The author, head of the Minority Shareholders Initiative, advocates for investor rights and class actions
Those outside Germany who admire the Rhineland model for its seemingly enlightened form of capitalism ought to examine the Wirecard collapse in detail. From my perspective, the chief problem of German corporate governance is that shareholders lack the power to hold management accountable. Wirecard shareholders tried to question Markus Braun, the company’s chief executive, at annual general meetings. But they did not have a chance to grill him. German law makes it easy for a company’s board members to evade awkward questions by talking in platitudes.
The erosion of shareholders’ rights is a scar on Germany’s corporate landscape that investor protection groups have complained about for many years. A related problem is that Germany’s two-tier system of a management board and a supervisory board does not produce the necessary stringent controls. Wirecard’s supervisory board say they did not have a clue about how executives were cooking the books.
MP Florian Toncar has called for external auditing firms to report directly to supervisory board members rather than a company’s chief financial officer. Shareholders, who have real skin in the game, also need to be involved by giving them special audit rights.
Instead, they have suffered as legislation and the federal high court reduced their influence — already small by international comparison — to allow for rapid approval of mergers or capital increases. Managers have argued that some minority shareholders were obstructing companies’ strategies in order to generate payouts for themselves. But there are less harmful ways to prevent such rare abuses than simply to strip all minority shareholders of their rights.
The silencing of investors reflects the determination of corporations to thwart active shareholders who like to ask questions. More recently, the rise of virtual AGMs has opened up new ways of restricting investor rights.
What might rebuild confidence in Germany’s capital markets? For starters, my home country could overhaul its corporate governance system and provide transparent accounting mechanisms. Good corporate governance requires effective means of private enforcement. Class action lawsuits and UK-style disclosures to investors are long overdue in Germany.
One bright spot, the EU’s second Shareholder Rights Directive, which was implemented in Germany last year, gave minority shareholders the option to oppose salary frameworks suggested by the supervisory board. While this “say-on-pay” vote is nonbinding, the board must review the plan and explain its response. This is, however, just a small step. There will need to be much more change to reach an appropriate balance of interests.
Those who seek compensation from German companies are also hampered by its 1879 civil procedure code, which was enacted when mass torts or fraud were not considered. Claimants must litigate individually, a time-consuming process that carries evidential risks and clogs the justice system. German’s next chance to address this issue comes when it transposes an EU directive on class actions into German law. This will be a matter for the government that takes power after next year’s Bundestag elections. Empowering investors would mean doing more than the bare minimum needed to comply with EU law.
Much work lies ahead in Germany to fix our ailing corporate system and the laws that protect it. In the meantime, the Wirecard scandal offers a cautionary tale for outsiders willing to learn from Germany’s mistakes. Protecting and strengthening the rights of investors is the surest way to promote corporate accountability.