Germany at the Crossroads

By: D. Manggala

A Paper for European Management Practices (26 April 2004)

Executive Summary

Germany now is at the crossroads; in a critical point to determine whether they stay with their old way in doing business, the social welfare economic system, or follow the Anglo-American capitalism. The pressure to go to Anglo-American capitalism is very strong due to the Germany’s stagnant economic growth. There are a lot of pressures to change German business culture to be more aggressive and more open for competition. On the other hand, some people still see that the social welfare economy system is the best for Germany. Politicians and especially unions are the strongest supporters of the current German business culture. They believe German business culture is cooperative, not competitive; all decision in a firm must be based on consensus that involves workers or unions.

Right in the middle of the debate about which way Germany’s corporate culture should go, German prosecutors brought Josef Ackermann, the head of Deutsch Bank, to the court. He and five other former Mannesmann officials are charged by the prosecutors with breach of trust (Untreue) because granting Mannesmann executives appreciation awards and accelerated pensions in the amount of $ 56 million after the Mannesmann hostile takeover by Vodafone, a British company.

This trial is important and very relevant because it reflects the battle between the reform forces and the status quo. As The Economist says, the trial is a “culture clash between the increasingly imported practices of Anglo-Saxon capitalism, and those the socially-oriented Rhineland variety.” Whatever the decision is, it will affect the future of Germany’s business culture and will determine if Germany will come back again as one of the world class economy or not.

Culture Clash

There has been a long debate in Germany about whether this country should join the British and American in capitalism culture or stay with the current social welfare economic system. Many businessmen, especially from the younger generations have been lost their patience because of current culture is not encouraging entrepreneurship and open competition. “How could Germany compete internationally now?” they said. The pressure to go to Anglo-American capitalism is very strong due to the Germany’s stagnant economic growth. However, it is hard to break the culture, especially when it blends with political situation that in the German case it is related to the huge power of labor unions. German politicians, in general, still have a bad view of capitalism because they perceive capitalism will be ended with human exploitation, which is a valid argument. On the other hand, without open competition there will be no incentive to invest to the market; no innovation is challenged   and in the end there will be no economic growth or, even worse, there will be a declining economic. Therefore, it is fair to say that German now is at the crossroads and there is a battle to determine the future of Germany business culture.

The trial of Josef Ackermann is the most recent example of such battle, which is dubbed as one of the most important trial in German’s corporate history.  Ackermann, now head of Deutsche Bank, and five other former Mannesmann officials brought to the court by German prosecutors as an implication of Mannesmann’s hostile take over in February 2000 by Vodafone, a British telecommunication company. They are charged with breach of trust (Untreue) because granting Mannesmann executives appreciation awards and accelerated pensions in the amount of $ 56 million. [1] The appreciation award, according to Ackermann, is a reward because Mannesmann management has successfully raising Vodafone’s bid by almost 30%. But from the other side, the grant is perceived as a ‘bribe’ to secure the take over process. Politicians, unions and Mannesmann employees are in this side. For German prosecutors the case is brought to the court because they perceived that giving such amount of money is just “too much” from Germany standard. According to the prosecutors, the way Ackermann and other Mannesmann former officials acts are examples of corporate greedy behaviors which are not the way Germany corporate should act. And this kind of action should be brought to the court with a criminal charge.

That is why this trial is important because this is right in the middle of the long debate about which way Germany’s corporate culture should go. As The Economist says the trial is a “culture clash between the increasingly imported practices of Anglo-Saxon capitalism, and those the socially-oriented Rhineland variety.” [2] Whatever the decision is, it will affect the future of Germany’s business culture and might be followed by a very long debate following the current controversy.

The controversy has divided the public into two sides: the pro Anglo-Saxon culture and the current Germany culture. Of course, the politicians are the first runners in giving their opinions. Oscar Lafontaine, the former chairman of the ruling Social Democratic Party has said that what Ackermann and friends are not different than organized crime. This opinion could be representing a society which sees that it is not right if a small group takes so much profit and creates a gap with the rest of the society. In a country where the social welfare economic has long been seen as the best way of life, the Mannesmann management act is a crime.  On the other hand, Angela Merkel from Social Democratic Party said that Mannesmann take over process and the appreciation award are common things in today’s business; so if Mannesmann take over could be done smoothly, it would show to the world that now Germany is a good place to do business. [3] Germany must evolve and adapt itself to the rest of the world, especially the successful ones, if it wants to stay in global competition.

