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How to Evalute the Share Price Performance during CEO Tenure

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How to Evaluate the Share Price Performance during CEO Tenure:
The Case of Josef Ackermann’s Stewardship at Deutsche Bank
Stephan H. Späthe *
First draft:
This draft:
August, 2012
July, 2013
Abstract
This clinical paper gives guidance on how to correctly compute and evaluate the share price
performance of a corporation during a specific CEO tenure. Although the emphasis is on
Deutsche Bank’s share price performance between 2002 and 2012, a lot of general questions relevant
for this kind of assessment are tackled as well. For instance, it is shown that currency adjustments are
essential when comparing global companies if their shares are listed in different currency areas. In
addition, the differences of dollar-weighted versus time-weighted returns for peer groups during
consecutive observation periods are discussed.
At Deutsche Bank’s AGM at the end of May 2012, the CEO tenure of Josef Ackermann officially
ended after ten years in office. During his stewardship, Deutsche Bank established itself in the bulge
bracket of investment banking and was one of the few global banks which survived the financial crisis
without any direct government support. Whether his regime was successful for shareholders is
controversial. It is shown that in spite of the fact that Deutsche Bank’s original share price
performance during Ackermann’s stewardship has been negative by −50 %; it significantly
outperformed other German financial institutions, international sector indices or hand-selected
investment banking peer groups. However, it is not clear if this relative outperformance is solely
attributable to Ackermann’s and his board members’ management capabilities or perhaps a result of
implicit guarantees by the German government.
Moreover, share price performance figures published by Deutsche Bank are reviewed. It turns out that
some figures overstate the real performance. The same is true for e.g. Morgan Stanley’s performance
graph in its latest 10-K report. This finally raises the question, how reliable share price performance
figures presented by companies are. This is important for the ongoing pay-for-performance discussion
because already the underlying data of share price performance could be biased.
JEL classifications: G21, M49, N24
Keywords:
Share Price Performance, Total Shareholder Return, Performance Evaluation,
Performance Graph, Price Index, Return Index, Dollar-weighting, Deutsche Bank,
Investor Relations
Data Availability: Data used in this study are publicly available from sources identified in the paper.
*
I would like to thank Ralf Stromeyer, Sunny Kapoor and Christina Wolff for their helpful comments and
suggestions. The responsibility for all remaining errors belongs to nobody but me.
Center for Financial Studies (CFS), Goethe University, GrГјneburgplatz 1, 60323 Frankfurt am Main, Germany
E-mail: spaethe@ifk-cfs.de, Phone: +49 (69) 798-30080
1
1
Introduction
At Deutsche Bank’s annual general Meeting (AGM) at the end of May 2012, the CEO tenure of
Josef Ackermann officially ended after ten years in office. During his stewardship, Deutsche Bank
established itself in the bulge bracket of investment banking and was one of the few global banks
which survived the financial crisis without any direct government support. Whether his regime was
successful from a shareholder perspective is controversial. In the months and weeks before the AMG,
almost every German newspaper published some kind of commentary on the Ackermann decade,
including an evaluation of Deutsche Bank’s share price performance. Although they all covered
almost the same observation period, they came to very different results. The reason for this is a broad
mix of measures for share price performance, which mostly have been used or interpreted incorrectly.1
The first objective of this clinical study is therefore to provide a comprehensive evaluation, which
covers different observation periods, performance measures and benchmarks. In addition, the impact
of currency adjustments and different computation methods are shown. My overall aim is to answer
the question, whether Ackermann’s stewardship of Deutsche Bank was valuable for shareholders or
not.2 This issue is also important for the current compensation debate of senior executives since the
linkage of executive compensation to share price performance is nowadays the standard in most
corporations. This debate has attracted a lot of public attention and as a consequence Deutsche Bank
has introduced at the end of October 2012 an external and independent compensation panel, which
should review the structure and governance of its compensation practice.3 From a theoretical point of
view the following quote summarizes the benefit of a strong linkage:
“The separation of ownership and control in corporations is a central feature of modern
economies. The largely unobserved choice of actions by a firm's managers can have a
major impact on the wealth of its shareholders. The literature on principal-agent theory
suggests that the primary means for shareholders to ensure that a manager takes optimal
actions is to tie her pay to the performance of her firm.”4
Although the shareholder value approach is criticized for its focus on short-term earnings at the
expense of long-term value creation, share price performance is the ultimate measure to evaluate
corporate performance from an investor perspective. In the short-run it could be driven by expectation
and rumors but in the long-run they have to materialize. To capture common exogenous shocks,
1
2
3
4
See e.g. DER SPIEGEL (April 7, 2012, p. 77), which highlights the 29 % fall of Deutsche Bank’s
market capitalization without adjusting for its latest capital increase of € 10.2 billion; Handelsblatt (February
3, 2012, p. 67) compares Deutsche Bank with international peers without any currency adjustment or
Hackhausen and Panster (2001), which compare Deutsche Bank’s price index with the DAX’s return index.
