Wirecard’s dramatic fall from grace has thrust corporate governance and industry regulation across Europe firmly in the spotlight. The Munich-based payments processor filed for insolvency on Thursday 25 June, reportedly owing creditors €3.5 billion ($3.9 billion). The company’s collapse follows a series of investigative reports from the Financial Times into claims about accounting irregularities.
“Germany’s Enron” – the secondary effects of Wirecard’s collapse
The revelation last week that €1.9 billion had disappeared from Wirecard’s balance sheet has seen the firm’s share price collapse 98% and former CEO Markus Braun arrested on suspicion of falsifying accounts. The Wirecard saga and its broader implications raises many questions, with some experts describing the scandal as the “Enron of Germany.”
Governance
Under German corporate law, companies are required to have both a supervisory board and a management board. The supervisory board is responsible for overseeing management. Chris Hohn, the head of $24 billion hedge fund TCI, had called on Wirecard’s supervisory board to dismiss former CEO Markus Braun in late April. “We are of the view that the supervisory board is legally obliged to intervene,” he wrote in an open letter published April 28. “In our opinion, the necessary intervention is now to remove the CEO from all management duties.”
Nonetheless, Braun had resisted pressure to leave. He resigned last week after 18 years at the helm and is currently out on bail after being arrested in Munich last week. The fiasco has led to fresh questions about why Wirecard’s supervisory board did not act ahead of time.
“What you see with Wirecard, it’s a disaster,” Peter Dehnen, chairperson of the Association of Supervisory Boards in Germany, said on Thursday, 25 June. Dehnen is calling for reforms to Germany’s corporate governance rules. Though the German corporate governance code was updated only recently, Dehnen thinks there’s a need for something “new” and “dialogue-driven” that makes companies communicate with all their stakeholders — not just shareholders.
“This is modern corporate governance,” he said. “With the rules presently in place, I feel we’re still back in the last century. And for that we need a drastic change.” Maximilian Weiss, an attorney at law firm TILP Litigation, which filed an investor lawsuit against Wirecard in May, told CNBC’s “Squawk Box Europe” last week: “We are at the beginning of one of the biggest corporate scandals we have seen in Germany.”
PCM SAYS: With reports coming out of Germany that Wirecard staff have not received their June salary payments, and opportunistic funds causing the collapsed stock to rise four-fold since Friday, 26 June, this story has a long way to run, and serious questions have to be asked about corporate governance. While it’s easy to focus on Germany, the fact is that similar scandals have emerged in the US of late – including Hertz Car Rentals – and of course the UK is no stranger to spectacular collapses, including RBS, TSB, Halifax Bank and Northern Rock.
One can also think of Scandinavian bank executives resigning after being implicated in money-laundering activities in the Baltics. Executives in the payments sector cannot complain about increasing regulatory scrutiny of our activities when scandals such as these continue to appear regularly, if not frequently. Is it time for the industry to take the initiative, and create a credible, independent review of corporate governance practices across Europe?
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