Corporate liability

Ex-managers asked to pay up €120 million in German compliance debacle

main 33769890 Uwe Anspach dpa – Bilfinger management compliance investigation claiming money from executives ex-CEO Roland Koch chair Eckhard Cordes Tom Blades
Shadowy past. Source: Uwe Anspach / DPA

Bilfinger, once Germany’s biggest construction firm, wants 12 former executives to repay at least €120 million ($144 million) for alleged management in one of the biggest such claims in German corporate history.

The former construction industry icon that built the Sydney Opera House has been beset by bribery allegations over the years and its problems, although not on the scale of VW’s diesel cheating, mark yet another failure of German corporate governance.

That, at least, is the assessment of law firm Linklaters, which in February presented a report chronicling mistakes and neglect by Bilfinger’s management in the period from 2006 to 2015. Linklaters’ attorneys say executives failed to improve Bilfinger’s compliance system during the nine years investigated.

The long-delayed and now completed revamp of corporate checks and balances to prevent bribery and mismanagement cost a total of €150 million. Two thirds of that, says Bilfinger, stemmed from the failure of the former management to improve corporate governance quickly enough. That, plus other outlays, adds up to the €120 million the company wants former CEO Roland Koch and 11 other managers to pay.

After a corruption case, the US Department of Justice dispatched a supervisor to Germany to keep tabs on Bilfinger.

Mr. Koch, who ran the company from July 2011 to August 2014, was the governor of the state of Hesse before he joined Bilfinger. A member of Chancellor Angela Merkel’s Christian conservatives, he was once seen as a possible successor to Ms. Merkel. Ahead of today’s annual shareholders’ meeting, Mr. Koch dismissed the accusations against him as “without substance.”

The former politician had to quit in 2014, two years before his contract expired, after the company started issuing profit warnings. Bilfinger slumped to losses in 2014 and 2015, when the market for power station construction collapsed following Ms. Merkel’ decision in 2011 to phase out nuclear power. Since then, the former blue-chip company has dramatically shrunk in size and effectively broken itself up, selling its construction and real estate businesses as well as around a dozen loss-making subsidiaries.

The 138-year old company is now run by Tom Blades, a Brit born in Hamburg who took the helm in July 2016 to complete the group’s restructuring. It has shifted from construction into industrial services such as planning or running factories, for instance for wind mill maker Siemens Gamesa and power plants in Kuwait.

Bilfinger’s management troubles predate the losses of the last few years. The company has a history of corruption scandals going back to the 1990s and began setting up a corporate compliance system in 2006 to clean up its act. Nevertheless, the US Department of Justice felt compelled to dispatch a so-called “monitor,” a kind of minder, to keep tabs on Bilfinger. That put it in an exclusive club of German corporate titans who have suffered the same ignominy: Mercedes-maker Daimler, Siemens and VW have all had monitors, and the one for VW is still there.

The monitor at Bilfinger, Swiss lawyer Mark Livschitz, spent three years trying to convince Bilfinger’s management board to adopt his vision of an appropriate compliance system. He failed. When he reported back to the Department of Justice, it decided to extend his term at Bilfinger until the end of 2018.

At today’s annual meeting, shareholders will vote about whether to absolve former executives from their duties in 2015. Current management has advised investors to deny the former executives exoneration. Although a procedural step, the vote of no-confidence could serve as a prelude to claim back money from the former managers. That is exactly what the current board hopes to achieve.

Sönke Iwersen leads Handelsblatt team of investigative reporters. Volker Votsmeier is an investigative reporter with Handelsblatt. To contact the authors: iwersen@handelsblatt.com and votsmeier@handelsblatt.com

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