I am aware that Josef Ackermann did not manage Deutsche Bank alone and that other board members and
numerous senior executives had a stake in the performance of the bank, too. However, he was the Spokesman
and lateron CEO, who had the final responsibility and power of decision. Hence he was the decisive person.
See Deutsche Bank AG (2012d) and for the initial announcement Deutsche Bank AG (2012c).
Aggarwal and Samwick (1999, p. 1999)
2
insulate management from common risk and to obtain an informative measure to assess management
performance, a lot of companies use relative performance evaluation (RPE) by benchmarking own
results relative to competitors. Recent studies of e.g. De Angelis and Grinstein (2011, p. 17), Gong et
al. (2011, p. 1014) and Carter et al. (2009, p. 280) find that between 75 and 91 % of compensation
packages are linked to relative share price performance.5 However, other studies found evidence that
management often uses its discretion and is “gaming in the peer selection process” to promote its own
relative performance.6 In the majority of cases a downward bias of the benchmark could be identified.
But until now nobody has ever checked if corporations correctly compute their share price
performance in the first place and if they use appropriate concepts. Hence this examination is the
second objective of this clinical paper.
To summarize my analyses, I find that Deutsche Bank’s original share price performance during
Josef Ackermann’s stewardship has been negative by −50 % or rather −35 % including reinvested
dividends. The decisive observation period had been January 30, 2002 until March 7, 2012 (footprint
version) and the performance varies only slightly for different observation periods. Thus, from a
European shareholder value perspective his tenure was a disappointment. In a relative comparison, the
evaluation depends quite a bit on the benchmark, the respective currency denomination and the
observation period. However, all broad equity benchmarks like the DAX, EURO STOXX 50,
S&P 500 or MSCI World performed better, by at least 30 up to 65 percentage points over the ten
years.7 More appropriate would however be to compare Deutsche Bank with specific industry indices
or individual peer groups, since the whole financial sector suffered due to the financial crisis. When
doing so Deutsche Bank outperforms all German competitors as well as sector indices and most
international peers. Hence, Josef Ackermann’s stewardship rated on a relative performance evaluation
would be quite favorable. However, recent studies on implicit guarantees by governments in the
aftermath of the financial crisis deliver a possible alternative explanation and hence question the
management achievements.
I contribute to the literature in a number of ways. First, I show that a clear compatibility between price
indices and return indices for individual shares and especially indices must be guaranteed because
otherwise the results overestimate or underestimate the performance. Best practice should be
comparisons based on return indices because they include dividends and hence are independent of
different payout policies. Second, a correct observation period is essential and multiple subperiods
increase the complexity of correct performance computation. Third, relative performance evaluation is
a useful way to absorb negative as well as positive external shocks and to measure firm specific share
price performance. Individual peer groups can be useful but leave management with great discretion in
5
6
7
A study by Perry and Zenner (2001, p. 466) reports contrasting results with share price only in the fifth place
with approximately 20 %.
Faulkender and Yang (2010, p. 266)
See row �Return Index in EUR� of Table 3-2 as well as Table 3-3.
3
the peer group composition. Consequently, only published and well known industry indices should be
used as benchmarks. Fourth, I emphasize the importance of currency adjustments when comparing
international peers because foreign exchange trends influence performance comparison quite a lot.
Finally,
I demonstrate that from a shareholder perspective dollar-weighted returns instead of time-weighted
returns are the correct performance measure although their computation is more complicated.
