Imagine the fury of shareholders seeing a strategy gone awry and billions of dollars in value destroyed -- and a supervisory board that does nothing about it. That was the fate of Germany's disempowered minority shareholders. In postwar Germany, companies relied much more on banks than capital markets to finance industry, and an elaborate system of cross-shareholdings bred a tight-knit financial and industrial elite that shared golf games, expensive cigars, and board seats.
These corporate and banking titans had little interest in good corporate governance. Shareholder meetings were cozy affairs where crony boardmembers rubber-stamped the decisions of even the most unsuccessful managers -- then raised their salaries and extended their contracts -- thumbing their noses at angry investors. In the rare cases where unsuccessful CEOs had to be removed, they were almost always rewarded with supervisory board chairmanships. Transparency? Not even an issue.
Under that anachronistic system, Jõrg Pluta was a vocal firebrand. The Munich-based lawyer and shareholder representative stood up year after year to challenge the powerful German establishment and advocate change at $172 billion auto maker DaimlerChrysler (DCX ).
The icon of German industry and the country's largest private company, Daimler was one of the last German corporations to succumb to the rules of global capitalism, transparent markets, and good corporate governance. Starting with its 1998 merger with Chrysler and up through July 28, 2005, the company's shares lost half their value, thanks to the failed strategy of Jürgen Schrempp. When the embattled chief executive finally announced his departure on July 28, the market roared its approval, sending the shares up 10%.
Pluta recently spoke with BusinessWeek senior European correspondent Gail Edmondson about the watershed moment in corporate governance for Germany's preeminent industrial company and the dawning era of shareholder capitalism in it represents. Edited excerpts of their conversation follow:
Q: What does Jürgen Schrempp's resignation mean for Daimler shareholders? Can we expect a new strategy and real accountability from Daimler's management from now on? A:
Q: What does Jürgen Schrempp's resignation mean for Daimler shareholders? Can we expect a new strategy and real accountability from Daimler's management from now on?
A:For starters, it means a rising share price. I'm hoping the new chief executive, Dieter Zetsche, will rethink the company's strategy and take it in a new direction.
The big hope is that the company will hive off its crisis-ridden core units, such as Smart [mini cars] and Maybach [luxury limousines]. Asia is a huge problem. Mercedes has to bolster its quality. Whether Chrylser is viable long term is doubtful. The U.S. auto market is prone to brutal price wars.
Q: How much of the responsibility for the poor performance over the past five years at DaimlerChrysler is the fault of the board of supervisors? A:
Q: How much of the responsibility for the poor performance over the past five years at DaimlerChrysler is the fault of the board of supervisors?
A:Eighty to ninety percent of the blame goes to the board members. They were the ones who decided not to intervene along the way. They allowed Schrempp to continue [destroying value]. On the board at DaimlerChrysler there isn't one independent member who is a reasonable specialist for the auto industry. You have a magazine publisher and a baseball club manager. They have no idea about the car business, and they didn't make any effort to learn something about it. The board exhibited no serious controlling function. It was an old man's club with no relation to the real economy.
Q: Do you believe investors will press for changes at the board level, especially the replacement of supervisory board chairman Hilmar Kopper? A:
Q: Do you believe investors will press for changes at the board level, especially the replacement of supervisory board chairman Hilmar Kopper?
A:One could expect that now. Kopper must go, absolutely.
Q: How could such a scenario unfold? A:
Q: How could such a scenario unfold?
A:At the annual shareholders meeting there's a chance to approve the performance of each member. You can vote any member off the board with three-quarters of the votes of the shareholders present. That's a high hurdle, but you can also give a high negative approval which might shame someone into resigning.
Q: Is the way clear now for any investor to build a large stake and force better management if it's not forthcoming under Dieter Zetsche? A:
Q: Is the way clear now for any investor to build a large stake and force better management if it's not forthcoming under Dieter Zetsche?
