About the bombings in London I have nothing useful to say, beyond expressing my sympathies for the wounded and bereaved and my admiration of Londoners’ stoic resolve. And as others, here and elsewhere, are expressing those things better than I could, I shall leave it to them to do so.
Instead I shall turn to another topic, one that is admittedly less dramatic, but important for all that. That topic is corporate governance; specifically, corporate governance as it is (or is not) implemented in Germany. In recent days German headlines have been full of two particularly interesting items: a corporate governance scandal of colossal proportions at a major firm, and now a significant governance reform that is unlikely to make top German managers very happy.
First, the scandal. You’ve all heard of Volkswagen, of course. Tainted origin in the Third Reich; universal success of the iconic Beetle; mostly mid- to upper-mid market cars these days, rather overpriced if you ask me. If asked for a concrete example of the peculiarly German consensus approach — ‘partnership’ among capital, labour and state — that drove the Wirtschaftswunder, not a few people would point to VW. (And the state is still important: VW’s largest shareholder remains the Land of Lower Saxony.)
So imagine the fun had by all as amazing revelations began to emerge from Wolfsburg. VW management, it seems, had a long-term policy of keeping the Betriebsrat — the works council — sweet. Sensible enough, you might say, and in keeping with that German consensus approach. But even Ludwig Erhard would surely have scowled at some of the sweeteners: front firms set up to ladle secret cash to top labour representatives; all-in junkets to Brazil, including (if the rumours are true) the services of a profession rather older than auto-making. Germanophones can read all about it in a series of articles from the S?ddeutsche. (You can read about it in the Spiegel as well, of course, but as they’ll make you pay to do so they don’t get a link.)
Prof. Baums of Frankfurt, who has long crusaded for better corporate governance, thinks that state involvement is to blame. In a brief interview behind a paywall in the WirtschaftsWoche, Baums notes that state involvement ‘transfers the role of the risk-bearing owner with a personal stake to a functionary who is not affected [by the success or otherwise of the firm].’ [My translation.] Well; maybe. The cynical among us might suppose that the risk-bearing shareholders of (say) DaimlerChrysler might say something similar about some of their managers, none of whom is to my knowledge a state functionary. Indeed, the problem Baums notes is nothing new, and nothing peculiar to state involvement; Berle and Means made it the centrepiece of their seminal work even before the regime under which VW was founded came to power. And the even more cynical among us might suspect that the salient thing about the VW scandal is not that the state is the largest shareholder, but that the management and works council were caught.
Now for the good news, unless you are managing director of an exchange-listed German firm. Current German rules don’t require firms to disclose much detail about executive pay, and the disclosure may be made on an aggregate basis, i.e., for the management board as a group. This morning the Bundesrat, the German parliament’s upper house, appoved a bill that will require listed corporations, as from the 2006 fiscal year, to make detailed disclosure of executive compensation on an individual basis. (This story is also from the S?ddeutsche.) This isn’t something that will go away if and when Angela Merkel becomes chancellor in September; the opposition already control the upper house and could have stopped the bill there if they didn’t like it. (The lower house, where the Red-Green coalition currently has a majority, had already passed the bill.)
In fairness, I should note that Deutsche Bank and some other German firms have already been making fuller disclosures voluntarily. Now giants like DaimlerChrysler, BASF and Munich Re are going to have to do the same, despite their bitter opposition to the bill. I must say I find their opposition odd. Top German managers are well-compensated by any sane measure, and without bothering to research the point I’ll go out on a limb and guess that the differential between the lowest- and highest-paid employees of big German firms has been growing. Still, from what I am able to see, German compensation schemes, on the whole, aren’t nearly as outrageous as the most egregious things one finds in America.
If you hold shares in a firm (or are considering buying some), surely you are entitled to know how much you are paying the people who manage your property for you. In particular, you’d want to know how much of their pay was variable (bonuses, options, SARs and similar schemes), and under what conditions they get their swag. All too often firms shovel money at managers who are destroying the firm’s value. As a shareholder, there might be little you can do to stop this; but armed with adequate disclosure, you can at least decide to sell (or decline to buy in the first place).