This is the first study which independently recomputed performance data provided by a company and
thus reviews it. In the case of Deutsche Bank it turns out that an important graph from the latest annual
general meeting as well as some comparisons in the share price section of the annual report are
deceptive. All are in favor of the company and hence reinforce the argument of Lewellen et al. (1996,
pp. 248–249):
“… performance matters to senior corporate executives. If it didn't, there would be no
reason for firms to report downward-biased performance benchmarks in their proxy
statements in order to attempt to create favorable comparisons with their own firms'
performances.”
However, as this clinical study shows, companies not only wrongly compare return indices of their
own share price including dividend payments with return indices of benchmarks without dividend
payments, they also influence the computation of share price performance. For unsophisticated readers
like the average private shareholders these shortcomings are hard to detect undermine and the basic
pay-for-performance principle.
1.1 Research Question
At the first glance the following research question of this clinical study may look quite simple, but it
turns out that some of obstacles have to be overcome. Especially press article, but investor relation
departments of corporations as well tend to disregard some problems or mix approaches, which cannot
be combined. Therefore I want to provide a structured approach which answers the problem:
п‚·
How to compute and first and foremost evalute share price performance?
In addition the following questions should be solved within this framework too:
п‚·
What is from a shareholder perspective the best concept to measure share price performance?
п‚·
How to define the appropriate observation period?
п‚·
What are good benchmarks to evalute the computed share price performance?
п‚·
How to deal with share prices in different currencies?
п‚·
How to compute returns of peer groups given that the overall observation period is divided
into several periods of time?
The general research question of this clinical paper applied specifically to Deutsche Bank would be as
follows:
4
п‚·
Was Deutsche Bank’s share price performance during the stewardship Josef Ackermann
superior, average or inferior?
1.2 Related Literature
The focus of this clinical paper is the correct computation of share price performance and more
importantly its appropriate evaluation relative to different benchmarks. The computational basics are
first of all related to classical textbooks in finance such as e.g. Sharpe et al. (1999), Bodie et al. (2011)
or Albrecht and Maurer (2008) as a German one. Although the fundamentals and distinctions of
original share price performance, price index performance and return index performance are
straightforward, they are often mixed or not clearly labeled in newspaper articles as well as annual
reports. To my knowledge no research paper has ever analyzed this topic. Therefore this clinical paper
highlights that even in publications of a large corporation such ambiguities exist and it seems that
these mistakes are not random. Hence, findings of studies that by like Bannister and Newman (2006,
p. 37), who used share price performance figures published by corporations and did not recompute
them, could be distorted.
A second line of research related to this clinical paper confirms this impression management
hypothesis and these are research papers, which analyze financial graphs and performance measures.
Brennan et al. (2009, pp. 792–794) provide a very detailed general overview of over 60 prior research
papers, which all analyze accounting narratives from an impression management point of view and in
which performance comparison is one of seven subcategories. A more focused overview of
international financial graph literature is given by Beattie and Jones (2002, p. 549) as well as Beattie
and Jones (2001, p. 198). The latter is the first study which compares the annual reports for 1992 of
the top 50 companies in six important countries worldwide, including Germany. Interestingly, already
at that time, 128 graphs illustrating share price performance or shareholders’ funds have been
displayed by 300 companies, which correspond to 43 %.8 Even more surprisingly, most graphs on
share price and shareholder funds included French companies with 54.2 graphs (108 %) and the lowest
number UK firms with only 8.5 (17 %).9 German companies provided 11.0 graphs (22 %).
Frownfelter-Lohrke and Fulkerson (2001, pp. 352–353) documented that graphics by non-U.S.
companies are more deceptive than those of U.S. firms.10 Most recently, Beattie and Jones (2008) as
well as Penrose (2008) summarize the current state of knowledge concerning graphical practice in
8
9
10
See Beattie and Jones (2001, p. 208). My assumption is that no company included more than one share
related graph. Decimal numbers are the result of graphs presenting more than one variable (n) and therefore
only count 1/n.
The low percentage for the UK decreased over time: For annual reports of 1989 it had been 20 % (combined
49 out of 240 companies) and for annual reports for 2003-2004 10 % (combined 10 out of 94 companies); see
Beattie and Jones (1992, Table 3) and Beattie et al. (2008, Table 5). Therefore the following analysis of Dilla
and Janvrin (2010, pp. 275–276) is wrong: “… the percent of such companies graphing non-accounting
information such as stock price performance … increased [sic.].” Since 2008 graphs of shareholders’ funds
(performance graphs) are compulsory for UK corporations and for more details see Footnote 32.
