Deutsche Bank chairman warns of conflict between foreign regulators and German governance

Newsletter: Moral Money

German companies cannot satisfy both international regulators and local securities laws, Deutsche Bank Chairman Paul Achleitner warned in a speech in Frankfurt Wednesday.

Germany has a two-tier advisory system where the board is fully responsible for the day-to-day affairs as well as the strategy of the company. Managers should not receive orders from the supervisory board, which is only empowered to appoint, control and advise management.

“[International] regulators and watchdogs do not accept when [a German] president emphasizes that it is just their duty to monitor the control system of the company, ”Achleitner said at a conference on corporate governance. “Instead, they expect detailed control measures that fall outside the scope of German securities law.”

Achleitner has chaired Deutsche since 2012 and will step down from the lender next May, at the end of his second five-year term. Deutsche has yet to name a successor.

Under his leadership, the bank’s share price collapsed nearly 70% as it racked up losses of € 12 billion, raised € 19.5 billion in new capital and paid out billion to settle various allegations of misconduct.

For much of the past 20 years, Deutsche has had a difficult relationship with foreign regulators, including the US Federal Reserve, with frequent complaints about the bank’s controls.

Deutsche has stabilized since Christian Sewing was appointed managing director in 2018 and launched a radical restructuring. At the beginning of this year, the bank registered its highest quarterly profit since 2014, and its share price has risen by over 45% in the past 12 months.

In his speech, Achleitner argued that German supervisory boards have become much more professional over the past decade. However, he said they still lack the legal powers that non-executive directors have on US or UK boards and are struggling to meet the expectations of non-German regulators.

“At least in the banking sector, not only the chairman but also the individual members of the supervisory board are invited to conversations [by regulators]”said Achleitner.

“It’s of little help [in such conversations] to point the finger at German corporate governance, ”he added, arguing that foreign regulators hold supervisory boards accountable for certain matters regardless of their actual legal competence under German law.

Although Achleitner did not call for the abolition of the German two-tier board system, he suggested several reforms, including that in order to make supervisory boards more effective, they should be reduced. Currently, they typically have 20 members, which makes “productive discussions and quick decisions” more difficult, he said.

He also called on companies to redouble their efforts to professionalize supervisory boards. “Since the turn of the millennium, we have surely seen improvements in recruiting. We must rely on them to meet the growing expectations of investors and regulators. “

Last week, Sewing had to apologize after the bank posted, then pulled, a research report accusing German financial regulators and the country’s outgoing conservative government of serious failures.

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