Josef’s uncomfortable Christmas

Dec 22nd 2005
From The Economist Global Agenda

Germany’s federal court has ordered a retrial of Josef Ackermann, the boss of Deutsche Bank, for his role in awarding bonuses after Vodafone’s takeover of Mannesmann. The ruling is likely to hasten his departure from the bank, just as he succeeds in turning it into a force to be reckoned with in investment banking

DESPITE its economic might, Germany is often criticised for the way business is conducted there. Over-mighty unions hold sway over firms’ decision-making; the country’s model of corporate governance is clunky, to put it mildly. Optimists point to a series of recent reforms that have begun to unpick “Deutschland AG”, the cosy arrangement of cross-shareholdings and board appointments that deterred international involvement in German business and made firms largely unanswerable to investors outside the system. But a decision by the Federal Court of Justice in Karlsruhe on Wednesday December 21st will be seen by many as exemplifying Germany’s resistance to change, and as a victory for those fighting a rearguard action against the advance of Anglo-American capitalism.

The court has ordered a retrial of Josef Ackermann, the boss of Deutsche Bank, Germany’s largest financial institution, for his role in awarding €57m ($55m) in bonuses to executives at Mannesmann after the German telecoms company yielded to a €180 billion hostile takeover bid by Britain’s Vodafone in 2000. Mr Ackermann was a prominent member of Mannesmann’s supervisory board at the time. After the takeover, the Deutsche boss, three other former members of Mannesmann’s supervisory board and two top executives, including Klaus Esser, Mannesmann’s then chief executive, were accused of failing in their fiduciary duty to the company, and stood trial. They were acquitted in 2004, but an appeal was lodged, culminating in this week’s ruling. All of the accused will have to go back to court.

The ordering of a retrial is certain to increase pressure on Mr Ackermann to step down from Deutsche Bank, just as efforts to turn it into a respected global player are coming to fruition. Mr Ackermann is the architect of Deutsche’s change of emphasis from domestic retail banking to investment banking on the world stage. This shift has boosted the bottom line: in October, the bank announced net profits in the third quarter of €1 billion, 25% better than expected and nearly half as much again as the same period last year. The bank can now boast a return on equity of more than 25%, a long-held ambition of Mr Ackermann, who joined Deutsche in 1996 to run its investment-banking businesses and took over as boss in May 2002.

While the announcement of bumper third-quarter profits was a vindication of Mr Ackermann’s strategy, trouble had begun to brew. Disquiet over job cuts announced earlier this year was compounded by news of trouble at a multi-billion-euro property fund run by Deutsche. But more significantly for Mr Ackermann, an appeal court sat in October to reconsider his acquittal over the Mannesmann bonuses. Despite the original verdict, doubts persisted about payouts of many millions that were of no apparent benefit to the company.

Although Mr Ackermann has always insisted that his legal difficulties have not detracted from his role running Deutsche, he may now conclude that he cannot continue as boss of a very large, increasingly complex institution while another long court case grinds on. He may yet be able to cut proceedings short by striking a deal with prosecutors, but any such agreement would probably involve some admission of guilt that would undermine his authority within his bank. If found guilty second time round, he and the other defendants would face up to ten years in jail or hefty fines, or both. Most legal experts following the case say custodial sentences are unlikely.

Already, there is much speculation about who might replace Mr Ackermann. One possible successor is Rainer Neske, head of Deutsche’s retail-banking operations. Even Rolf Breuer, the chairman of Deutsche’s supervisory board, is talking about the post-Ackermann era. He was quoted by the Financial Times on Wednesday as saying he would prefer to see an internal candidate take over, when the time comes. Deutsche's shares fell slightly on the news of the retrial, but rallied after Mr Ackermann issued a statement saying he intended to continue as chief executive. His present contract ends in October 2006.

At the time, Vodafone’s takeover of Mannesmann caused widespread indignation that foreign business cultures should impinge upon the German way of doing things. Trying Mr Ackermann and the others again for handing out and receiving bonuses that would have been uncontroversial in Britain or America suggests that Germany’s efforts at reform are stalling. The payouts were not concealed but were made publicly, at the behest of one of Mannesmann’s biggest shareholders, as an “appreciation award” for the services of the firm’s top executives. Although executive remuneration is a fitting topic for debate, it is rarely the subject of career-blighting court cases. Clearly, many sections of Germany’s elite are still chary of embracing the brand of capitalism that is commonplace in Britain or America. Mr Ackermann is set to pay a heavy price for looking beyond Germany’s borders.

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