Compare findings with Cassar (2001, p. 136).
5
annual reports. In summary, deceptive graphs in general are not uncommon for annual reports. As a
consequence some proposals suggest that auditors should not only review the pure financial reporting,
but the narrative section of the annual report including graphs as well.11 Until now this is not the case
and many people are not aware of this fact.12
What consequences distorted graphs have on readers was the topic of several experiments in
controlled settings. In a study on earnings announcements Krische (2005) found out that “investors are
still likely to neglect relevant aspects for information due to memory limitations.”13 Beattie and Jones
(2002) discovered in an experimental setting too that measurement distortions of financial graphs in
excess of 10 % were identifiable. In addition, already Taylor and Anderson (1986, p. 127) showed that
even loan officers as sophisticated readers of financial reports can be misled by deceptive graphs.
Burgess et al. (2008) confirmed the result in a comparable study with CPAs and MBA students. Hence
securities regulation should limit managers’ discretion on accounting narrative and share price
performance as much as possible. Otherwise the possibility that deceptive information and illustrations
are presented to readers cannot be completely ruled out. As researchers shown even sophisticated
investors are not capable of completely recognizing a possible deception. And as Beattie and Jones
(2002) note “Readers with lower levels of financial understanding appear to be most at risk of being
misled by distorted graphs.”14 Already in 1992, the U.S. Securities and Exchange Commission (SEC)
introduced very detailed regulations for performance graphs, which focus on shareholders fund
performance.15 However, except for the UK, where this issue is regulated since 2009, in the European
Union no comparable legal requirement exists. And despite the detailed SEC regulation, companies
still have a great deal of discretion as the following studies show.
Most research on performance graphs is based on the inaugural year of the SEC regulation and uses
proxy statements filed in 1993.16 Hence the performance graphs cover an observation period from
1987 to 1992. One of the earliest studies is from Lewellen et al. (1996) and they found a downward
bias for broad equity market indices (other than S&P 500) as well as for industry indices or peer group
returns, but only for one-year horizons, not over five years. They conclude a “self-serving behavior on
the part of the reporting firms’ manager” by “choosing comparative stock return indices that have
displayed differentially poor performance, thereby casting a more favorable light on their own firms’
return”.17 As a result they questioned the effectiveness of the SEC rules and proposed stricter criteria
11
12
13
14
15
16
17
See Department of Trade and Industry (2001, p. 189).
See for the first time Steinbart (1989) as well as more recently Beattie and Jones (2008, p. 6), Penrose (2008,
p. 159) and Eakin et al. (2009).
Krische (2005, p. 265).
Beattie and Jones (2002, p. 562).
For more details see Section 2.1: Legal Requirements & SEC Performance Graph.
An extensive analysis of securities regulations in general is provided by Prentice (2002).
For more details see Footnote 45.
Lewellen et al. (1996, p. 228).
6
for benchmarks selections.18 Byrd et al. (1998, p. 32) showed that 131 of 475 sample companies elect
self-constructed peer groups instead of public industry indices. A majority of 57.5 % of these peer
groups underperform appropriate public benchmarks and the average overall is 11.8 % over five years.
They conclude that companies use reporting discretion to improve their reported relative performance.
