Why German CEOs are a problem for the corporate sector

At first, I assumed that the senior investment banker I was meeting for lunch at his posh private members club in Mayfair was joking. “There are no chief executives in Germany,” the specialist in merger and acquisitions advisory quipped.

I wondered if he was referring to the fact that the current crop of German CEOs tends to be more humble and less buccaneering than earlier generations of corporate leaders. Towering figures such as Volkswagen’s Martin Winterkorn, Deutsche Bank’s Anshu Jain and Daimler’s Jürgen Schrempp were often larger-than-life characters who defined the whole culture of their corporate empire, and not necessarily in a good way.

But my lunch date really meant it. “I’m dead serious,” he said, “German CEOs are not real chief executives and that’s a real problem for the German corporate sector.” The banker then embarked on an extensive lament on the sorry state of German blue-chips, with many members of the Dax 40 embroiled in corporate crisis, and management being unable to adjust swiftly disruptive change.

For instance: Germany’s auto industry has for years struggled with the evolution to electric cars, software maker SAP is fighting to fend off threats from more agile rivals, pharma and agri group Bayer is bogged down by its botched takeover of Monsanto, Deutsche Bank is battling to stay relevant as a global investment bank while being under threat by nimble fintechs, Thyssenkrupp has for years failed to put its steelmaking operations on a sustainable footing, and BASF is overly depended on Russian gas supplies.

While all these corporate crisis have different causes, they also have a common feature, the banker argued — a woeful management failure, caused by ossified governance structures that has taken companies hostage.

Historically, German corporate leadership in postwar Germany has been a team effort. With the exception of the Winterkorns, Jains and Schrempps, CEOs have been less powerful than in the US or the UK

That was one of the big lessons learnt from the political, ethical and economic catastrophe of the Third Reich, which was defined by the opposite: a strict “Führer” principle in all areas of society, where subordinates were expected to execute orders from higher-ups.

Now, under the country’s two-tier board system, German CEOs are not even consulted on the hiring decisions of fellow board members. The appointment and dismissal of executives is a key competency of the supervisory board, where half the seats are held by union representatives.

Moreover, the executive board is a collective body: under German law, its members are jointly responsible for the company’s decisions. A German CEO cannot compel a fellow board member to do certain things — if the head of product has a fundamentally different view from the boss, and cannot be swayed by the power of the argument, there is little the CEO can do, apart from lobby the chair or threaten to resign.

Because the chair has to balance the interests of investors and workers, it is not necessarily straightforward for the supervisory board to resolve the situation, and the consequence more often than not is gridlock.

For decades, consensual decision-making and the “social partnership” between owners and workers has served German companies well. As workers and managers treat each other with mutual respect, acrimonious labour unrest with long walkouts have been rare. The country’s employers invest heavily in the education of young apprentices and are rewarded with a loyal and well-educated work force.

Yet, in a world with ever-faster structural change, disruptive innovation and new global competitors, the built-in stability has become a burden for Germany’s corporate world, the banker argued.

Disruption always creates losers, and under German corporate governance, managements have ample opportunity to fight change tooth and nail in an attempt to avoid painful adjustment for as long as possible. Executives in charge of divisions that are in structural decline can forge alliances with union representatives who are keen to block large-scale job cuts, and hence become an almost insurmountable roadblock to change.

Addressing that issue will be a stretch, given that shifting a corporate governance system that has evolved over decades is anything but easy. The problem can be aired over a nice lunch, but finding ways to fix it will surely take much more.

olaf.storbeck@ft.com