Voting rights advisers criticize Commerzbank’s remuneration system

Frankfurt The Commerzbank is holding a virtual general meeting for the first time this year because of the corona crisis. But even without protests from small shareholders on site, there will be no shortage of critical topics at the event on May 13.

Added to this is the criticism of Commerzbank’s remuneration system. The influential voting rights advisor Glass Lewis and his German subsidiary Ivox recommend that shareholders reject the slightly modified remuneration system for members of the Management Board in March 2020. This emerges from the recommendations of both companies for the Annual General Meeting, which are available to the Handelsblatt.

“From our point of view, there is great potential for improvement in the company’s remuneration policy,” says the Glass Lewis study. The goals on which the variable remuneration of the Board of Directors depends are too vague and too focused on the bank’s performance in the past.

Anglo-Saxon investors in particular often follow the advice of proxy advisors such as Glass Lewis and ISS at general meetings. If the Commerzbank shareholders did not endorse the remuneration system, the Supervisory Board would have to deal with it again. Germany’s second largest private bank did not want to comment on this.

Criticism of the number of positions

In his study, Ivox also speaks out against the planned election of Jutta Dönges to the Commerzbank Supervisory Board. The co-boss of the finance agency is to be elected as the new representative of the federal government to the control committee in May – together with Frank Czichowski from the KfW development bank.

Dönges and Czichowski are to replace State Secretary Markus Kerber and Anja Mikus, who heads the State Fund for Nuclear Waste Management. After Commerzbank’s rescue from the crisis, the federal government still has a good 15 percent stake in the bank – and anything but satisfied with the development of the money house in recent years. In Berlin, some have hopes that Dönges and Czichowski can give new impetus to the supervisory board.

But at least Ivox has reservations about the Dönges personnel. There are no doubts about the manager’s qualifications, according to the study based on guidelines of the BVI fund association. “However, there are concerns about the number of mandates.”

Dönges is already a member of the supervisory bodies of the FMS Wertmanagement and the Deutsche Pfandbriefbank. In addition, there is her job as managing director of the finance agency, which Ivox rates as an “executive position” like two mandates.

According to this method of counting, your work on the Commerzbank Supervisory Board would be your fifth mandate. And that would be two more mandates than Ivox recommends for people in an “executive position”. “Therefore, this election should be viewed very critically,” said the voting rights advisor.

The finance agency did not want to comment on Ivox’s criticism. However, a spokeswoman pointed out that Dönges had resigned from the supervisory board of Eurex Clearing in order to avoid conflicts of interest.

In contrast to Ivox, the parent company Glass Lewis has no objection to the choice of Dönges. Other persons familiar with the personnel also consider the appointment to be sensible, after all the financial agency manages the federal government’s participation in Commerzbank and is in close contact with the institute anyway.

Dönges is also highly valued in Berlin because it closely monitored the Commerzbank strategy review. Some also believe that Dönges’ work at FMS Wertmanagement cannot be viewed as a full supervisory mandate.

More concrete goals for 2020

The core remuneration system for Commerzbank board members has existed for several years. In March it was slightly adjusted to take account of the new requirements of the second Shareholder Rights Directive (ARUG II) and the new version of the German Corporate Governance Code. The most important innovation is that a maximum remuneration for each member of the Board of Management of six million euros per fiscal year has now been fixed.

The variable remuneration of the Management Board depends 70 percent on the achievement of the Group’s goals and 30 percent on the development of the department for which the respective Management Board member is responsible. In addition, individual goals have an impact on the amount of bonus payments.

When calculating the variable remuneration for 2019, the development of the bank and the respective department in 2017, 2018 and 2019 is taken into account. Glass Lewis criticizes this approach as backward and advocates “forward-looking” goals. However, this would have the consequence that Commerzbank could not set the bonus payments for 2019 until 2021 – and that the actual payment to the Management Board would then be postponed even further.