A:I see that as a real possibility.
Q: How much time do you think investors will give Zetsche to turn around Mercedes and improve the overall results of the company? A:
Q: How much time do you think investors will give Zetsche to turn around Mercedes and improve the overall results of the company?
A:People will give Zetsche at least one year. But if he says he wants to continue following the same strategy as Schrempp, the pressure will rise very fast. If Zetsche gives a couple of new [initiatives], most people will give him two years to make headway. He has a very full plate.
Q: What should be his key priorities? A:
Q: What should be his key priorities?
A:The loss-making Smart Car division is doomed. It was an experiment, but it's now clear that Smart is too small a player in a small niche. There's no way for it to emerge from this position. And it's a product that doesn't really fit the Mercedes brand.
Zetsche would be well-advised to sell the Smart business. I can't imagine who would want it -- maybe Hyundai, as a basis for their European operations, or even the French -- Renault and Nissan (NSANY ) could make something out of it. It's conceivable.
Q: How much work is ahead for Zetsche, fixing quality and margins at Mercedes? A: Mercedes is job No. 1 This is the core of the company and was the basis for high returns for years. Mercedes boss Eckhard Cordes started overhauling Mercedes this year, but Zetsche needs to step up the pace of change. One hears that Mercedes' manufacturing costs are as much as 40% higher than BMW's. The profit margins are thin -- but Mercedes plays in a higher segment of the market than any other player.
There should be an enormous amount of potential to improve performance with flexible production and working-time models. Schrempp's management team neglected manufacturing productivity over the years. BMW is way ahead of the game, and you can see it in their 8% profit margins. [Note: The operating margin at luxury brand Mercedes' fell to 3.3% last year, worse than both French mass-market auto makers Renault and PSA-Peugeot Citroen.]
Q: What else? A:
Q: What else?
A:In the U.S., Zetsche has to oversee new Chrysler Chief Executive Thomas LaSorda and make sure the company continues to improve efficiency, boost sales, and strengthen itself against a possible economic downturn or rebate wars. Mercedes and Chrysler are the main problem areas. Everything else is running fine. The truck business is highly profitable now.
I hope above all Zetsche will install a new senior management team and not continue with the old guard loyal to Schrempp.
Q: Do you favor a selloff of Chrysler? A:
Q: Do you favor a selloff of Chrysler?
A:I don't believe Zetsche will sell Chrysler, having invested so much personal energy in turning the company around. But if Chrysler starts to sink into the red again, he will not hesitate to consider selling it off.
For now, they're the strongest of the Big Three in the U.S. market and are making a profit. Even so, I don't see anyone who would want to take it over. Maybe Zetsche will be able to wring more savings from cooperating. Schrempp was late to start thinking about sharing platforms or parts under the hood.
Q: What about the Daimler's 32% stake in the European Aerospace & Defense Systems group? Should Zetsche spin it off? A:
Q: What about the Daimler's 32% stake in the European Aerospace & Defense Systems group? Should Zetsche spin it off?
A:Yes. That's not part of Daimler's core competence.
Q: A breakup of the company could earn shareholders a 100% premium. Would you favor a breakup of the group if it were in the name of rebuilding world-class luxury auto maker Daimler? A:
Q: A breakup of the company could earn shareholders a 100% premium. Would you favor a breakup of the group if it were in the name of rebuilding world-class luxury auto maker Daimler?
A:I'm not sure a pure shareholder-value approach, which involves selling off all the parts separately, is a future-oriented strategy.
Q: Being a stand-alone luxury-car maker seems to work well at BMW. A:
Q: Being a stand-alone luxury-car maker seems to work well at BMW.
A:I see better global growth potential for BMW than Mercedes. Its focus on sporty premium cars lures young customers as well as older ones. Mercedes is aimed at more of a middle to aging driver. Its business might be better balanced out with something like the commercial-vehicle division.
Edited by Patricia O'Connell