RI Interview: Christian Strenger, a champion of German corporate governance

Many German fund executives play golf. But only a few have ever equalled Christian Strenger, the former chief executive of Deutsche Bank fund arm DWS who retired in 1999. In his younger years, Strenger was Germany’s amateur golf champion three times and went on to represent the country in international competition. In an interview in 2009, Strenger said his handicap in earlier years was “+1” – or one notch below a perfect rating of 0 – but had fallen to “+3.5” during his retirement.

Since leaving DWS, which he led for eight years, Strenger has become a champion of another activity: effective governance of listed German firms. Strenger has for years been a member of the government’s Corporate Governance Committee, which in 2002 drafted the country’s first Corporate Governance Code. Since then, he has been a tireless promoter of the code, engaging often with Germany’s biggest firms to get them to live up to its spirit.

In 2013 for example, he singlehandedly persuaded industrial firm SGL Carbon to guard against any conflicts of interest involving BMW heiress Susanne Klatten, the firm’s Chairwoman and part owner. Strenger also was part of a coalition of investors that induced ThyssenKrupp, the German steel giant, to accept an external review of its corporate governance after losses of billions of euros in a Brazilian steel venture.

Strenger’s promotion of good corporate governance has not been limited to Germany. In 2005 and 2006, he served as Chairman of the International Corporate Governance Network (ICGN) and on advisory panels for the subject at the World Bank and OECD. Responsible Investor interviewed Strenger, who still holds a seat on DWS’ supervisory board, at the fund manager’s headquarters in Frankfurt.

What is the origin of Germany’s Corporate Governance Code and what does it entail?

The origin can be traced back to the government of Gerhard Schröder. Following the bankruptcy in 1999 of Philipp Holzmann, a big construction firm that was steeped in tradition but in the end poorly managed, Chancellor Schröder called for better governance at listed German firms. His government created a special commission that I was a part of and which drew up a governance code for listed firms. That work was completed in February 2002. The Code specified the rights and duties of management and supervisory board members. It also stressed the importance of committee work and the independence of supervisory board members.Why does Germany, unlike say the US or Switzerland, have a two-tier system of corporate governance?

While the Holzmann episode showed that our two-tier system of governance had to be strengthened, it is, in principle, an effective way of running and supervising a company. This of course depends on a supervisory board that challenges management and asks the tough questions. It should also be noted that in countries with unified boards, there is a trend towards the separation of duties. A lot of the important work gets done in the audit and compensation committees which are dominated by independent directors.

Has the code been effective?

On balance, yes. International investors, which own around half of Germany’s biggest listed firms today, have a clear picture of our corporate governance and what constitutes best practice. Another positive development is that supervisory board members are more accountable to the public and better equipped in checking the dominance of management. Finally, the work in important committees like audit also has become more professional than it was in the past. That said, the Code hasn’t prevented the government from at times regulating corporate governance.

What has the government done specifically?

During the last three federal election campaigns, politicians eagerly called for more corporate regulation. In 2005, they wanted greater transparency regarding executive compensation. In 2009, a “cooling-off period” was demanded to prevent a retiring management board member to move immediately to the supervisory board. At the time, 16 of the 30 chairmen of the DAX firms had been CEOs. After the elections of 2005 and 2009, the corresponding laws were enacted. In last year’s election campaign, the politicians were at it again, with the Social Democratic Party (SPD) wanting a minimum female quota for German boards. Now that the SPD is part of the new government, a quota of 30% at listed firms is to be required from 2016 onwards.
Why was this all necessary when all three measures were included in the Code?

The Code is voluntary, so it is up to the companies to follow its recommendations. Of the three measures, the one about transparency for executive pay was most necessary as too few listed firms complied back then. Regarding cooling-off, I fear the government may have gone too far, as companies need board members who know their business first-hand. The cooling-off period makes it harder for German companies to find such people. But of all three, the strict female quota is the most problematic, in my view.
Many German firms in technical businesses lack experienced women to draw from. Our Code has a solution for this, and it is even what the previous centre-right government had recommended: a “flexi-quota” whereby firms would be given time to recruit women for their boards. But if they fall short, an automatic female quota applies.

What still needs to be done to further improve German corporate governance?

Because of Mitbestimmung (‘co-determination’), German boards often have too many members. Large company boards are comprised of 10 people representing shareholders and 10 people representing employees. This often hinders intensive discussions. Another problem is the legal requirement that employee representatives be German. That they see the protection of German jobs as a priority is understandable, but this is difficult for companies that do most of their business outside of Germany. Some companies have therefore changed their legal status from a German AG (Aktiengesellschaft) to an SE (Societas Europaea, a European listed firm). This has two advantages: First, supervisory boards are limited to 12 members with an equal number of shareholder and employee representatives. Second, the board will have more European representation to better reflect where the firm is doing business. German supervisory boards also need to be more independent. Only then can the tough questions be asked of management before major strategic decisions are made.Are ThyssenKrupp’s problems at its Brazilian steel operations an example of supervisory board failure?

In that case, the former CEO (Ekkehard Schulz), the former Chairman (Gerhard Cromme) and the Honorary Chairman representing ThyssenKrupp’s biggest shareholder (Berthold Beitz) were unopposed in their desire to build a new steel mill in Brazil to regain its former leading position in the global steel market. But the decision was primarily based on false assumptions, such as global steel prices not falling more than 10%, a weak local currency or cheap labour. Added to this was a Chinese contractor failing to deliver a promise to build the plant on the cheap. In the end, ThyssenKrupp and its shareholders lost between €8bn and €9bn. While it is always difficult to oppose powerful and knowledgeable chairmen, that fiasco could have been averted if the other board members had been more critical.

What else could be improved in terms of German corporate governance?

Another big issue is the problem of people serving on too many supervisory boards. Best practice recommends that one person have a maximum of five to six board seats (with the Chair counting double). The Code also stipulates that management board members have at most three board seats. The reason is that even a very experienced and organised person will be overwhelmed if he or she supervises too many companies.