View from Frankfurt: Learning how to be held to account: John Eisenhammer watches German companies try to cope with sharp changes to share trading laws

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The Independent Online
GERMAN corporations have taken to displaying distinctly un-Teutonic signs of apprehension and bewilderment. The cause is the recently passed Second Finance Law, the laudable aim of which is to bring Germany up to the same standards of investor protection and market regulation which prevail in all other important international centres.

On 1 August, insider trading was finally outlawed in Germany. Transgression is punishable by up to five years' jail - a dramatic change from a system where the only way of deterring insider traders was the threat of pursuing them for not paying taxes on their gains.

For the moment, this tough new regime remains largely confined to the statute book, as the new Federal Supervisory Office, Germany's answer to the SEC, still has no staff or headquarters, and is expected to be fully operational only by the summer of next year.

However, it should be working in a limited capacity by the beginning of 1995, when the second part of the insider regime comes into force - the publicity rules which stipulate that all potentially price-sensitive company information must first be cleared with the stock exchange and supervisory agency.

The improper handling of such information could cost chief executives fines of up to DM3m (pounds 1.9m).

For a business community that has traditionally adopted an arbitrary approach to sensitive company information, where pretty much anything can be said to anyone as long as it serves the interests of the firm, the new restrictions are forcing a sudden jump into hostile Anglo-Saxon terrain.

The executive floors of listed companies across the land are busy with 'information sensitivity-enhancing seminars', and new operational procedures. No firm wants to be the first to see its chairman carried away in irons.

The leap across the cultural divide poses a challenge. Just last week, a big utility company dispatched its half-year results through the post with a publication embargo set for two days later. This showed faith in the clockwork precision of the German postal service, but even so, appeared a little eccentric in the age of the fax.

A few months ago, one of the country's main car makers, with strong links to the British auto industry, thought nothing of proffering exlusive profit information to an AP-Dow Jones reporter.

A big bank in Munich considered it routine to brief journalists in the morning on its interim business performance, without mentioning any earnings, only to comment on these at length that same afternoon at a separate meeting with analysts.

Such selectivity reaches its apotheosis in the tradition of what Germans call the 'fireside chat', where board members invite a small circle of journalists to discuss what are often significant business developments.

British and Americans may find it paradoxical that this 'anachronistic' behaviour prevails in such a sophisticated, world-class economy.

The explanation lies in the fact that Germany is a different economy, one shaped by the relative lack of a dynamic investor culture.

Put simply, it is not a nation of punters.

This shows in virtually every way the Germans run their businesses, from the opaque accounting system to the selective use of company information.

Only recently, Rolf Breuer, chairman of the German Stock Exchange and a board member of Deutsche Bank, bemoaned the lack of an equity culture.

A mere 6 per cent of German households own shares, compared with more than 20 per cent in Britain and the US. Germany's equity market is very much in the second division, disadvantaged by the customs and preferences of a credit-based economy.

The amount of capital raised through the equity market remains small. Because companies depend to only a limited degree on the market, they do not feel beholden to it, and therefore not accountable to investors.

The distribution of potentially price-sensitive information has not been guided by any principle of investors' right to know, but on a need-to-know basis, arbitrarily decided by board members according to what best suits the firm, and its main creditors.

Companies got away with saying almost anything, like confident profit forecasts that skydived in nine months to record losses, to take the example of Volkswagen last year.

The degree of sensitivity towards the possible effects of information, the sense of responsibility towards investors, is still limited in corporate Germany. They are matters that many chief executives never bother to think about.

When several companies were asked how they are preparing for the new rules, the response was telling. Almost invariably they replied: 'We expect little change for ourselves, since we have long been very open and information-sensitive. But of course a lot of others will have to be much more careful.'

There is a lot of uncertainty, and not a little nervousness. The wording of the law is vague, leaving many firms wondering exactly what constitutes price-sensitive information.

There is a thriving business of flying in pundits from the City to train Germans in the art of surviving the rough world of English- style financial market regulation.

Most firms are busily restricting the number of executives with access to sensitive information, and setting up American-style links between legal, finance and press departments, to filter information.

The era of privileged, exclusive information is ending. Germany is taking another step in the internationalisation of its business practices.

This should boost Frankfurt's image, long tarnished by inadequate investor protection, as it competes in the global financial arena. But it does not remove the doubts about whether one can promulgate an equity culture by law.

German companies are being forced to act according to the rules of a market for which most still only have limited use.

Until this changes and companies really do feel beholden to, and accountable to, investors, there appears to be little chance of a genuine equity culture flourishing.

(Photograph omitted)

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