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German businessman Klaus Esser, former chairman of Mannesmann, has one advantage over his colleague, Deutsche Bank chairman Josef Ackermann: his law degree. It's the kind of background that looks increasingly in demand in post-bubble Germany. Both men learned last week that they, along with four other men, had been indicted on still-unspecified charges after a two-year investigation into more than $100 million in bonuses paid out to Esser and other employees. The bonuses were awarded after U.K. telecoms giant Vodafone acquired Düsseldorf's Mannesmann in a $180 billion takeover, the most expensive in history.
Dubbed the Mannesmann Affair, the deal has been a nagging knock in the once finely tuned engine of corporate Germany. Not only did the cross-border deal wound Germany's industrial pride, but curmudgeonly shareholders charged that the bonuses were glorified kickbacks to managers for selling Mannesmann to the Brits. Those involved deny it, but the state's Ministry of Justice says there is enough evidence to warrant a trial. Hence, some of the biggest names in German business could soon be hauled before a panel of judges if the state court agrees to hear the case.
And the woes didn't stop with the Mannesmann Six. A Munich court ruled that Ackermann's predecessor at the Deutsche Bank helm, Rolf Breuer, had violated confidentiality laws by discussing media mogul Leo Kirch's debt in a televised interview early last year. This, the court says, left Breuer and the bank liable for what could be more than €100 million in damages to Kirch, who eventually filed for bankruptcy. Investigators also raided homes and offices of eight other prominent German executives looking for evidence in a fraud case surrounding bankrupt industrial group Babcock Borsig.
What's going on? Traditionally, German big business has been a staid, chummy affair where consensus reigns and the powerful protect one another. But now the country is starting to look more like the post-Enron U.S., with every managerial decision coming under a prosecutor's microscope. Optimists say that transparency and accountability have simply taken their rightful place now that the interlocking web of cross-holdings that comprised good old Deutschland AG has been disentangled. But others see a more sinister force at work.
"In the case of Mannesmann, it's backlash," says Daniel Selter, a specialist in corporate governance and executive compensation for Boston Consulting Group in Berlin. "Here in Germany, we attack anyone who makes money — it's a matter of envy — while, ironically, there's still a lot of freedom for incompetent managers to stay in power so long as they don't do something blatantly illegal."
The object of that envy is Esser, who became chairman just six months before Vodafone made its initial bid in late 1999. He spent 10 weeks and $215 million maneuvering out of Vodafone's clutches, with $25 million of that going to an ad campaign urging shareholders to resist Vodafone's offer. Vodafone, however, kept bidding, and the share price climbed from €190 to €383 — when Esser abruptly agreed to sell.
The advisory board rewarded him with $30 million — largely, they said, because his clever tactics had added nearly $80 billion to the company's worth. But two Stuttgart lawyers, Mark Binz and Martin Sorg, filed a complaint with the prosecutor's office, charging that the bonuses were unrelated to performance and therefore violated German law. Although their complaint was first dismissed, the indictment eventually went out to Esser, Ackermann and four others — including IG Metall trade-union boss Klaus Zwickel, a labor representative on the supervisory board who allowed the bonuses to go through but now says they were a mistake. Zwickel has vowed to fight the complaint, as have Esser and Ackermann.
Sorg concedes that Esser's defense tactics provided a zip to speculators, but he says they added no actual value to the company. "The shares gave back more than half their gain in the 10 months after the merger, and from the time of the first offer to now have actually underperformed the NEMAX stock index," he says. Stephan Paul, a professor of applied economics at the University of Bochum, says the way Esser's $30 million plays out in court — if indeed the case gets that far — will depend on whether his contract specified such variable compensation. He predicts the real focus will be on the $70 million divvied out to retirees, secretaries and others not in a position to impact on share prices. Deutschland AG isn't quite disentangled yet.
- STEVE ZWICK | Dusseldorf
- Prosecutors take a close look at German corporations