Porac et al. (1999) outline at first that the definition of conceptual categories like comparable firms
and similarity is never easy and always subject to interest-driven manipulation. In the context of
performance graphs they describe it as a power play between shareholders and the management. In the
end the board decides and explains its decision to shareholders. Further the authors provide an
excellent example of how companies can influence readers’ perceptions of performance graphs despite
all SEC specifications:19 Capital Cities ABC Inc. mandatory five years performance graph in the proxy
statement filed in 1994 provided a total shareholder return of $ 171 and thereby a considerable
underperformance relative to the S&P 500 ($ 197) and only a slight outperformance in comparison to
a self-constructed peer group ($ 165).20 However, a voluntary ten-year performance graph was
provided in addition and here the broadcasting companies ($ 433) outperformed both S&P 500 as well
as its peer group ($ 401 and $ 343 respectively). Porac et al. (1999) describe this procedure as follows:
“The important political and informational forces operating on these comparisons, as well as any
symbolic manipulations that are designed to manage these forces, are thus driven by the companyshareholder relationship.”21 Their empirical findings based on performance peers of 280 S&P 500
companies and their 1993 proxy statements are as follows: First, 47.1 % used public industry indices
versus 28.6 % other published composite indices and 24.3 % self-constructed peer groups.22 Second,
the average size of peer groups was 19.55 firms.23 Third, 9.6 % change the peer group composition in
the subsequent year 1994.24 Finally they show that boards negatively alter peer group returns by
including peers from outside a company's 2-digit SIC category.25 Bannister and Newman (2006)
confirmed the downward bias found by other studies and provide for the first time specific
determinants too: negative performance relative to an industry benchmark and inside directors in
compensation committees increase the likelihood that a company does not disclose specific dollar
amounts in performance graphs. Inside directors are also accountable for the fact that companies chose
a downward biased industry benchmark. For compensation committees consisting only of outside
directors the authors could not find any downward bias in industry benchmarks.26 Cassar (2001) found
18
19
20
21
22
23
24
25
26
Soffer (1996) according to Byrd et al. (1998, pp. 31–32) conducted at the same time a comparable analysis
and came similar to conclusions.
Since old company filings are only available in the SEC’s EDGAR system starting in 1994, subsequent cited
numbers derived from Capital Cities ABC’s proxy statement of 1994 instead of 1993 as quoted by Porac et
al. (1999, pp. 117–118); see http://www.sec.gov/Archives/edgar/data/17109/0000950130-94-000567.txt.
For a criticism of Capital Cities ABC’s self-constructed peer group see Porac et al. (1999, pp. 138–139).
Porac et al. (1999, p. 118).
See Porac et al. (1999, pp. 128–129).
See Porac et al. (1999, p. 129).
See Porac et al. (1999, pp. 136-137 as well as interrogative p. 140).
See Porac et al. (1999, p. 134 and Table 5).
Related to that, Gong et al. (2011, p. 1027) report that independent boards favor primarily the use of RPE.
7
for the top 500 firms of Australia, where performance disclosure is unregulated, a greater bias
compared to the regulated disclosure regime in the U.S. and concluded “the SEC rules were not
effective in eliminating all selective biasing behavior, however, the rules did appear to substantially
reduce such behavior.”27 Only one more recent study for UK FTSE 350 companies in 2002 by Carter
et al. (2009) could not find any bias in self-constructed peer groups. On the contrary, their returns even
exceeded those of published industry indices.28
Very similar to the research on performance peer groups is research on executive compensation and
especially on compensation peer groups.29 Although from a theoretical point of view both peer groups
should be identical to align shareholders’ and managers’ interests, in the majority of cases they are not.
E.g. Cadman and Carter (2012, Footnote 2) report based on the analysis of 100 proxy statements filed
in 1997 of S&P 1500 companies that only seven use the same peer group and an additional 23 have
some overlap. For proxy statements filed in the ten years before (1997), Bizjak et al. (2008, Table 1)
report that only ten out of 100 randomly selected S&P 500 companies report identical peer groups.
Faulkender and Yang (2011) analyze compensation peer groups after enhanced SEC disclosure rules
in 2006 and find very strong results: the gaming of peer groups became even more severe and
shareholders are not rewarded with higher industry-adjusted return.30
Research papers which focus on technical aspects of share price performance are rare and only three
could be found, which are in some way relevant for this clinical study: First, Dikolli et al. (2011)
analyze theoretically which influence peer-performance summarization errors have on the test of the
RPE hypothesis and find a bias against it. Because their focus is on compensation peers and not
performance peers, the regulatory framework is different: only the names of peer constituents must be
published, but not the weights or detailed performance numbers.31 Second, Dichev and Yu (2011)
compare the difference between returns of hedge fund and the returns of investors in these funds; first
measured as buy-and-hold return and later as dollar-weighted return. The difference is with 3 to 7 %
quite large and as a consequence the real alpha of hedge fund investors is close to zero. Finally, only
Paape (2003) demonstrates how to deal with currency effects in investment portfolios, which is very
relevant for peer groups consisting of international companies with different home currencies.
