Deutsche Bank Needs a New Leader
It's a nasty feeling when you're not wanted but haven't left yet. In this sense, I have sympathy for Deutsche Bank co-chief executives Anshu Jain and Juergen Fitschen, who have just survived what, by German standards, was a nasty shareholders' meeting. It's harder to condone their decision to stay on: They should realize that, to overcome the inertia of fraud and failure that keeps dragging it down, the bank needs an outsider at the top.
In Germany and a number of other European countries, shareholders vote to discharge the management board from liability for actions they've taken since the last general meeting. It's a way to recognize that the top executives didn't violate any laws, contracts or shareholder resolutions. The shareholders also absolve them of responsibility for failure to properly supervise others. In Germany's polite, though Byzantine, corporate culture, these votes are usually no more than ritual. Researchers from the Organization for Economic Cooperation and Development examined 750 directors' discharge resolutions and found that dissent amounted to only about 3 percent. That makes what happened at the Deutsche Bank annual meeting yesterday extraordinary: Only 61 percent of shareholders voted to discharge Fitschen and Jain's management board of liability.
Legally, they're on safe ground. Yet the co-chief executives have been responsible for the rot that has eaten away at the bank for years. They've had long careers at Deutsche and top management roles since 2002. They presided over much of the wrongdoing that has resulted in the 6,000 lawsuits now pending against the lender. They somehow missed the foreign-exchange and interest-rate manipulation that have cost Deutsche billions of dollars in fines and will probably cost more. And, despite all the scrutiny the bank is facing, nasty incidents keep happening. In April, Deutsche suspended several Moscow-based traders for allegedly breaking money-laundering rules.
Even though Fitschen and Jain became co-chief executives in 2012, they are not legally responsible for the 7.2 billion euros ($8 billion) in litigation expenses their bank incurred in 2012-2014 -- an amount equal to 61 percent of the lender's net income for that period. Nor are they liable for the $2.5 billion fine it paid last month for the bank's role in Libor manipulation. Yet they were around when the groundwork was laid for these huge expenses. At the time they were appointed, nobody knew how much the bank would bleed -- but they should have.
The Fitschen-Jain tandem was meant to bridge the gap between the investment banking culture, represented by Jain, an Indian business executive who'd played his part in engineering and then overcoming the U.S. mortgage crisis, and the traditional German banking culture, the domain of jovial corporate banker Fitschen. Jain's German is not good enough for important conversations, and he switched to English during the shareholders' meeting. Fitschen knows whom to talk to in Germany and how.
It turned out to be the wrong combination of skills to fix the bank.
Jain is now going to manage the latest iteration of Deutsche Bank restructuring, which includes radical cuts to the lender's retail business and a spinoff of Postbank, acquired as recently as 2010. That will give investment banking an outsized role, which is precisely what the bank tried to avoid when it decided to divide the chief executive's job. As Gerald Braunberger put it in the Frankfurter Allgemeine, "The control of Deutsche Bank was never to fall into the hands of investment bankers. The investment bankers in London and New York were free to walk around in suspenders and pay themselves a lot of money only as long as they made the bank and the shareholders rich at the same time."
Now, Jain is in control. Fitschen is mired in a fraud trial in Munich, accused of conspiring with other top executives to provide false testimony in response to a lawsuit filed by Leo Kirch, the bankrupt media mogul who died in 2011. And Jain has not been making the shareholders rich. Deutsche has been underperforming benchmarks for more than a year:
The biggest threats to the bank's performance today lie in investment banking, which continues to generate fines and litigation costs, and in retail, where a failure to make operations cheaper and more efficient has compounded the pain of low interest rates. Jain has not done a stellar job cleaning up the first problem, and he lacks the background to solve the second one with anything except a butcher's cleaver.
And if Fitschen was supposed to safeguard the bank's reputation and political power, he has failed spectacularly.
The shareholders have given the tandem another chance, having first booed and punished them with an unusually close vote. Patience is a virtue, but the bank's supervisory board ought to spend the next year looking for a successor, preferably an outsider with an ability to take a bird's eye view of the behemoth that is Deutsche Bank -- and without the baggage of supervisory failure. Germany's biggest bank needs a strategist with an unblemished reputation if it hopes to cleanse itself and move forward.
(Corrects the date in third paragraph on which Moscow-based traders for Deutsche Bank were suspended.)
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