Germany’s Business Culture

What are the differences between German culture and the so-called Anglo-American culture? Why do many politicians and unions consider Anglo-American business culture as a bad thing? According to Professor Klandt of the European Business School in Mainz, part of German society sees that the Anglo-American business culture is too aggressive that may create instability in Germany. Furthermore, there are some business actions that are viewed as really bad, such as hostile take over, and those are socially unacceptable in German. [4] The German business culture is more a cooperative economy, not competitive economy. Its business culture is also known as consensual business model because labor union has a very big power in decision making process in a big firm. The idea of capitalism does not exist; German has its own idea which is called soziale Marktwirtchaft or social market economy. The most important characteristic of this model related to corporate culture is the employees and unions are the sozial partner (social partner) of management and they must be closely involved in  many decision making process. There is no strong CEO (Chief Executive Officer) such as Jack Welch (former CEO of General Electric) or Steve Ballmer (CEO of Microsoft) of the Anglo-American corporate culture; In German, CEOs are weak and unions are strong. A weak CEO is preferred even though he or she is not successful in his/her position; no wonder Jurgen Schrempp of DaimlerChrysler is stay in his position while Ulrich Schumacher, who is an example of flamboyant American-style CEO, is ousted from Infineon. [5] The social market economy and its consensus model have perceived as a better way because it provides job security and stability for years. This is why Germany has been traditionally reluctant to adopt Anglo-American corporate culture. [6]

From all the differences that exist there are two important characteristics differentiating German business culture and the Anglo-Saxon business culture: its capital/financial market and its labor policies. First of all, firms in Germany depend more on banks (mostly state-owned) than financial market. Almost 70% of all commercial credit is supplied by only three large banks. [7] The keyword in financial institutions is conservatism which also reflects the characteristic of Germany as a nation. Because of this, it is very hard to find support for innovation because they strongly depend on proven process or products. The consequence of this is German banks’ return on equity is only half of other countries in EU. [8] This characteristic also make it is almost impossible a kind of startup like Google or Yahoo will be born in Germany.

Secondly, unions in Germany are very strong. The Co-Determination Act has placed workers representative on board. As previously mentioned, unions are social partners in decision making process in Germany corporate governance. One other act that is important is the Protection Against Dismissal Act, an act that make it is very difficult to fire a permanent worker. Once a worker works more than six months, she or he becomes a permanent worker. This limitation has made German companies are very careful in hiring more employees that in consequence they could not expand in a flexible manner as in the United States. [9]

Big Pressure from the Market

With the stagnant economy in the last couple years, it makes senses if people start to evaluate to above business practices. Some businessmen have already taken the Anglo-American way by doing business more aggressive as shown by Mannesmann management or Infineon’s former CEO.  But it is hard to break an established culture. The trial of Josef Ackermann is the symbol of the culture clash; Josef Ackermann symbolizes the reform forces, the prosecutors symbolize the status quo and the trial symbolizes “the battle for the soul of Germany.” [10]

But the battle does not only involve those three parties. The biggest pressure to reform comes from the market. Germany’s GDP only grows at 1.4%, almost a half of other countries in European Union and its national income per person is below the EU average for the first time. [11] Germany is not a rich country anymore; its pride as one of the world class economy is no longer true. Furthermore, the high unemployment in Germany needs new investments either by entrepreneurships or foreign capitals. See Figure 1 for unemployment rate. To have unemployment rate at 9-10% is not an easy thing in a country that have many brilliant people, especially engineers. They have to have jobs, and the government must do something quickly.

Figure 1:

Source: Country Data-The Economist Intelligent Unit (http://www.economist.com/countries)

With those pressure, even the government want to overhaul some of its regulation that is started with tax reform that will make it is easier (and cheaper) for banks and investors to sell their stakes. [12] More reforms in labor laws and pension system as well as financial market are also necessary to boost the economic growth. The current government must do something different because the old ways do not work.

But again, it is very difficult to break an established system such as the Germany economic system. The debate will be continued for some more years. As the debate continues, the trial of Josef Ackermann is also continued. The Anglo-American capitalism seems to have its chance in Germany, at least for now. On the mid-trial judicial review in the end of March 2004 in Duesseldorf, Judge Brigitte Koppenhoefer did not see any basis for criminal charge of breach of shareholder trust. The case will be discontinued until the prosecutors have new evidences. [13]

Bibliography

Works Cited

Bartlett, Frank. “Mannesmann Faces Culture Shock.” BBC News 14 January 2000 Accessed 13 April 2004 from http://news.bbc.co.uk/1/hi/business/602496.stm

Class Outline by Professor David Hanson, week 6. GRBUS 627-Management Practices in Europe.

Guyon, Janet. “The Trials of Josef Ackerman.” Fortune 26 January 2004:111-114.

“Kultur Clash.” The Economist 3 April 2004: 69.

O’Donnell, John. “Mannesmann Case Set to Fail without Fresh Evidence.” Reuters 31 March 2004. Accessed 13 April 2004 from <http:uktop100.reuters.com/latest/Deutsche_Bank/top10/>

Randlesome, Collin, William Brierly, Kevin Bruton, Colin Gordon, and Peter King. Business Cultures in Europe 2^nd ed. Boston: Butterworth-Heinemann, 1997.

“Why Has the German Economy Performed so Much Worse than the Rest of Europe?” The Economist 21 February 2004.

Work Consulted

“Germany’s Gloom: The Malaise Thing.” The Economist 27 March 2003:50.

Savage, Timothy M.”Speeches of the American Consul General Timothy M. Savage: Cultural Differences.” An excerpt from Seminar “Zielmarkt USA 29 February 2000. Accessed 13 April 2004 from <http:www.usembassy.de/chtmonsular/leipzig/speeches/gabean.htm>