The power of investors: Why stronger supervisory boards would be the bitter pill for Paul Singer & Co

Schach

Dear readers of the GermanBoardNews,

this week, the 123-page draft of a law to strengthen financial market integrity (Financial Market Integrity Strengthening Act – FISG) was published. Already the view of the objective (“… Recent events have shown that especially the balance sheet control must be strengthened and the audit of annual accounts must be further regulated…”): With this law, the Federal Ministry of Finance and the Federal Ministry of Justice want to learn lessons from the Wirecard case and present them as an agenda.

However, we all know – even if we do not know much yet because the principle of silence applies for reasons of liability law and procedural tactics – that Wirecard (as with Steinhoff and other cases before) is a complete failure of the governance system. However, the aforementioned federal ministries do not dare to question the system as a whole.

This is quite understandable. After all, one would have to deal with complex and difficult issues – such as this one: Does the system of control and governance anchored in German company law still function at all in the digital world, which is driven by increasingly powerful institutional investors? Who owns the economy and what social responsibility do companies and their stakeholders have? What role do ethics and corporate culture play in governance issues? Who decides and who monitors whom, how and where?

Of course we are not alone in the world with this problem. Now there is #vastaamo, a #Wirecard in Finnish – another nightmare and with it, so to speak, the increase of the unimaginable. And again it says now: “You had seen it coming, nobody had done anything about it.”

The Worst Case for Economy and Capital Market

In order to give answers to the above questions, it is necessary to first understand some of the interrelationships correctly. And sometimes it helps to imagine the worst case scenario. But what would be the worst case for the German economic and financial system? What would be even more powerful than Wirecard, Steinhoff and the Lehman bankruptcy?

Let’s think the unimaginable: The investment volume of the large international institutional investors is growing and growing – and with it their power, i.e. their influence on companies and their acting persons as well as on the (privately organized) German Stock Exchange and its rules and regulations.

At the peak of this development and in difficult economic times, Larry Fink leaves Blackrock’s stage and is replaced by a guy who is as ticking as Paul Singer – an aggressive investor who is primarily interested in making fast money and puts companies under massive pressure.

What would then be going on on the German capital market? How would politics (re)act? Are we prepared for such scenarios – even in a milder form? This question is of course rhetorical.

With a reform of the Bafin and with even more scrutiny, you certainly won’t do anything wrong, but you won’t solve the real problem. Instead, politicians are just turning a few more screws in the steel plate to keep the old system in place. I believe that we must change this as quickly as possible and – with momentum and open eyes – start a broad structured dialogue in order to develop a better, sustainable corporate governance system.

One thing is already clear to me: We need more bitter pills against investors like Paul Singer – in the form of strong, professional supervisory boards with more competencies and more responsibility, which are independent of investors and other strong stakeholders. An important step in this direction would be the new §100a AktG, which I proposed in the last issue of GermanBoardNews. More on this soon.

Stay healthy!

Best regards

Your

Peter H. Dehnen (Editor)