Investor Say More Dialogue, Please

Shareholders and supervisory boards don't talk to each other in Germany. That needs to change, argues the head of Handelsblatt’s companies section.
Shareholder meetings in Germany can get testy. That's because the two sides don't talk regularly enough.

SAP is Germany's most valuable company with a market capitalization of a good €115 billion ($126 billion). The software company is in great shape: Earnings are outstanding, even compared to the competition, and it has clearly coped well with its strategic realignment towards cloud computing. That is why Chief Executive Bill McDermott likes to emphasize: “SAP can’t be stopped.”

But such a success story in itself is no protection from the wrath of shareholders – and rightly so. Trouble can be expected at the company’s annual general meeting on Wednesday, where influential investors like Union Investment and the British pension fund Hermes are expected to refuse a vote of confidence in the supervisory board. Powerful shareholder advisers like ISS are recommending this course of action to all investors.

The issue at SAP is the system of executive pay, which shareholders opposed last year and which enabled the executives to earn a total of three times as much in 2016 as it did the year before. Investors like Hermes are angry above all because the supervisory board – which has the power to hire and fire managers and approve strategic decisions like pay – was unwilling to even discuss the system with shareholders before approving it.

Hermes and its allies are insisting they have a right to a regular and open discussion with the supervisory board. That’s something investors in Germany do not have by law. But surely it would have been appropriate for SAP to have a debate in this case?

In the United States and Britain, major shareholders regularly exchange views with the board as a matter of course.

The law in Germany is clear. The Corporate Governance Code states: “The chairman of the supervisory board should be prepared, within reason, to hold discussions with investors about specific issues relating to the supervisory board.” The word “should” is decisive here: It is a word often used in the code to indicate suggestions, not recommendations. In this case, that means SAP’s supervisory board has the option of speaking to investors, not an obligation. On the face of it, therefore, Supervisory Board Chairman Hasso Plattner in no way contravened the principles of good management by declining the request from investors to hold talks on executive pay.

Anglo-Saxon investors no doubt have a different perspective. In the United States and Britain, major shareholders regularly exchange views with the board as a matter of course. But it shouldn’t be forgotten that boards of directors also have much more operational responsibility in the US than in Germany. In the United States, around half of all supervisory board chairmen are also executive board chairmen of the company - an unthinkable combination in Germany. Here, the emphasis for a supervisory board member is very much more on his oversight function and that, in itself, excludes the possibility of executive board members also sitting on the supervisory board.

It is also the case in Germany that companies are managed according to the so-called stakeholder model. This means shareholders’ interests are not the only factors influencing companies; the interests of other groups like customers, employees and even suppliers are all taken into account. This too is different than in the Anglo-Saxon world, where the so-called shareholder model dominates and it is considered natural for big shareholders to be the most important interlocutors for managers and board members. Their influence is therefore immense.

Given that background, it is quite understandable that Hermes, a British pension fund, would expect access to the head of the supervisory board of the German companies it invests in. And in some cases, it is difficult to argue with that.

The German system has also created something of a two-tier society: Some shareholder groups have their own people on the supervisory board. That includes, for example, Jens Tischendorf from the investor Cevian, who seats on the boards of Thyssen-Krupp and Bilfinger. By contrast, investors with no representative of their own on supervisory boards have no direct access.

According to the letter of the law, members of corporate supervisory boards are obliged to act in the interests of the company. But Mr. Tischendorf will hardly have been able to reserve one half of his brain for Bilfinger and the other half for Cevian. Even conducting himself absolutely correctly, he automatically has a knowledgeable head-start over investors who are not represented on the supervisory board.

It’s impossible to compensate for this information gap, since much of what is discussed on the supervisory board is strictly confidential. But what is the objection against important investors, who are not represented on the board, being given the right to speak to the supervisory board in Germany too? The issues to be discussed would have to be clearly restricted to “specific supervisory board matters” and transparency must certainly be maintained vis-à-vis other shareholders. Both sides would benefit from this, as the odd dispute could be more easily resolved. It might, for example, have helped Hasso Plattner avoid an embarrassing defeat at SAP’s annual meeting.

It is about time that we in Germany saw investors for what they are: owners of the company.


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