Voting rights advisers also take a critical view of the fact that the expectations of the Management Board are not described clearly enough. The performance goals are “only presented in a descriptive manner, but not clearly disclosed,” complains Ivox. As a result, it is not understandable for shareholders whether the goals for the Management Board are ambitious enough, emphasizes Glass Lewis.

Strictly speaking, these comments do not refer to the remuneration system, but to the remuneration report, which the Annual General Meeting does not vote on this year. Nevertheless, there are employees within Commerzbank who find this criticism justified. According to financial circles, the goals for the Executive Board in the 2020 financial year have therefore already been formulated more specifically.

It is of course another matter whether there will be any significant bonus payments in view of the Corona crisis 2020. In addition, the payment of Commerzbank management is generally rather below average compared to other institutions. In the past year, the total remuneration of the Management Board amounted to EUR 12.1 million. At the neighbourhouse Deutsche Bank the executive committee received almost three times as much despite a loss of billions.

Assistance: Jakob Blume

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Bad Bank FMS doubles profit

Munich Dealing with the financial market crisis can still make money around a decade later. Last year, FMS Wertmanagement generated an annual surplus of EUR 236 million, more than twice as much as in 2018. The sale of hybrid capital bonds by the Irish subsidiary Depfa and a high dividend payment from a British subsidiary led to the gratifying result.

The Federal Government founded FMS Wertmanagement in 2010 in order to solve its biggest problem from times of the financial crisis in 2008 and 2009. The real estate financier Hypo Real Estate (HRE), which had even made it among the top 30 German companies in the Dax at that time, had started to roll.

A business model based on long-term financing in the real estate sector was responsible, but was only refinanced in the short term. When If the HRE threatened to run out, the state stepped in and ensured the orderly liquidation of the huge stock of securities via the newly founded FMS.

Of the approximately 175 billion euros with which the Munich-based settlement agency started in 2010, 69.3 billion euros were still in the portfolio at the end of last year. The company, which still has a total of 500 employees, announced on Tuesday.

Unusual: The portfolio increased slightly in 2019 compared to 2018. This was due to assets acquired by companies of the Irish subsidiary Depfa. On the other hand, the appreciation of the pound and dollar led to an increase in the nominal value of the euro-based portfolio. This resulted in a currency gain for FMS.

However, inventories of around five billion euros were also reduced. “2019 was a very successful year,” said the new CEO, Christoph Müller. He had taken over the management position last year when his predecessor Stephan Winkelmeier changed to BayernLB’s chairmanship.

Further figures illustrate how complex the complete liquidation of the huge securities portfolio from the portfolio of the scandal bank HRE is. Of the once 66 countries worldwide where the resolution agency had papers, 42 are still left after ten years of work.

“These are often products that were launched before the financial crisis and that no longer exist in this form today,” explains the new board member Carola Falkner. Almost three quarters now come from Great Britain, Italy and the USA. Almost half of the papers have terms that end between 2030 and 2040. Some complex financing goes beyond 2060.

Project “Next” started

However, FMS ‘business model from a shrinking portfolio paired with a high level of specialty should inevitably lead to red numbers for the processor in the coming years.

General administrative expenses were reduced by around four percent in 2019, but the total was still € 138 million. Management believes that the high costs will remain in the coming years, even if the shrinking portfolio’s profits are likely to decline.

That is why they started the “Next” project last year. The goal is to restructure the portfolio by 2025 so that it can be continued elsewhere and FMS Wertmanagement can be dissolved.

A lot will depend on the further effects of the corona crisis. Possible failures or deferrals of interest payments on certain papers are already becoming apparent. The sale of the Irish subsidiary Depfa planned for this year, which was already well advanced with the help of the British Barclays Bank, is currently stalling.

CEO Müller left it open whether a model like FMS Wertmanagement would also fit the current crisis: “The bad bank concept worked very well after the financial crisis in Germany. Whether it is a model at European level has to be assessed in individual cases “.

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