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Author, Head of Minority Shareholders Initiative, Advocates for Investor Rights and Class Actions
the Wirecard case, the latest in a series of corporate scandals in Germany, raises an important question. Why does Germany find it so difficult to protect investors?
Those outside of Germany who admire the Rhine model for its seemingly enlightened form of capitalism should examine the Wirecard collapse in detail. From my point of view, the main problem with German corporate governance is that shareholders do not have the power to hold management accountable. Wirecard shareholders have tried to question Markus Braun, Chief Executive Officer of the company, at annual general meetings. But they didn’t have a chance to grill it. German law makes it easy for board members of a company to avoid difficult questions by speaking in platitudes.
The erosion of shareholder rights is a scar on Business landscape in Germany that investor protection groups have been complaining about for many years. A related problem is that the German two-tier system of a board of directors and a supervisory board does not produce the necessary strict controls. Wirecard’s supervisory board said it has no idea how the executives cook the books.
MP Florian Toncar called on external audit firms to report directly to members of the supervisory board rather than to the company’s chief financial officer. Shareholders, who have real skin in the game, should also be involved by giving them special audit rights.
Instead, they suffered as legislation and the Federal High Court reduced their influence – already weak in international comparison – to allow the rapid approval of mergers or capital increases. Executives argued that some minority shareholders were hindering companies’ strategies to generate payments for themselves. But there are less harmful ways to prevent these rare abuses than simply denying all minority shareholders their rights.
The silence of investors reflects the determination of companies to thwart active shareholders who like to ask questions. More recently, the rise of Virtual AGMs opened up new ways to restrict investor rights.
What could restore confidence in German financial markets? To begin with, my home country could revise its corporate governance system and put in place transparent accounting mechanisms. Good corporate governance requires effective means of private enforcement. Collective actions and British-style investor disclosures are long overdue in Germany.
A bright spot, that of the EU second directive on shareholders’ rights, which was implemented in Germany last year, gave minority shareholders the opportunity to object to the salary frameworks suggested by the supervisory board. While this “say on pay” vote is not binding, the board must review the plan and explain its response. It is only a small step, however. It will take a lot of changes to achieve an appropriate balance of interests.
Those seeking redress from German companies are also hampered by its 1879 Code of Civil Procedure, which was enacted when mass crimes or fraud were not considered. Claimants must litigate individually, a lengthy process that entails evidentiary risks and obstructs the justice system. Germany’s next chance to solve this problem comes with the transposition of an EU collective redress directive in German law. It will be the business of the government that takes power after next year’s Bundestag elections. Empowering investors would mean doing more than the bare minimum necessary to comply with EU law.
Much work remains to be done in Germany to correct our troubled business system and the laws that protect it. In the meantime, the Wirecard scandal offers an edifying tale for foreigners eager to learn from Germany’s mistakes. Protecting and strengthening the rights of investors is the surest way to promote corporate responsibility.
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