Germany rethinks board structure after corruption scandals

An unusual law that shapes the way German companies operate is being re-examined yet again following corruption scandals at Siemens and Volkswagen – even as more companies are finding ways to skirt the requirements of the law.

Under German law, companies are required to give as many as half of their supervisory board seats to labor representatives. That increasingly appears to be leading to conflicts of interest and bribery in corporate Germany, because executives need a board's support to keep their jobs and carry out strategies.
At Siemens, one of the company's most senior executives was arrested last week amid accusations about funneling euro34 million, or USD45.6 million, to gain favor with a labor union represented on the board.

Prosecutors privately dub the case "Amigo" to highlight the suspicious alliance between management and labor.

At Volkswagen, a senior executive earlier this year was fined euro576,000 and received a suspended prison sentence for his role in a scandal that involved bribing workers with money, trips and prostitutes.

Nowhere in Europe are the ties between labor and management so close.
Germany requires any company with more than 2,000 employees to grant half its board seats to labor.

Only Austria and Luxembourg come close, requiring one-third representation. Fourteen of the 27 member states of the European Union have no such requirements whatsoever.

Yet the parallels between the cases at Siemens and Volkswagen are prompting some Germans to call for an overhaul to the system, known as co-determination, or Mitbestimmung.

Its advocates say that the consensus-driven corporate culture helped the country emerge from the devastating effects of hyperinflation and two world wars over the last century to become a powerhouse in the global economy.

But German media are beginning to point to questionable practices between labor representatives and management at other German companies, such as Deutsche Bahn and Deutsche Post.

At the same time, a few German firms are finding ways to get around the law, in part by incorporating abroad or changing their legal status.

The fear in Germany, and among international investors, is that the cases exposed so far are just the tip of the iceberg. Die Welt, a German newspaper, in recent editorials called the law "a license to bribe."

Thomas Straubhaar, director of the Hamburg Institute of International Economics, said he hoped "that Siemens and Volkswagen remain exceptions.
But on the other hand, the system is susceptible to collusion and corruption."

At Deutsche Bahn, the German railway system, the chief executive, Hartmut Mehdorn, contributes corporate funds to an external organization headed by a labor representative, Norbert Hansen, who is the vice chairman of the company's supervisory board.

The lobby, called Allianz pro Schiene, describes itself as an alliance to promote environmentally friendly and safe rail transport. A spokesman confirmed the contribution but declined to name the amount. The German weekly news magazine Der Spiegel put it at euro130,000 a year.

At Deutsche Post World Net, the German postal company and operator of the DHL express delivery service, the chief executive, Klaus Zumwinkel, has also been accused of getting too cozy with labor. Good relations will be important next year when a commitment of no layoffs expires.

In one example, Deutsche Post has 530 employees who have put their normal jobs aside to act as full-time labor representatives, often with company cars and private secretaries. This is well above the legal minimum of about 400 for the company, which has more than 500,000 workers and is one of the world's largest employers.

A spokesman for the company, Dirk Klasen, said that its decentralized structure justified more labor representatives.

"It is not a luxury job," he said. "It is more important that we could get a good atmosphere of open discussions."

In another episode, Zumwinkel, as head of the supervisory board of Deutsche Telekom, last year backed Regine Büttner to become the new head of personnel at the former telephone monopoly. The endorsement was controversial because she was the wife of Rolf Büttner, then-vice chair of the supervisory board and a labor representative at his own Deutsche Post, German media have widely reported. Zumwinkel lost in the end.

Klasen, the Deutsche Post spokesman, declined to comment.
Manuel Theisen, a professor at the University of Munich, said that the biggest conflict of interest arises when the head of a company's worker council also sits on the company's supervisory board. Such is the case at many businesses, including DaimlerChrysler, the auto manufacturer.

Erich Klemm, vice chair of the supervisory board, joined DaimlerChrysler as a mechanic at age 16. Since 1988, he has sat on the board of Daimler Benz and then later DaimlerChrysler after a merger.

Klemm has a "massive power function" at the company, Theisen said. Individuals like Klemm "are insiders. As such, they can stomp very hard on the feet of management, even before a meeting of the supervisory board occurs."

A spokesman for DaimlerChrysler could not immediately be reached.

As a way to get around Mitbestimmung, some companies feel pressure to incorporate in other countries or to change their legal structure to Societas Europae. It is a legal form similar to SA, AG or Inc. that the European Union created in 2004 to help standardize corporate governance across Europe. It also gives companies more flexibility in labor representation.

At a shareholders meeting in Berlin on Wednesday, Henning Gebhardt, a fund manager at DWS, called on DaimlerChrysler to convert to an SE.

"The German model of Mitbestimmung has unfortunately not been effective in practice," he said.

Allianz, the insurance company, became an SE last year. BASF, the chemical company, and Fresenius, the medical company, have announced plans to follow suit.

Air Berlin, by contrast, became a British Plc when it listed on the stock exchange last year. In the middle of a roadshow to sell its shares, the chief executive, Joachim Hunold, said that Mitbestimmung "is no longer competitive internationally."

"There are always cases in which companies always must compromise, as was the case with Volkswagen," he told Der Tagesspiegel, a Berlin newspaper.
A spokeswoman confirmed his comments.

The Confederation of German Employers' Associations, a large umbrella group that lobbies on the behalf of companies, plans to take up the issue of overhauling the co-determination law before the next national election, according to Thomas Prinz, a member of the group's legal department.

"We will continue our fight to make Germany more competitive."