Jan 27th 2005 | FRANKFURT
From The Economist print edition
Reform of the way German companies are run is proceeding slowly
GERMANS are increasingly questioning the way that their large public companies are run. State prosecutors are investigating why Volkswagen kept a pair of parliamentarians on its payroll for years, while last week a Frankfurt court ruled that a reluctant Deutsche Bank must disclose how much it pays to members of its elite executive committee. This week, Werner Seifert, the chief executive of Deutsche Börse, owner of Frankfurt's stock exchange, came under attack for ignoring his shareholders' views in his eagerness to buy the London Stock Exchange.
At the heart of German corporate governance lies its unusual two-tier board structure. Meetings of its non-executive supervisory board are, says one veteran director, little more than time-wasting theatre. There can be as many as 30 directors sitting round a boardroom table. In any company with more than 2,000 employees, up to half of them might be workers' representatives who see their main task as saving jobs in Germany, even when a majority of their company's workforce is based abroad.
Co-determination (by workers and management), a guiding principle of German corporate governance since 1951, is proving a hindrance these days when speed and flexibility are essential to global competition. Yet, until a few months ago, any talk of its abolition was taboo. Many bosses pretend to like it. In some cases their job depends on keeping on good terms with workers' representatives who sit on the board that hires and fires them.
Moreover, top German executives look forward to moving on to their company's supervisory board. Heinrich von Pierer is stepping down as CEO of Siemens to assume duties as chairman of its supervisory board. That will mean that at 17 of the top 30 German listed companies, the chairman of the supervisory board is a former chief executive.
A government-sponsored body, the Cromme Commission, published a code of corporate governance in May 2003, and recommended that a maximum of two former executives should sit on a company's supervisory board. A draft EU corporate-governance code recommends a five-year gap between executive- and supervisory-board duties at the same company—in recognition of the risk that former executives may defend bad business decisions that they previously initiated.
Supervisory board members are supposed to control and advise the executive board (the Vorstand). “They need to be professional, to be sparring partners for the Vorstand,” says Heinz Evers, a partner at Kienbaum, an executive-search firm. But they are not well motivated. A recent study by Spencer Stuart, another executive-search firm, found their pay ranged from €5,000 ($6,530) a year to €102,000. The workers' representatives, appointed by the unions, have to give 95% of anything that they are paid above a modest €3,500 a year to the Hans-Böckler-Stiftung, a trades-union foundation.
In recent years German companies have been “doling out unwarranted pay” to their executives, says Christian Strenger, a former CEO of DWS Investment and a member of the Cromme Commission. According to a recent study by a human-resources consultancy, not only are German executives the best paid in Europe, but the component of their bonuses linked to short-term targets is higher even than that of their counterparts in America. This has put pay and performance out of line. In one case, while DaimlerChrysler's market value fell by 60%, its top executives' pay rose by 40%.
No government in the foreseeable future is likely to tackle co-determination and two-tier boards head on. The best that can be hoped for is that shareholders, rating agencies and the media will increase the pressure for boards to be more transparent, and thereby more answerable to their shareholders. Since a press campaign last year, more companies have undertaken to follow a Cromme Commission recommendation to reveal individual executive's pay: 23 out of the 30 companies on Germany's main stockmarket index, the DAX 30, have complied or said they intend to. But it is clear that some are doing so only under duress.
Deutsche Bank had devised a way round the requirement: in 2002 it set up
a group executive committee that was independent of its two-board structure.
While the bank's 20-strong supervisory board watched over its four-man executive
board (whose salaries are declared), the committee got on with running the
bank without revealing its executives' remuneration. Last week, however, a
court ruled that the pay of these executives too must be revealed—a rare
victory for transparency.