Lessons about big extra pay, and justice

April 09, 2003|By JAY HANCOCK

FROM Eliot Spitzer, attorney general for New York, to Arthur W.H. Docters van Leeuwen, president of the Netherlands Authority for Financial Markets, to Lee Jung-Jae, chairman of South Korea's Financial Supervisory Commission, corporate baby sitters are pulling out their paddles.

A decade of misbehavior cued a massive crackdown in the executive romper room.

But the most interesting white-collar prosecution is not taking place in the great financial capitals. It's in Dusseldorf, Germany, known for steel mills and blood sausage.

In a hearing scheduled for April 17, a Dusseldorf judge will decide whether to hold trial to determine if Deutsche Bank boss Josef Ackermann and five other executives are criminally guilty of untreue, or breach of trust.

If the trial proceeds, Ackermann, perhaps Germany's most powerful corporate figure and ultimate head of Baltimore's Deutsche Bank Securities unit, may have to resign. If convicted, he could spend five years in jail.

Here is what occurred.

Three years ago, as supervisory directors of German conglomerate Mannesmann AG, they were considering a hostile takeover bid from Vodafone Group PLC, a British telecommunications firm, in what would become history's biggest merger.

Mannesmann boss Klaus Esser stubbornly opposed the deal, or at least played hard to get, even though Vodafone made a huge offer. But eventually he caved. Mannesmann shareholders doubled their money, and Ackermann and the other board members rewarded Esser with a $30 million golden parachute.

Business as usual, right? In the United States, merger bonuses and gilded bailouts are common as hamburgers.

Not in Germany. For borrowing from the American playbook, Ackermann and the other Mannes- mann directors find themselves in criminal legal jeopardy. Charges were filed by Dusseldorf state prosecutors in February.

"Bribery," say headlines in Germany, where the tale of Esser's goldene handschlag, or golden handshake, has become the Martha Stewart-style schadenfreude story of the day.

Critics claim that Esser was paid off, pure and simple, to ignore his duties and sell out his company and employees to the British raiders. Ackermann and other directors are accused of breaking faith with the Mannesmann organization and essentially suborning malfeasance with the $30 million payment to Esser. The defendants deny wrongdoing.

It is true that Mannesmann shareholders owned the Dusseldorf-based company, approved the merger and made out handsomely. This doesn't matter to Ackermann's accusers.

As a director, "you must only consider the interests of the AG - the company - and the company has nothing to do with the stock price," Martin Sorg, a partner in the law firm that initiated the Mannesmann prosecution, said on the phone yesterday. "If I take any measure, I have to consider whether this is in the interests of the company, not whether it's in the interests of the shareholders."

Ohhh-kay. So what's important is the corporate bureaucracy, not the customers who buy the products or the owners who make the company possible.

Sorg is a principal with Stuttgart's Binz & Partner, which filed a criminal complaint with the Dusseldorf prosecutor's office against the Mannesmann defendants, as any citizen can do under German law. After the prosecutor certified the allegation, Sorg was shocked that not every German pundit believed it was the right thing.

"The local press and the normal daily press have high sympathy for us, but the economic press argues against us because they are on the side of the big companies," he says. "That was very surprising for us and very disappointing for us."

Well, Herr Doktor Sorg, maybe the economic press is against you because they know how economies work, understand corporate governance, worry that Germany is turning into Japan and recognize scary, prosecutorial overreaching when they see it.

If corporate directors don't primarily represent the shareholders who own the company, whom do they represent? If directors can't approve compensation for executives employed by shareholders, who should? Some local district attorney?

The Dusseldorf prosecutor is way out of bounds. That's the first lesson of the Mannesmann case.

Here is the second. When corporate boards reward executives with enormous extra pay for little extra work, public opinion, and sometimes public prosecutors, tend to erupt.

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