Ahead of the Deutsche Bank AGM tomorrow, Hans-Christoph Hirt, Head of Hermes EOS at Hermes Investment Management, assesses the bank’s progress and highlights areas for improvement.
Robust strategy progress despite reversals
We welcome the focus of Deutsche Bank’s Strategy 2020 on reducing the bank’s scope, complexity and costs and shrinking risk-weighted assets with the ultimate objective of creating sustainable returns for shareholders. Deutsche has made robust progress in the implementation of Strategy 2020, including significantly improving its capital position.
We commend Deutsche for the way it handled a very difficult period in the second half of 2016 following rumours about the size of a potential settlement with the US Department of Justice (DOJ) for mis-selling mortgage-backed securities before the financial crisis. The $7.2 billion settlement with the DOJ and progress on other significant litigation matters is very welcome.
However, the reversal of Deutsche’s strategy on Postbank, which was put up for sale in 2015 but will now be re-integrated, and its Asset Management business, which the bank very recently declared core but now plans to partly float, raises questions about the bank’s ability to develop thoroughly considered strategic positions and then execute them. We recognise there were fundamental reasons for these strategy shifts, but Deutsche should now move forward with the re-integration of Postbank and the flotation of a minority stake of its Asset Management.
We look forward to the management board’s further execution of Strategy 2020 and delivering on the cost reduction, capital and return targets communicated for 2018 through 2020.
Supervisory board election
We are supporting the election of the proposed candidates for election to the supervisory board. However, two of the candidates have been suggested by two of Deutsche’s largest shareholder groups. While there is nothing wrong in principle with the representation of major shareholders on the supervisory board, we urge the nomination committee to carefully monitor its composition and ensure a robust nomination process. It is vital that the supervisory board is composed in a way that ensures an optimal mix of experience, skills, diversity and adequate independence. This can be compromised when major shareholders press for representation by their candidates on the supervisory board. The nomination committee should consider and communicate how it will manage this challenge going forward.
Remuneration of management board
We commend Deutsche for not paying any bonuses to the members of the management board for a second year in a row. Furthermore, we welcome the significantly reduced size (down almost 80%) of the bonus pool for senior employees . While a total of €1.1 billion was granted to retain key staff, the overall approach to remuneration has sent a positive signal to shareholders that the bank is committed to aligning management and executive pay better to shareholder returns.
Last year we opposed the proposed new remuneration system due to an array of concerns, ranging from the inadequate transparency regarding the performance criteria and targets in general and the proposed so-called Division Performance Award, to the high level of discretion of the supervisory board concerning variable remuneration. We are pleased to see that that the supervisory board has taken the criticism of shareholders into account and overhauled the remuneration system. Many of our suggestions, including better disclosures, a reduced weighting of relative Total Shareholder Return (TSR) and the adjustment of the peer group, have been implemented. We also welcome the removal of the Division Performance Award. While we continue to have concerns about the lack of specific disclosures around certain performance metrics and particularly targets, in the light of the good track record of the supervisory board in exercising discretion, we will support the new remuneration system.
Culture and transparency improvements needed
We remain underwhelmed by Deutsche’s progress on culture change. The most recent employee engagement survey suggests that the employee commitment and enablement index levels have declined to critical lows . However, we welcome the fact that more Deutsche Bank employees now observe changes in their behaviour.
Further to this, we urge Deutsche to develop an ambitious sustainability strategy with tangible targets which is integrated into and supportive of its business strategy. Given the more pressing issues highlighted above, this has not been a focus of the bank over the last couple of years. However, in support of Deutsche’s objective to create adequate returns for shareholders, it needs to move from a reactive to a proactive approach to sustainability.
In the light of the substantial shareholder support for special audit proposals at last year’s AGM and similar requests this year, we implore Deutsche to be more transparent about the internal investigations that it has conducted into alleged wrongdoing by management and supervisory board members. This is a necessary step, to provide clarity, regain shareholder trust and move on.