How Germany’s leading Corporate Governance advocate was let down by the Supervisory Board system
Note: you can read an update on this story on Thyssen Krupp Corporate Governance here.
“At ThyssenKrupp good corporate governance is an issue which embraces all areas of the Group. It promotes the trust of investors, financial markets, business partners, employees and the general public in the management and oversight of the Company and is essential to the Company’s sustainable success. The Executive Board and Supervisory Board regard it as their duty to secure the Company’s continued existence and sustainable value creation through responsible corporate governance focused on the long term.
The Executive Board and Supervisory Board work closely together in the interest of the Company. An intensive, continuous dialogue between the two boards is the basis for efficient corporate management. We have enhanced and intensified this dialogue step by step and in accordance with national and international standards.
Corporate governance at ThyssenKrupp is based on the German Corporate Governance Code, as published by the Government Commission, under the chairmanship of Dr. Gerhard Cromme, on February 26, 2002 and amended most recently on May 15, 2012.”
That extract is taken from the ThyssenKrupp website.
What led to last Friday’s (19 January) vote by 31% of shareholders against the respected Gerhard Cromme’s re-election as chairman after 10 years? Dr Cromme made his name in German corporate governance circles by cleaning up Siemens after a scandal at its own corporate head. Cromme must feel embarrassed at being accused of sleeping on the job of corporate governance, having complained fifteen years earlier about what he saw as poor corporate behaviour by Thyssen when he, as chief executive of Krupp Hoesch, made an unwelcome (but successful) bid to take over its larger rival, Thyssen. He subsequently went on to become an acknowledged icon of modern corporate governance practices in Germany. He now pleads for understanding on the basis that he, presumably together with the other members of the Supervisory Board, was mislead by the executives on the Executive Board.
The immediate cause of shareholders’ dissatisfaction is a thumping loss coupled with a cancelled dividend. However, the roots go back some years, and in seeking the reasons, this article will discover strategic errors coinciding with lax corporate governance. Finally, we will conclude the article by considering how things might have turned out differently had ThyssenKrupp been using our Applied Corporate Governance approach instead of relying on the traditional two-tier board and ticking the boxes of a Code of Corporate Governance.
In the early years of this century ThyssenKrupp joined the ranks of the steel companies addressing the consolidation of steel industries round the globe. This process saw Lakshmi Mittal strike out from his Indian base to acquire businesses in the USA, and Western and Eastern Europe to build ArcelorMittal into the biggest steel company in the world, producing nearly 100m tonnes per annum. By contrast, over the same period, ThyssenKrupp’s current position is around 17th, producing barely 18m tonnes. In the process, ThyssenKrupp invested boldly in the USA and Brazil, investments which came in late and over budget. The executive team responsible appears to have presented an optimistic view of progress and the Supervisory Board appears to have accepted this. Hindsight provides 20/20 vision, but it was clear during this period that competition in steel production was ferocious and a large measure of scepticism was in order when considering such a major allocation of the company’s resources. The end result is that, after ArcelorMittal, the next ten producers are Chinese, Japanese or Korean, and ThyssenKrupp has clearly missed the boat. Whether the strategy was misconceived or badly executed doesn’t really matter. It was clearly going off the rails five years ago, but the Supervisory Board let the team which had chosen it run for several more years racking up increasing losses. The most recent announcement declared a loss of 5bn Euros after booking a big write-down on the Steel Americas plants.
Eventually Dr Cromme, who is chairman of both ThyssenKrupp and Siemens, brought in Heinrich Hiesinger from Siemens as the new chief executive, to get a grip on things. And for the last 18 months Mr Hiesinger has been tackling what he has described as the “old boys networks” and “blind loyalty” which had led not only to a non-viable business model but to accusations of corruption. The latter emerged after the German Federal Cartel Office imposed big fines on ThyssenKrupp and three other companies for their involvement in conspiracy to supply rails at inflated prices to Deutsche Bahn. Deutsche Bahn is now suing ThyssenKrupp for a sum which could amount to nearly 0.5m Euros and accuses ThyssenKrupp of “systematically defrauding” it over many years. Compounding this was the recent suspension of an Executive Board member, after state prosecutors started investigating whether he had breached the trust of shareholders, reportedly by taking groups of journalists on expenses paid trips. And most recently, the company was accused of paying for the deputy chairman, a trade unionist, to take several first class flights on business trips. The person concerned has indicated that he will now step down and repay the costs.
The chief executive is seen as starting to tackle the problems. He has agreed sales for significant parts of the business, including a prized steelworks, and has put the American plants on the market. He also brought about the departure of three of the six members of the Executive Board and sacked a number of senior managers for misconduct. However, the finger is now pointing at Dr Cromme. The argument is that he has become complacent over the past ten years and he and his Supervisory Board have let things happen which should not have been allowed to happen. In other words they have not fulfilled their fiduciary duties and duties of care. As quoted earlier in this article, Dr Cromme says they were misled by the Executive Board, and indeed it is not for the Supervisory Board to challenge the executives on the nitty gritty of running the business and the minutiae of the company’s strategy. However, Hermes and the other complaining shareholders surely have a case when they accuse Dr Cromme of ducking his responsibilities and the Supervisory Board for accepting poor performance over many years.
How would our holistic approach to corporate governance apply here, and how might it have made a difference? Taking the five elements of good corporate governance in turn:
Ethics: regular confidential surveys of the two major stakeholders, employees and customers, would surely have drawn the Board’s attention to the questionable practices obtaining regarding the long-running contract with Deutsche Bahn, and internal informants would certainly have mentioned journalists being taken on foreign trips as something quite unusual, long before this leaked into the public domain.
Commonly agreed Goal: it seems clear that even if customers enjoyed buying the products of the loss-making steelworks, the shareholders didn’t share their pleasure. What happened to the investor relations that delayed action for so long?
Strategic management: the big mistake was made ten years ago, and maybe with a Lakshmi Mittal in the driving seat the strategy could have worked. But, realistically, there was no Lakshmi Mittal available and the Krupp foundation no longer provided the entrepreneurial support that such a person would have needed. So the Executive seems to have led the Supervisory Board by the nose, and unbiased opinion might have reported this to the Board
Organisation: was the organisation fit for purpose in terms of implementing the strategy? Clearly the US and Brazilian steelworks were not, and the mistake was to allow them to carry on for several years longer than should have been permitted. Equally clearly, the shareholders thought so, but their opinion seems to have been discounted. We can only guess what the knowledgeable senior staff thought, but outside America they are unlikely to have been supportive.
Accountability and communication: from the record of recent events and from ThyssenKrupp’s website page on corporate governance, it seems that the Supervisory Board was very concerned with dotting the “i”s and crossing the “t”s of the German Corporate Governance Code, particularly in view of the role of Dr Cromme. However, the day to day links back to the key stakeholders do not seem to have figured so prominently. Certainly the current views of Hermes and ISS, to name but two major shareholders, suggest considerable disgruntlement rather than recognition of a strong sense of accountability on the part of the Supervisory Board.
Overall, the performance of the ThyssenKrupp Supervisory Board has caused the Association of Supervisory Board Members in Germany to write an open letter to Dr Cromme recommending that he resign the chairmanship of ThyssenKrupp. This perhaps illustrates the limitations of the two tier system of governance, particularly when chaired by a long-time apostle of good governance and proponent of better governance in corporate Germany. Dr Cromme’s life might have been much less stressful had he put in place the rules and processes advocated in our Applied Corporate Governance.
For an update to this story click here.
