Ahead of the Deutsche Bank AG AGM on Thursday 24 May, Dr. Hans-Christoph Hirt, Head of Hermes EOS at Hermes Investment Management, highlights the questions the Chair needs to answer and explains why the Chair is ultimately responsible for the company’s limited progress in the implementation of a value-creating strategy. He also raises concerns about the high turnover of management and supervisory board members and urges a review and improvement of the selection and nomination processes for management board members and non-executives.
The Chair needs to answer serious questions regarding CEO turnover and other management board changes
Given the catalogue of challenges Deutsche Bank currently faces, more effective leadership and continuity is needed in its management board. Unfortunately, there continues to be high churn:
- The appointment of Christian Sewing as the new CEO in April, which was preceded by rumours and leaks, means that Deutsche Bank has now had four CEOs/co-CEOs during the six-year tenure of the Chair, Paul Achleitner. He hand-picked John Cryan, who was initially appointed as co-CEO in mid-2015 (when he was a member of the company’s supervisory board), after overseeing the previous co-CEOs for three years following his own election in 2012
- In addition, Marcus Schenck, one of Deutsche Bank’s deputy CEOs, appointed to the management board in 2015, and Kim Hammonds, its former COO, appointed in 2016, have either left or will leave the company following the appointment of Christian Sewing as new CEO
- These changes follow a significant management board purge after the appointment of John Cryan in 2015
The continuing frequent departures of management board members raises the question of whether there are deficiencies in the supervisory board’s selection process of senior executives. Furthermore, we ask whether the management board changes could simply mask an underlying problem, namely, the lack of an implementable strategy that creates value for shareholders and other stakeholders.
The Chair is ultimately responsible for sustainable value creation
While the Chair of the supervisory board of a German public company has no immediate legal responsibility for the development of a strategy and its implementation, he/she is required to be closely involved in related processes under both company law and as part of obligations under the Banking Act. The Chair also leads on the appointment of the CEO and the management board and as such has the means to influence strategy and its implementation. Thus, in our view the Chair bears ultimate responsibility for a company’s sustainable value creation.
Paul Achleitner has not only overseen significant CEO and management board turnover during his six-year tenure but also a number of attempts to define and implement a value creating strategy for Deutsche Bank. This included strategic U-turns, not least regarding both the bank’s retail and asset management businesses, and to date, a failure to move decisively on the troubled investment bank. In our view, he is therefore ultimately responsible for the limited progress Deutsche Bank has made during his tenure in the implementation of a value creating strategy. Paul Achleitner will need to demonstrate more effective leadership at the top of the supervisory board.
The high turnover of supervisory board members may impact its effectiveness
During the tenure of Paul Achleitner, there has been an unusually high turnover on the supervisory board of Deutsche Bank. Some of the changes during the early part of his tenure may have been desirable and well-managed. However, even following the initial supervisory board clear-out, there continues to be significant change, with some members leaving the supervisory board after a single term. This gives rise to the following concerns:
- The average tenure of the shareholder-elected members on Deutsche Bank’s supervisory board will be just over two years following elections at the AGM.1 Given the complexity of the bank’s activities, this could mean that they have a limited understanding of the business, which would impact the effectiveness of the supervisory board
- Moreover, the departure of Henning Kagermann from the supervisory board and subsequently its key committees, leaves a significant vacuum as he has acted as a de facto Senior Independent Director, amongst the shareholder-elected members
- There appears to be no suitable candidate for the role Henning Kagermann has played over the last years and no apparent chair succession planning
We urge Deutsche Bank to carefully consider the future composition of the supervisory board’s nomination committee and use its reconstitution as an opportunity to review and improve the selection and nomination processes for management board members and non-executives respectively. The nomination committee should also start to consider plans for the succession of Paul Achleitner.
Given the potential conflicts of interest, we do not believe that the nomination committee should comprise representatives of the major shareholders.
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.
1 Norbert Winkeljohann will only join the supervisory board in August 2018.