DWS woes put spotlight on the limits of its independence

When Deutsche Bank listed its asset management arm DWS in 2018, it thought it had engineered a neat solution for a strategic problem.

Unshackled from its scandal-prone parent, the value of one of Europe’s biggest fund managers should become more visible. It would also raise capital for Deutsche without diluting its own shareholder base. And equipped with its own shares as a valuable acquisition currency, DWS could also lead the consolidation in global asset management.

Four years on, the disappointing record of DWS has fallen very far below that vision. Its chief executive has departed in the wake of a “greenwashing” scandal and its shares are trading 20 per cent below the flotation price.

That has left Deutsche open to scrutiny on the lender’s enduring influence over its subsidiary and whether the structure it chose for the listing befits what is meant to be a champion of shareholders’ rights in Europe.

Such concerns have been underlined by the rapid appointment of Deutsche Bank manager Stefan Hoops as DWS chief executive in early June. The 42-year-old former investment banker and longtime confidant of Deutsche Bank chief executive Christian Sewing was parachuted in to replace Asoka Wöhrmann, despite not having much of an asset management background.

Wöhrmann resigned hours after the company’s offices in Frankfurt were raided by police investigating claims it had misstated its record on investing on environmental, social and governance criteria — allegations that Deutsche and DWS continue to deny.

Unlike the process for public companies in other markets, Hoops was appointed chief executive without the need to seek approval from all shareholders because of the idiosyncratic German structure that Deutsche chose for the DWS listing, known as a KGaA. It combines elements of a limited partnership and a stock corporation. In effect, the influence of minority shareholders is small.

The supervisory board, which is elected by shareholders, has very limited power. In contrast to ordinary joint stock companies, it has no say in appointing and demoting executive board members and cannot block crucial corporate decisions such as on mergers. It is the “general partner” in the KGaA — Deutsche Bank in the DWS case — that can call the shots.

Deutsche Bank said the appointment of Hoops was the result of “a proper selection process”, which did involve a headhunter. However, it declined to disclose when the process started, who the headhunter was and if external candidates were considered. The lender said that Hoops was chosen because of his “outstanding capital market expertise, a deep understanding of customers and excellent leadership qualities”. 

Whether Hoops turns out to be the right man for the job at DWS, it was a demonstration of Deutsche’s control over its subsidiary.

Desiree Fixler, the former head of ESG at DWS who raised the greenwashing allegations at the fund manager, said the notion of the company’s independence from Deutsche was always “a mirage”. “In my experience, there was no separation at all between Deutsche Bank and DWS,” she told the Financial Times.

Deutsche Bank rejects the notion that it is having undue influence over DWS, arguing that the KGaA structure was “completely common” in the German corporate landscape. External investors and corporate governance experts, however, have long raised concerns over the governance set-up.

“We don’t like the KGaA structure from a corporate governance perspective,” Janne Werning, head of ESG Capital Markets & Stewardship at Union Investment, told the FT, adding that it “unduly restricts shareholders’ rights and makes it difficult for DWS to be perceived as a company in its own right”.

The structure makes issues such as corporate strategy or deciding on a chief executive particularly sensitive. In 2019, a mulled merger of DWS and the asset management arm of UBS fell apart partly because Deutsche was keen to keep control in the asset manager, according to people familiar with the discussions. Would minority shareholders in DWS have preferred a UBS deal or a chief executive with more asset management experience?

DWS has declared itself as a champion of shareholder rights and “transparently communicated succession planning”. It promises to hold “boards and directors accountable” over those issues, calling on them “to demonstrate how they are including relevant stakeholder views in their discussions and decisions”.

If DWS continues to perform poorly, the questions over whether the KGaA structure fits with those aims can only multiply.

olaf.storbeck@ft.com