Deutsche Bank: The Man Who Really Calls the Shots

(Bloomberg Opinion) -- During the go-go years before the financial crisis, Deutsche Bank AG expanded with reckless abandon, chasing a spot among the Wall Street elite at all costs.

Since the wheels came off for the industry at the end of the last decade, the German giant has been ruinously slow to adapt, deepening the value destruction for its shareholders. For two decades now it seems that the people charged with watching over the firm’s managers, its supervisory board, have been missing in action.

From boom to hard landing, it wasn’t just Deutsche Bank’s chief executives who made dubious decisions and procrastinated when tougher remedial care was needed. A perilous mixture of ineffective corporate governance and, latterly, a chairman who still has grand plans for the company has played its part in the long decline.

That the lender’s business model needed fixing has been obvious for some time. The engine that drove Deutsche Bank’s growth during the financial boom — the trading of bonds — shriveled after the post-Lehman Brothers bust and has shrunk steadily since 2012. Meanwhile, the bank ratcheted up more than $18 billion in fines for misconduct, largely for bad behavior at its securities unit — evidence that oversight at the group was fundamentally flawed. At home, a fragmented and competitive banking market has held back profitability for years. For a very long time now, there has been no place for Deutsche to hide.

Under Chairman Paul Achleitner, who’s held the post since 2012, the supervisory board — made up of shareholder and employee representatives — has tried to steer the bank onto a course that will generate sustainable returns. The result has been a series of restructuring plans and a revolving door in the CEO’s office. The present incumbent, Christian Sewing, was appointed in April last year to lead the third management team in as many years.

Unfortunately, while each new broom has arrived with their own strategy, these have merely entailed slight tune-ups of predecessors’ plans, stopping short of the bold overhaul that’s needed. The trading operations have been pared back too slowly. Revenue across the bank has been falling, while expenses have remained stubbornly high and fines have taken a heavy toll on profit. The various managers flip-flopped between integrating and selling a key unit, Postbank, before finally deciding to keep it. The constant changes in direction have cost a lot of time and money.

As Deutsche tries to go at it alone after abandoning talks to merge with local rival Commerzbank AG, the debate has intensified about its future global trading ambitions. As things stand, shareholders shouldn’t hold out too much hope for a radical change of course.

In part, that’s an inevitable consequence of Germany’s much-debated corporate governance regime (subject of many analyses on its pros and its cons). Europe’s biggest economy requires companies with more than 2,000 employees to let workers elect up to half of their supervisory boards, a practice known as co-determination. That board is in charge of appointing senior executives and ratifying their strategy. Shareholders appoint the chairman.

While the social objectives of co-determination are admirable, it’s hard to see how Deutsche’s German employees can be effective in overseeing one of the world’s largest and most complex financial institutions. Typically more familiar with the bank’s mundane deposit-taking operations, the labor representatives will have limited knowledge of the intricacies of Deutsche’s giant derivatives book. The most sophisticated of regulators have struggled to keep the bank in check.

Worker groups have been predictably vocal too in resisting moves that would lead to job losses at home, especially the Commerzbank deal.

But Deutsche’s shareholders are hardly blameless either. In choosing and re-electing Achleitner, they have stuck by a board chairman who was one of the architects of the bank’s current predicament. A staunch advocate of the investment bank, he has long argued that Europe needs a big finance beast that can compete with Wall Street. Indeed, he helped determine Deutsche Bank’s destiny two decades ago: As a Goldman Sachs banker, he advised Deutsche on the transformational acquisition of America’s Bankers Trust in 1999.

Credited with helping Germany’s biggest companies reorganize in the 1990s as they unwound cross-shareholdings, Austrian-born Achleitner has built a powerful network of fellow corporate titans. He sits on the supervisory boards of Bayer AG and Daimler AG. There have been failures too. As chief financial officer of the insurance firm Allianz SE, he helped orchestrate the doomed 2001 purchase of Dresdner Bank AG. The lender ended up being sold to Commerzbank, and a crisis-era rescue of the German bank followed.

In fairness, Achleitner didn’t appoint Deutsche’s former co-CEOs Juergen Fitschen and Anshu Jain (whose time at the top was particularly damaging as he fought to maintain the lender as the “last man standing” in European investment banking). Since Jain’s 2015 departure, pretty much the entire management group has been replaced.

Yet there’s a clear sense that the chairman has been working around his CEOs, in a manner that has reportedly undermined the top executives who followed: John Cryan and now Sewing. In sticking by his vision of Deutsche challenging the U.S. lenders, Achleitner has pushed back on rethinking the investment bank.

When shareholders gather at the bank’s annual meeting on May 23, they may want to re-examine their consistent backing of the one constant presence at Deutsche’s top level over the past seven years. Something needs to shift.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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