Throg Street:

Throg Street: The German businessman Thomas Middelhof once described himself as 'American with a German passport.' His statement was designed to indicate that he was an avid supporter of US-style laissez faire capitalism.

The German businessman Thomas Middelhof once described himself as 'American with a German passport.' His statement was designed to indicate that he was an avid supporter of US-style laissez faire capitalism. But the controversial Middelhof, who expanded the Bertelsmann media empire at the rate of knots while he was chief executive, was eventually ousted in 2002.

He made some bad investment decisions - so he was probably heading for a fall. But his 'American' way of doing things was anathema to many in corporate Germany, not least the conservative Mohn family, which controlled 75 per cent of Bertelsmann.

The story shows the strains within corporate Germany as it embraces a less protective form of market-driven capitalism. That brings me to the great locust debate raging inside and outside Germany.'Locusts' was the name given recently by German politicians to Anglo-Saxon private equity groups and hedge funds buying into German companies for allegedly short term gain.

Guy Hands, one of the City's best-known entrepreneurs, last week acquired £5 billion worth of German residential property via his private equity vehicle Terra Firma, reigniting the arguments.

And all this in the wake of the ousting of Ralph Breuer and Werner Seifert, Deutsche Börse's chairman and chief executive, for ignoring the wishes of shareholders (mostly foreign) by bidding for the London Stock Exchange.

But the locusts issue has obscured some of the more fundamental issues facing Germany. Its post- Second World War consensual economic model was good while it lasted, but few believe it can be resurrected.

One reason it lasted so long was that the state was wealthy enough to subsidise generous social security payments and pension rights for its citizens. That all changed in 1989, when the Berlin Wall came down and the cost of reunification shattered the status quo.

Germany's banks, which had long maintained 'supportive' shareholdings in Germany's big industries, found themselves overstretched. And when rules were introduced to allow them to sell their industrial holdings without incurring huge capital gains tax liabilities, they couldn't move fast enough to offload their stakes.

Moreover, Germany has an ageing population; that means the welfare state must be trimmed back and reformed. Citizens have little choice but to invest in the capital markets to help fund their retirement and to bolster savings as the state looks to reduce its role.

Consequently, German shareholders are now demanding the sort of returns from their investments that British and American institutions have long expected.

Germany cannot easily shift gear now. True, the pace of change can be dictated by government, but the real question is whether Germany can pick and choose which bits of the market economy it wants to follow. The answer to that question is yes and no.

Government could place curbs on the activities of the secretive hedge funds, but almost certainly it would be better to work with international regulators, which are as worried as anyone else about the way they operate.

But the removal of Seifert and Breuer at Deutsche Börse tells us that German management's freedom of action is not what it used to be. In the old days, the cosy relationship between executive directors and supervisory boards - made up of a mix of trade unions officials and regional bigwigs - worked well in that only rarely did supervisory boards question the actions of management.

Their failure to do so in the case of Deutsche Börse was dramatic, although hardly surprising as shareholder activism has taken Germany by surprise. But unless Germany turns in on itself, institutional shareholders - both German and foreign - will continue to make a bigger noise. And foreign capitalists such as Guy Hands will exploit opportunities that have come about as corporate Germany opens up. Like or not, the locusts are coming.

Compass bites more than it can chew

Few companies are as unpopular as Compass, the contract caterers. In the City, fund managers are spitting blood over two profits warnings in six months, while consumer groups complain about its operations because it is Compass that provided schools with the reviled Turkey Twizzlers, highlighted by Jamie Oliver's recent television campaign.

Something has gone wrong at this once-great company, and poor management looks like being at the root of the problem. The chief executive, Mike Bailey, and the chairman, Sir Francis Mackay, last week failed to convince shareholders that they had the right recipe to turn things around.

My own view is that managers took their eye off the ball during and after the messy marriage with Granada in 2000. It was a merger that was more trouble than it was worth and investors have never forgiven Mackay, who was head of Compass at the time.

Little wonder, then, that Mackay, not Bailey, is heading for the door marked exit. He is to retire early in the new year, but his achievement in building up the group - it will still produce annual turnover of £12bn and profits of around £700m - is surely worthy of recognition.


Richard Wachman

The GuardianTramp

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