Sir Chris Bonington, the British mountaineer who repeatedly tackled Mount Everest, once said that anyone who asked him why he did it would not understand the answer. That’s how I feel about debates on the independence of those who are supposed to protect investors.
What part of independence from the companies it supervised did the president of Germany’s Financial Reporting Enforcement Panel (FREP), Edgar Ernst, not understand? FREP and the country’s financial regulator, BaFin, are under parliamentary scrutiny for failures in the supervision of Wirecard.
Ernst announced his departure on 24 February. He was still quibbling over whether joining the supervisory board of Metro in 2017 breached a ban brought in by FREP in 2016 on senior staff taking up such roles. By the way, he had two other supervisory board positions, but the ban was only on new roles. According to the Financial Times, Ernst has argued that taking up the Metro seat was in line with the rules, as his employment contract was older than the 2016 ban on board seats.
But that is not the point. How could any accounting regulator ever imagine that it was okay for Ernst to sit on a company’s board? And what hope is there for principles-based regulation if the spirit of the law is breached in practice? Ernst clearly did not understand the answer to the question: why is independence important?
What hope is there for principles-based regulation if the spirit of the law is breached in practice?
Bias against short-selling
Part of the answer is that there should be no sniff of conflicts of interest. Another part is that there should be no bias towards or against any market participant. But Wirecard’s collapse in June last year, after the discovery of a €1.9bn cash hole, highlights regulatory bias of another kind – towards national champions and against short-selling.
Ernst’s departure came less than a month after the government ousted Felix Hufeld as head of BaFin, along with his deputy Elisabeth Roegele, who was in charge of financial markets supervision. Hufeld’s line had long been that Wirecard was the victim of short-selling. He and Roegele were instrumental in a ban on short-selling of Wirecard’s shares in 2019.
In April of that year, BaFin filed a criminal complaint against two Financial Times reporters that was only dropped after the company’s collapse.
BaFin’s defence of Wirecard went back several years. In 2016, after publication of an anonymous short-sellers’ report accusing the company of criminal misconduct, it discussed the short-sellers’ ‘cultural background’ and said it was ‘striking’ that most of them were British and Israeli. More than a whiff of prejudice here.
Blindingly obvious
But while Germany’s accounting regulators present an egregious example of compromised independence, there is no room for complacency elsewhere.
Take the issue of independent non-executive directors (NEDs). The UK’s corporate governance code has seven bullet points describing circumstances that could impair an NED’s independence, starting with the blindingly obvious ‘is or has been an employee of the company or group within the last five years’.
If the definition of independence needs to be spelt out, as FREP tried to do with its belated ban on supervisory board posts, this provides cover for a legalistic approach. The root of the problem is a lack of understanding of what the concept means and why it is a bastion against bias.
