keeps it on the cutting edge. So does youth; the average Nokian is 32. At 43, Baldauf is one of the few European women with a top operating role, and she attributes her rise to Nokia's lack of hierarchy. It was a strategic task force she led 11 years ago that showed Nokia how to take advantage of digitalization in the mobile-phone market. "If something is presented to the board, it's not done by the top guy in a group; it is the person who knows the most about it," she says. "If you bring value added, you get credit."

Whether all this adds up to a new model of corporate life remains to be seen. But Europe still has a slew of laws and attitudes that protect employees and companies from the brutalities of the markets. "If this company [Hoechst] had its cultural roots and main markets in the U.S., I would have needed half the time" to restructure, says Dormann.

Companies that have embraced shareholder value see it as an essential tool for global competition. Companies that resist this ethos question whether it is the only way to keep up. And is winning the global race a worthy corporate goal? Intriguing questions, but probably academic ones. Having a single European market, a single currency, and liberal world trade means it is simply not possible to stay out of the scrum. And it is not obvious that rewarding shareholders means that the rest of society is told to go hang: Poorly run companies can be social sinks.

The shareholder-value revolution will eventually come even to those who now spurn it, because they are bound to face the sort of crises that Nokia suffered in the early 1990s. Nokia's reinvention didn't come about until it had suffered through huge losses, hemorrhaging sales, a capital drought, a management makeover, and exposure to the demands of Wall Street. Perhaps the rest of Europe will be so lucky.