Germany’s elites reveal their true colours

Published in Business Spectator (Melbourne), 20 November 2014

Over the past years of the continent’s debt crisis, Germany liked to present itself as a haven of integrity in Europe. Other nations were shocked and sometimes embarrassed by the behaviour of their elites. Just think of the scandal-prone Italian ex-premier Silvio Berlusconi, Greece’s endemic corruption or Cyprus’ role as a money-laundering oasis.

Germany, meanwhile, celebrated its image of respectability, insisted on compliance with EU treaty law and missed no opportunity to lecture its neighbours on good governance. However, recent news about the behaviour of Germany’s own societal elite suggests it is the Germans themselves who might have a few lessons to learn about that as well.

Gerhard Schröder, the former federal chancellor, and Thomas Middelhoff, the charismatic ex-chief executive of media giant Bertelsmann and retail empire Arcandor AG, stand for the failure of German elites to set good examples. In recent days, both made headlines for very different reasons. Both their cases show how high social status induced them to place themselves above normal categories of law and morality.

Middelhoff’s case is as tragic as it is straightforward. For many years, he was seen as one of Germany’s most charismatic and successful executives. When he was chief executive of Bertelsmann, he used AOL’s merger with Time Warner in 2000 to sell Bertelsmann’s stake in AOL for €7.5 billion — a deal which personally secured him a bonus of €40 million.

The bonus payment finally catapulted him into the top league of European executives, and in the following years he continued to earn remarkable salaries (certainly by German standards). His departure from Bertelsmann in 2002 was sweetened by a golden handshake worth €20m, and his annual net income in the following years hovered between € 13m and €21m.

After Middelhoff’s meteoric rise came a deep fall. He took over as CEO of Arcandor, when it was still called KarstadtQuelle AG. The company, one of the largest retailers in Germany, was already in trouble then. Under his leadership, the decline continued and the share price fell by almost 90 percent. Just months after he left Arcandor, the company filed for insolvency. With Arcandor’s bankruptcy, Middelhoff’s legal troubles began.

Arcandor’s insolvency administrator had a very close look over the company’s books to find some rather odd expenditure items. Arcandor had paid for helicopter flights from Middelhoff’s home to his office; it paid for private jets to take him to board meetings of other companies in which he held directorships; it even financed a festschrift for one of Middelhoff’s personal friends. In none of these cases did the expenditure have any direct link to Arcandor’s own business — unless of course you follow Middelhoff’s logic that flying him in by helicopter saved valuable time in morning peak traffic and thus helped the company.

In total, about half a million euros were spent on Middelhoff’s private affairs out of Arcandor’s corporate accounts — money the insolvency administrator now wants back. He also instigated criminal proceedings for embezzlement, and last Friday the District Court of Essen sentenced Middelhoff to three years imprisonment. He was arrested on the spot. Instead of returning to his villa in Saint-Tropez, he will now spend considerable time behind bars. He still did not even show the slightest sign of remorse or regret.

Middelhoff’s case may not be symptomatic for German corporate leaders but it shows how far removed from reality some of them are. The problem is not so much Middelhoff’s preference for helicopter flights but his belief that others have to pay for them.

If Middelhoff’s behaviour was only hurting shareholders, ex-chancellor Schröder damaged the country as a whole. Bizarrely, though Schröder’s behaviour may be morally more objectionable, it is highly unlikely to land him in prison.

As was revealed last week, Schröder sold the publishing rights to his memoirs while still in office. That in itself would not be too strange if it had been a publishing house buying the rights from him. Instead, it was a friendly businessman who paid Schröder €2m for the rights to his book and then sold them on to a publisher for half that price. In other words, Schröder received an extra €1m, well, for what?

The transaction only really makes sense if one considers the business interests of Schröder’s generous donor. Finance entrepreneur Carsten Maschmeyer benefitted enormously from the introduction of publicly subsidised private retirement plans in Germany. The policy was heavily promoted under the Schröder government, so Maschmeyer had every reason to be grateful to Schröder for helping his business. Conversely, Schröder also had good reasons for being grateful to Maschmeyer; he had supported his election campaign with expensive ads in newspapers.

Between Maschmeyer and Schröder there was a symbiotic relationship which helped both financially. But it was a deal at the expense of political transparency. It may not fulfil the strict legal criteria of corruption because there were no direct bribes paid in return for political favours. However, the much more informal arrangement between the two parties still makes it hard to believe that Schröder’s political decisions were completely independent of his personal relationship to his generous donor and vice versa. Would Maschmeyer have purchased the overpriced publishing rights to Schröder’s memoirs without the former chancellor’s political decisions that had pushed his business? To ask the question is to answer it.

Middelhoff and Schröder: As different as both these characters are, they shine a strange light on Germany’s political and business culture.

Their cases suggest that once a certain position in Germany’s social hierarchy is reached, conventional norms of decency and morality no longer apply. Whether it is shareholders’ interests or the trust of the electorate, in the pursuit of personal ambitions and vanity they can be brushed aside without a hint of a bad conscience. Middelhoff feels unjustly pursued by the prosecution, and Schröder does not even find it necessary to comment on the payment he received from his friend Maschmeyer.

For Germany’s reputation as a place to do business, both cases are damaging. They leave a stench of corruption and unjust enrichment on a country that otherwise likes to celebrate its transparency and cleanliness. They are more reminiscent of a banana republic than one of the leading developed countries in Europe.

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