German corporations — and regulation — are in the dock
The country’s consensual model of capitalism needs an overhaul in the wake of Wirecard’s implosion
Gears were seizing up and gaskets burning out long before the emergency stop on the autobahn. Now the consensual German model of business has suffered multiple mechanical failures. Wirecard, the payments group that bolstered German tech credentials, has imploded in fraud. Bayer is taking up to $11bn in charges mostly triggered by a disastrous US takeover. Once-proud conglomerates Siemens and Thyssenkrupp are shrinking. Volkswagen’s service life shortens each time Tesla’s outlook improves.
Worried engineers are peering under the hood. What has gone wrong? Germany has been Europe’s postwar economic motor. Technocratic and collaborative, German business fostered close links with workers, lenders and the state. The US model looked anarchic in comparison — warring bosses and entrepreneurs pumped up with equity and spoiling for a fight. But coronavirus has intensified the challenges facing manufacturing-focused Germany and the opportunities for the tech-led US.
Germany, can we talk? “Sure. I’m driving but I’m German so that’s second nature,” jokes an economist via his hands-free, “I don’t think there is any common thread between Wirecard and these other examples.” According to him, the worst accidents occur when German business adopts US ways. Wirecard had a two-tier board structure, like most German businesses. But its supervisory board was seemingly full of corporate yespersons, not vigilant workers as governance rules dictate. And the group was led by a bossy entrepreneur.
Kenneth Amaeshi, a professor of business at Edinburgh university, disagrees with such exceptionalism. He believes the Wirecard scandal puts German stakeholder capitalism “in the dock”. It points to a structural weakness of regulation, he says. He is right.
German financial regulator BaFin failed by restricting its oversight to Wirecard’s German banking arm. A German banker says: “BaFin isn’t in the same league as the [UK’s] Financial Conduct Authority, which impressed me when I was in London.” A banker who privately confesses an admiration for the FCA? Is that a first?
In the past, UK regulation has had a reputation for laissez-faire laziness. Germany’s regulatory lapses spring from another root: a love of consensus. This is the cause of the German model’s problems. Watchdogs assume CEOs must know what they are doing — after all, many have PhDs. Supervisory boards assume the same thing, so long as jobs are safe. When consensus has delivered huge economic dividends, people who ask tough questions can look like wreckers. That is why the German financial establishment turned on journalists and hedge funds who doubted Wirecard’s financial solidity.
Consensus is to blame for other woes. It suited Bayer’s bosses and workers to buy Monsanto for $63bn in cash in 2018 because this promised to make the chemicals group invulnerable to takeover. Engineers Siemens and Thyssenkrupp were permitted to muddle along as outdated conglomerates long after a wave of break-ups in the US and UK. VW perpetrated a diesel emissions testing scandal while dithering over electric vehicles thanks to fierce executives and a board crowded with trade unionists and political appointees.
Consensus has failed to foster German tech start-ups to rival the US giants. For that, you need disruptive mavericks financed with patient equity. The collapse of Wirecard has left SAP, a software group founded in 1972, as Germany’s only large quoted tech company.
The UK, of course, has none. Even so, German economists ponder whether Rheinischer Kapitalismus can be re-engineered, or is fit only for the crusher. “Germany is good at making incremental improvements,” says Allianz’s Katharina Utermöhl, “the question is whether stakeholders have the will to update the German model deeply”. They have done so before. In the noughties, Germany unpicked Deutschland AG, an incestuous network of crossholdings between banks and industry.
Corporate governance must be overhauled this time. Supervisory boards must shrink, meet more often and include more independent directors. Regulators must adopt the adversarial approach of US peers. Industrial giants should unbundle further to create a new tier of focused medium-sized businesses. Siemens’ 2018 flotation of Healthineers, a healthcare equipment unit, shows what can be done.
Germany’s biggest challenge is spurring investment in disruptive technology. Business has depended on debt finance from risk-averse investors. But there is no lack of equity, as Guntram Wolff of Bruegel, a think-tank, points out. It features as retained corporate earnings rather than footloose investment capital. This is reflected in total equity of some €1.2tn on the balance sheets of Germany’s top 100 quoted companies, according to S&P Global data. Tax breaks are needed to chivvy more of this capital into start-ups and electric vehicle development.
It would be a shame to waste two good crises — the meltdown of the German model plus coronavirus. Moreover, support is growing worldwide for stakeholder capitalism, in which social and environmental goals rank alongside profits. Germany just needs to reduce its emphasis on safe jobs for workers and well-networked managers. A little less consensus can make the German model roadworthy again.