Germany Inc.’s Wild Week of Corporate Collapse and Redemption

(Bloomberg) -- At its best, Germany is the kind of well-managed place that steers clear of corporate drama, so the past week was a shock to the system. One-time financial tech darling Wirecard AG imploded after saying more than $2 billion on its balance sheet doesn’t exist, Bayer AG agreed to pay $12 billion to settle U.S. legal claims, and Deutsche Lufthansa AG narrowly escaped insolvency with a $10 billion rescue package.

“Wow, what a week,” said Marc Tuengler, a shareholder representative at Germany’s DSW investor association in Dusseldorf. “When the dust has settled, particularly on Wirecard, people will start asking some hard questions about trust, and whether our regulatory framework is sufficiently robust.”

The country has suffered its share of corporate malpractice over the years, from a bribery case at Siemens AG a decade ago that almost brought down the engineering behemoth to the diesel-cheating saga at Volkswagen AG that’s cost the carmaker more than $30 billion. Just this week, one of the country’s biggest financial scandals—a dividend-skimming scheme called Cum-Ex—reared its head when prosecutors charged yet another lawyer in the trading strategy that ranks as the biggest tax heist in German history.

But none of those cases have led to more robust oversight, said Gerhard Schick, a former German lawmaker who now works at a Berlin think tank demanding financial reform. In fact, many cases, including Siemens, Volkswagen, and even the Bayer litigation, were the result of outside pressure from foreign jurisdictions on German companies. In Volkswagen’s case, the scam only collapsed when U.S. authorities got involved, leaving their German counterparts scrambling to respond.

“For the longest time we harbored a feeling that our big companies are honorable, despite past scandals,” Schick said. “There’s a whole range of pressing issues, from financial crime to climate change, that just haven’t been tackled aggressively because it was easier to cruise along and leave people in peace.”

Checks, Balances

German companies should have better control mechanisms given their unique system of an executive management board that runs the company and a supervisory panel that watches over senior managers. But even such checks and balances can’t prevent malfeasance, said Ingo Speich, the head of corporate governance for Deka Investment in Frankfurt.

“It’s not about one-tier or two-tier governance systems, it’s about people’s behavior and stance,” Speich said.

And while Germany reboots from lockdown, the drama went beyond board rooms, with painful reminders that the coronavirus is far from defeated. An outbreak that sickened more than 1,000 at a meat-processing factory in the densely populated state of North Rhine-Westphalia pushed up infection and closely-watched contagion rates.

That prompted public criticism that the government wasn’t doing enough to control virus hot spots, and took some of the shine off of Chancellor Angela Merkel’s reputation for guiding the country through the pandemic with relatively few deaths, a business-aid program deemed fair, fast and generous, and broad public acceptance of masks and social distancing.

Hard Landing

In this week’s turmoil, the hard landing of Wirecard left a particularly messy mark as it went from tech visionary to fraudulent outcast in just a few days. Based outside Munich, the company had been promoted as a technology beacon on Germany’s DAX30, the benchmark index populated largely by industry and engineering heavyweights including Volkswagen and Siemens. The demise of the company, which began insolvency proceedings on Thursday, is especially embarrassing for regulators and auditors, who stand accused of failing to heed multiple warning signs of malfeasance.

BaFin, the agency that oversees the financial industry, called it a “complete disaster.” German Finance Minister Olaf Scholz said the scandal is a “wake-up call that we need more supervision and control of financial markets” and promised an overhaul of regulatory structures. But that’s after he initially lauded regulators by saying that the supervising institutions “worked very hard and they did their job.”

Bayer, meanwhile, effectively saw its $63 billion purchase of Monsanto—the most expensive takeover in German history—rise by 20% after it agreed to the settlement with plaintiffs who said they had gotten cancer from using Roundup, a weed killer made by the American company. While the accord gives Bayer some closure over litigation that had weighed it down in the last two years, it also vindicated investors who said management had been negligent in not seeing the risks in the takeover.

More Rules?

The double-blow of Wirecard and Bayer was softened somewhat by the survival of Lufthansa. After the coronavirus pandemic grounded carriers around the globe, Lufthansa was forced to seek a bailout or face the prospect of going bust, potentially leaving Europe’s largest economy without an airline.

But getting the deal over the line proved nerve-wracking. Lufthansa’s biggest shareholder, billionaire Heinz Hermann Thiele, voiced opposition to the government-orchestrated rescue, and for several days salvation looked unlikely. In the end, Thiele came around, but it meant investors had to endure wild swings of the stock before the deal was struck.

“This week changed a lot,” said Tuengler of DSW, “and there will be calls for tougher rules.”

©2020 Bloomberg L.P.