They called it Rhine capitalism, or Germany, Inc., and it referred to large companies run by just a few big shareholders.
Big banks, insurers and industrial companies were listed on the stock exchange, but in reality, only a few strong shareholders had any say in how they were run. And these tended to be other large companies.
Supporters of the model said it offered stability. Detractors criticized it for cartel-like nepotism.
The structures held strong for decades, and were only broken under former chancellor Gerhard Schröder.
But Germany, Inc. hasn’t disappeared. Rather, it has mutated into a different, more successful version.
A set of powerful shareholders, referred to as anchor shareholders, control about half the 30 companies in Germany’s benchmark DAX Index, according to a study by Barkow Consulting seen by Handelsblatt.
Some wield control with only a minority of shares. They may not own a majority stake, but control enough to dominate annual shareholder meetings, where many shareholders are absent.
That is the case at Deutsche Telekom, the former phone monopoly, where as a major shareholder, the German government shapes its direction and fate.
The same is true at automaker BMW, where the Quandt family steers the course.
And it also applies to Continental, where the Schaeffler family is in charge.
At Henkel, a consumer products maker, the founding family retained a majority, and is represented by Simone Bagel-Trah, who manages the non-executive supervisory board.
Some see this modern form of Rhine capitalism — the publicly-listed family firm — as a new model.
“It unites the advantages of both worlds,” said Rolf-Magnus Weddigen, a private equity expert at Bain & Company. His argument: Public listings can create transparency and better access to new money, while anchor shareholders are committed over the long term and provide continuity.
That seems to be the case. From BMW, Henkel, Fresenius, a dialysis services company, and software maker SAP in the DAX, to lubricant maker Fuchs Petrolub, optician Fielmann and clothing chain Gerry Weber in the MDAX index of mid-size companies, many are experiencing rising stock prices and dividends.
That is also the case for the DAX sub-index of the 30 largest family-owned companies.
And small shareholders profit financially, even if they don’t get much of a say in how things are run.
But to succeed, these companies and families have to share the same interests. Where they do, this model works, according to Wolfgang Schnorr, an expert in corporate governance.
“But if major shareholders act solely in their self-interest, this can be a curse,” he said.
At Thyssen-Krupp, for example, the anchor shareholder – the Alfried Krupp von Bohlen and Halbach-Foundation – pushed Ekkehard Schulz, the management board chairman who was let go in 2011, seamlessly onto the supervisory board, which hires and fires top managers and sets strategy. That the action contradicted the principles of the company’s leadership – Mr. Schulz had been responsible for a disastrous Brazilian business – was of no importance to the foundation.
“If major shareholders act solely in self-interest, this can be a curse.”
But first glances can be deceptive.
Most German listed companies are in fact controlled by thousands of investors: only 20 percent of the 30 DAX companies are in the hands pf large anchor shareholders. The remainder are accountable to small and minute bundles of shareholders.
There are only four DAX companies where anchor shareholders have surpassed the 50 percent threshold: Merck, Volkswagen, Beiersdorf and Henkel.
With the rest, the majority are in free float, held by hundreds if not thousands of investors.
However, small shareholders frequently do not organize or wield their power, because they do not share common interests and rarely attend shareholder meetings. In that sense, an anchor shareholder – often an ownership family – does not need to have a majority of shares for total control, but only the majority of the represented capital at shareholder meetings. And that often consists of only a half of those actually present votes.
Sometimes, it is even less: At the Deutsche Bank’s last shareholders’ meeting, for example, only about 30 percent of the voting capital was present, and at the fertilizer manufacturer K+S it was exactly the same. Whoever holds 15 percent of the shares in those companies thus already had the majority.
Little can be done at K+S without the consent of the major shareholder Andrey Melnichenko, even though he holds only 7.05 percent of the K+S shares through the mining group Eurochem.
According to the study by Barkow Consulting, 14 of 30 DAX companies are de facto dominated by their anchor shareholders. If their management boards would like to implement a strategy, they only need to reach an agreement with these shareholders, even if they do not hold majority stakes.
For example, Deutsche Telekom is effectively controlled by the German state, which owns a 31.7 percent stake held directly and indirectly through KfW, a state bank. But in terms of voting shares, the federal government has a stable majority with a quota of 55 percent.
Anchor shareholders can be a blessing for companies. They shield the board from short-term profit demands – and let them plan long-term.
Majority shareholder families usually act prudently.
“With publicly listed family companies, the discrepancy between family property and shareholder property does not apply,” said Christoph Kaserer, professor for financial management and capital markets at the Technical University in Munich. Such problems occur often only when short-term interests don’t tally with long-term interests – for example if larger restructuring measures cause a decline in the stock price. Clear majority relationships, often is the case at family-owned companies, also tend to favor quick decision making and help implement innovations more quickly.
There is of course a danger that this system leads to an autocratic rule, and means that fewer shareholders are ultimately involved in key decisions.
Mr. Schulz, the Thyssen-Krupp chief executive, seamlessly transitioned into the supervisory boardonly with the support of Alfried Krupp von Bohlen and Halbach Foundation, which wielded more than 25 percent of voting capital. Not all investors were happy with the move. Many blamed Mr. Schulz for losing control of costs at the Thyssen-Krupp steelworks in Brazil. The company had to write off billions of euros as a result – and slid into the deepest crisis of its history.
There was meant to be a two year “cooling off period” before senior executives could join the supervisory board, but Thyssen-Krupp’s anchor shareholders, with more than 25 percent of the shares, ignored the rulesat the request of the dominant family owners.
This did not happen in Linde, the industrial gas manufacturer, whose shares are more widely held. There, the former chief executive Wolfgang Reitzle could not become supervisory board chairman in May 2014.
Pension and investment funds worth billions in the United States and United Kingdom are not keen on the idea of chief executives moving straight to supervisory boards: it is not considered good corporate governance.
Volkswagen, where only 12 percent of shares are freely floated, is another company that has shown it is not bothered by considerations of corporate governance. The company’s patriarch Ferdinand Piech placed his wife, Ursula on the supervisory board 2012. Shareholders were told she was an kindergarten and nursery school teacher who had taken extra exams in economy and law.
Such a decision would be unthinkable at a company where shares are widely held and more democratically ruled.
Ulf Sommer covers news, finance and companies for Handelsblatt. To contact the author: firstname.lastname@example.org