German governance must be fit for purpose
The once purring engine of Germany Inc is sputtering. Bayer faces investor fury over its disastrous Monsanto takeover. The ailing Deutsche Bank’s leadership is under pressure after the collapse of merger talks with Commerzbank. VW is still battling to restore shareholders’ faith four years after the emissions scandal. Some of the blame must go to a corporate governance system that can be parochial, inward looking and less responsive to shareholders than it should be.
There are ironies here. While Germany still has plenty of scandal-free world-beaters, governance problems are emerging just when reformers are suggesting US companies, say, should start to look a little more German. Senator Elizabeth Warren’s Accountable Capitalism Act would require large US companies to take interests of workers, customers and communities into account along with shareholders — and allow employees to elect 40 per cent of boards of directors. Both are defining features of German capitalism.
Germany, meanwhile, has been encouraged in the past two decades to shift to a more US-style focus on shareholder value. Webs of cross-shareholdings between banks, insurers and large businesses have been partly unwound. A governance code adopted in 2002 has encouraged shareholder activism.
Employee representation on boards is credited, in part, with leading to higher employee satisfaction and productivity, and lower income inequality. But having employee representatives who only represent German staff can be poorly suited to increasingly globalised businesses. It has sometimes enabled German workers to block job cuts or prevent functions being shifted to lower-cost countries. A bigger problem can be the dynamics of Germany’s two-tier structure — where management boards run operations, overseen by non-executive supervisory boards of investor and staff representatives.
The logic of the two-tier system is to preserve a clear line between executives and supervising non-executives, promoting a long-term view. But there can be too much of a revolving door between the tiers. While allowing executives to step up to supervisory boards might promote continuity, it can create conflicts of interests. A powerful chair may be too attached to strategies he or she put in place — and thwart new bosses’ attempts to make changes.
Indeed, the Bayer-Monsanto merger appears a case study in such issues. Bayer’s chairman, Werner Wenning, had explored a Monsanto takeover when he was chief executive. He was in close contact with his friend Werner Baumann, then Bayer’s strategy chief, during the 2016 transaction and involved in negotiating the deal, announced days after Mr Baumann became chief executive. Germany would be well advised to introduce a mandatory “cooling off” period preventing executives moving directly to supervisory boards.
Boards also tend to be overly German-dominated — EY says 71 per cent of supervisory board members and 64 per cent of executive board members are German. They lack diversity in skills, nationality and ethnic origin. Digital expertise is often lacking, too
The problems at some German flagships coincide with hand-wringing over the country’s failure to translate its manufacturing and engineering prowess into tech leadership, or create world-beating companies at the rate of the US or China. Addressing those issues will require longer-term moves to increase venture capital and private equity-type funding, and ensure the education system produces the appropriate skills. Ensuring the corporate governance model is fit for purpose, however, would be a good first step.
Published by Financial Times online 12-05-19