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RI Backgrounder: The showdown at Deutsche Bank’s AGM: what does it mean?

Responsible Investor answers the key questions about the Deutsche management discharge battle.

Deutsche Bank, Germany’s largest, could face a shareholder revolt during its annual general meeting (AGM) in Frankfurt on Thursday (May 21). Investors are angry over scandals that have tarnished the bank’s international reputation and forced it to set aside €9bn in reserve to deal with litigation related to the scandals. To express their anger, several big investors, among them the $174bn (€154bn) Florida State Board of Administration and a big Frankfurt-based asset manager, have already said they will deny Deutsche’s seven top managers ‘discharge’ for the 2014 business year. The largest proxy advisors ISS and Glass Lewis are recommending that shareholders deprive the bank’s management of their confidence (Glass Lewis favours abstaining on the vote).

The stage is set for a showdown. Responsible Investor answers the key questions:

Question: What is ‘discharge’ and why is the shareholder vote on it at Deutsche’s AGM important?
Answer: German securities law provides for shareholder votes on the discharge of the management and board of a listed firm for the business year just ended. It’s basically a vote of confidence or no-confidence as the case may be. There are no legal consequences. Yet if a majority of Deutsche shareholders deprive the bank’s management of discharge, it would not only be an historic event, it would put huge pressure on Chairman Paul Achleitner to remove those who no longer have the shareholders’ confidence.

Question: Why are Co-CEOs Jain and Fitschen as well as their five colleagues on the management board sweating it out?
Answer: Because of the scandals that have come to light since Jain and Fitschen took over in June 2012. The three most prominent are the Libor scandal – in which Deutsche traders in London manipulated interest rates for their own gain; a fraudulent value-added tax scheme; and, since 2002, the legal fight with the family of deceased German media mogul Leo Kirch. Of the three scandals, the Kirch mess has been the most damaging. The bank has not only paid almost €1bn tocompensate the Kirch family for directly contributing to the fall of Kirch’s media empire, but Fitschen, as well as two former CEOs, Rolf Breuer and Josef Ackermann, have been indicted for perjury in the case (They firmly deny all wrongdoing). And if that were not enough to make shareholders angry, consider that Deutsche has set aside €9bn in reserve – of shareholder money – to cover the costs of litigation stemming from the scandals.

Question: Will Deutsche Bank’s top management survive the vote on discharge?
No one knows for sure, but it looks likely despite the recommendations from ISS and Glass Lewis. Deutsche watchers say that the two biggest shareholders in the bank, namely US asset manager BlackRock (6.6% stake) and Qatar (just under 6%), will likely back management as it would be very difficult to find replacements for Jain and Fitschen. Moreover, they don’t want to undermine a bank that is already struggling, they say. Added to this is the fact that a considerable portion of the share capital is held by private investors and bank employees, who haven’t been very critical of the bank in the past. However, even a significant ‘no’ vote like 30% should send a strong signal to Jain and Fitschen that they had better make good on their promise to change the bank’s culture. Jain, in any event, believes that Deutsche’s management will get strong backing from shareholders on Thursday (see RI story).

Question: Analysts have not recommended Deutsche’s stock for some time now and the share price is not going anywhere; it’s hovering around €29 per share. Is the bank suffering from reputational risk?
Answer: Investors say reputational risk has definitely been one reason why some have not been willing to touch Deutsche. And you can’t blame them considering the wave of scandals and the thousands of lawsuits that have been filed against the bank as a result. In the bank’s defence, with Jain and Fitschen at the helm, Deutsche has improved its capital base, cut costs dramatically and remains profitable. In 2014, for example, earnings totalled €1.7bn compared with €681m the year before. But the CEOs have to prove to shareholders that they really do want to have a more ethical bank. Fitschen, meanwhile, has to beat the perjury charge in the Kirch case.