View from Frankfurt: Daimler leads Germans into a cold new world

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The Independent Online
Germany's one-man shareholder revolt was ejected kicking and screaming from Daimler-Benz's annual meeting on Wednesday.

Usually, when the questioning by Ekkehard Wenger, business studies professor at the University of Wurzburg and small shareholder crusader par excellence, becomes too awkward, the microphone is switched off. This time, however, a scowling Hilmar Kopper, head of Deutsche Bank and chairman of Daimler's supervisory board, decided sterner action was needed and made the orderlies pounce.

Mr Wenger is an ardent believer in the superiority of Anglo-American-style capitalism, where management is under much greater direct shareholder pressure to perform. With squads of his students, he travels from one big annual meeting to another, asking questions that management boards in Germany prefer not to hear, about accounting methods, hidden reserves, low dividends and poor share performance.

That he is a severe irritation is clear from the sharp reaction of those like Mr Kopper on the podium. But when one looks at the passive throngs of shareholders who turn up, as if attending a lecture, feeding heartily on the free sausages and sandwiches and respectfully applauding the board with a 99 per cent voting majority, it is hard to talk of revolution.

The big German companies go from year to year confident of stable shareholding majorities, fearing little from unexpected outside pressures. The reasons for this are technical, institutional and cultural. They have combined to give Germany a very different form of capitalism from that in Britain or the US.

First, there is the accounting system that places higher priority on protecting creditors than on, for example, the interests of shareholders. 'There is a tradition here to hide high profits. Managers want to preserve their own power and not become too dependent on shareholders,' said Roland Berger, one of Germany's best-known consultants.

Second, there is no real equivalent in Germany to the large pension funds. German managers do not fear that if they fail to keep the share price up, they risk having a sizeable stake dumped by some fund. On the contrary, big German companies go to great lengths to protect themselves from such vicissitudes by an intricate network of crossover holdings, and in some cases restrictions on share voting rights.

The outcome is a system of mutual dependence and influence that is virtually impossible for any outsider to understand, let alone penetrate.

The traditional defence of this set-up is that it has provided managers with much-needed stability, relieving them of having always to look over their shoulders at what this or that shareholder is thinking. During the prosperous Eighties it was hard for outside critics to score convincingly against this stance.

Now, however, as recession has exposed far-reaching structural weaknesses in many of Germany's flagship companies, there is a stronger case for saying that stability has become a cover for complacency. This line has been fiercely put in a book dominating the economic best-seller lists in Germany, Duds in Pinstripes, by the business journalist Gunter Ogger. He argues that German management has failed miserably to keep up with the best of the competition. Managers have been able to dismiss shareholders as no more than a sporadic source of funds, while feeling free to pursue business plans with barely a regard for profitability.

He cites Daimler-Benz as an example of how badly things can go wrong when management pursues its own interests and goals regardlessly. The massive expansion of recent years has increased turnover to nearly DM100bn, while profits have declined precipitously.

Important changes are, however, afoot. But they have less to with any hard-to-find shareholder revolt than a potentially far-reaching rethink being forced upon some of those managers Mr Ogger has so castigated. In the Eighties, German companies could afford to be snooty towards shareholders in general, and international financial markets in particular, because they were making so much money they managed to finance most of their investments from their own resources. In today's leaner times, the coffers are looking rather bare.

Moreover, the accelerated drive to internationalise means that having international capital-market standing is vital.

The decisive break came with the announcement in March that Daimler-Benz is seeking a full listing on the New York Stock Exchange by the end of this year. For some time Daimler and a handful of other German industrial giants have been talking to the New York financial authorities in an effort to get them to tolerate Germany's profoundly shareholder-unfriendly accounting practices. 'They want to play baseball in America, but they want seven strikes, no umpire and a right to cancel the game,' said Richard Breeden, chairman of the Securities and Exchange Commission.

Seeing that it was getting nowhere, Daimler, anxious to raise funds, broke ranks. In the bitter words of Helmut Loehr, finance director of Bayer, the chemical company, Daimler has 'capitulated'. Daimler's chief financial officer, Gerhard Liener, retorted that there had been no choice and other companies would be forced to follow. 'Just as English has become the language of international business, Anglo-Saxon accounting has become the accounting language worldwide,' he said.

Mr Liener quickly began to talk with the fervour of the newly converted. 'We can no longer treat our shareholders as if they were dumb and cheeky. Dumb for buying shares and cheeky for expecting something in return. We must begin treating them like customers who need our products,' he said.

Although the details of Daimler's agreement with the SEC have still to be revealed, it is clear that the German company will have to abandon practices that unsettled foreign institutional investors. It will have to provide a detailed breakdown of divisional profits and divulge hidden assets. That in turn should prevent Daimler from hiding profits through unidentified provisions, compelling it to pay higher dividends.

Daimler could never have taken such a momentous step without the full backing of Deutsche Bank, its largest shareholder. Although Hilmar Kopper claims that there are big obstacles to the bank adopting the same course - he is neither prepared to consolidate Deutsche's enormous industrial holdings into the accounts, nor reveal its hidden assets - he clearly realises that where Daimler is going, others will follow, with considerable consequences. He may even have to start being polite at shareholder meetings.

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