Buhlmann's Corner

Good conduct or responsibility?

Or in today’s terminology, do I want compliance or do I want ethics?

Of course you need rules otherwise traffic would be in permanent gridlock, nobody would get anywhere, and social and economic interaction would cease to exist . Sooner or later something happens and it gets recorded on a camera put there by the regulators. Broadly speaking, German legislation on joint stock companies introduced 6 September 1965 (Aktienrecht - BGBl I page 1185, in force from 01.01.1966) still holds good today. With no acknowledged responsibility, things can work for years as long as nobody starts asking questions. Insurance companies, pension funds and public sector expenditure all invest more in advertising than in responsible conduct.

A very unique case in point unfolded last month in Madrid during the AGM of Red Electrica when, after many years the company decided to change the structure of management – the Chairman and Chief Executive were no longer to be combined in one person for the following reasons:

“Red Electrica Board is a true believer in aligning the governance structure of the company with international best practices. Not only due to the fact that 69% of Red Electrica ownership is in the hands of foreign investors, but because the Board led by the chairman, is convinced of the benefits of having a well-tempered structure with proper checks and balances, especially in a complex regulatory environment“. This was the approach management adopted to explain the need for change to the shareholders whose approval was being sought.

Things work a bit differently in Volkswagen AG. There, we are witness to a minuet of posturing between the chairman of the executive board and his Supervisory Board counterpart. The former is obsessed with the idea of shifting from the position of CEO to being head of the Supervisory Board in one move and without going through the cooling-off period. Insofar as the issue doesn’t run counter to a policy of general legality, it can be said that here, responsible conduct would be to involve the shareholders in deciding how and when.

This all holds for M&As too. Despite the absence of any kind of official, let alone substantive offer on the part of Western Potash, K+S saw fit to send a letter to its shareholders asking them to hold off forming any kind of opinion regarding the situation or coming to any conclusions. But then the same envelope contained a questionnaire that the company invited the shareholders to fill in and, bypassing the recommendation agencies, express their opinion on the issue.

Canvassing in this fashion would be perfect for banks for getting their shareholders onboard. Two come to mind that are complete opposites, namely Banco Santander and Monte dei Paschi di Siena. Are you more interested in a cultural shift, or is banking with good and responsible conduct good enough for you?

Many people point to the divergence between the capital of the passives and the wealth of the actives, but they both have to be on the balance sheet, inseparably. Good conduct is for capital without which we wouldn’t get very far. Responsibility is, instead, how to make use of, take care of and enhance the capital.

On the subject of capital and good conduct, we saw, in 2009, that it doesn’t work to bundle worthless capital and sell it under another name. It was so all-pervasive that we talked endlessly, and mistakenly about “bank crisis”. When will we ever learn that outsourcing responsible conduct forges ever longer and obscure hierarchies of responsibility that in the end always trigger the same “something” that happens. So the question remains, how long before we identify it for what it is instead of looking the other way?