1.3 Course of the Investigation
This research paper is structured as follows. Part 2 starts by elaborating on several issues, which are
from a theoretical point of view important for the correct evaluation of a share price performance.
27
28
29
30
31
Cassar (2001, p. 136) and compare findings with Frownfelter-Lohrke and Fulkerson (2001, pp. 352–353).
See Carter et al. (2009, Footnote 22).
See e.g. Cadman and Carter (2012), De Angelis and Grinstein (2011), Bizjak et al. (2011), Faulkender and
Yang (2010), Gong et al. (2011), Albuquerque (2009), Albuquerque et al. (2009), Bizjak et al. (2008) and
Perry and Zenner (2001). In addition, Donahue (2008) provides a more general overview on current
developments of executive compensation disclosure.
See Faulkender and Yang (2011, pp. 19-20 and pp. 26-27).
See Dikolli et al. (2011, Footnote 2)
8
After a short introduction and some reference regarding legal frameworks in section 2.1, it is shown
why certain problems can arise, what the consequences may be and how to solve them. In detail the
accurate performance measure (2.2), an appropriate observation period (2.2), suitable benchmarks
(2.4), possible currency adjustments (2.5) and the correct calculation of peer group returns (2.6) are
discussed. Following this theoretical background, part 3 describes the data set and applies all concepts
described before on Deutsche Bank’s share price performance. To evalute Josef Ackermann’s
stewardship in a comprehensive way four different benchmarks are used: Deutsche Bank absolute as
well as its relative performance versus German competitors and the DAX (3.2.1), versus international
equity indices (3.2.2), versus an self-constructed investment banking peer group (3.2.2) and versus
Deutsche Bank’s official banking peer group for executive compensation (3.2.4). This part concludes
with a critical discussion of Deutsche Bank’s own presentation and evaluation of its share price
development at its annual general meeting in 2012. The final part provides in section 4.1 a summary of
all evaluations and the outlook in section 4.2 finally examines how government guarantees may have
influenced share prices and thus the overall assessment.
2
Theory
2.1 Legal Requirements & SEC Performance Graph
In Germany and the European Union in general, corporations are not required by law to provide any
kind of information on their share price performance in their annual report.32 This is in some way
surprising because a lot of other requirements exist, but the perhaps most important information for
shareholder is not compulsory.33 However, nowadays almost all annual reports contain voluntary
comparisons of share prices at the end of fiscal years or even charts, which illustrate the share price
performance during the year. Frequently, German corporations add benchmarks like the DAX or
MDAX to highlight the relative performance of their own share price. However, European or industry
benchmarks are not very common or only in the last few years. Since no regulation is present, a broad
range and mixture of data as well as illustrations exist: original share prices data opposite to return
indices as well as diverse benchmarks and investment periods. In essence, information and charts on
share price performance are in most cases a marketing devise and only of limited use for objective or
balanced assessments.
32
33
The same is e.g. true for Australia, see Cassar (2001, p. 127).
The UK is since 2008 partly an exception because a corporation’s remuneration report must include a
performance graph due to UK Statutory Instruments (2008 No. 410, Schedule 8, Part 2, Paragraph 5); for
details see Ferrarini et al. (2009, p. 44).
The UK regulation is similar to the SEC regulation describe on the following pages, but not as strict;
e.g. no industry index or performance number must be provided. However, the line chart, the duration of the
last five fiscal years and the emphasis on the total shareholder return is the same.
Deutsche Bank provided for the first time in its Annual Report 1993 a detailed description of its share price
performance. Prior to that, even the pure share price was not given, only the dividend.
9
For instance, Deutsche Bank describes in its latest annual report in detail its share price development
during the last fiscal year, but does not state the disbursed dividend.34 Hence the total shareholder
return is not directly provided. Second, the subsequent text refers to the performance of a banking
index by STOXX35 and the DAX as benchmark, although for the first one the performance of the price
index is shown and for the latter of the return index.36 Finally, the starting point for an investment
model calculation is the year 1980, as it has always been since Deutsche Bank’s Annual Report
1995.37 Because the return index back in this base year was low, the performance for all subsequent
years looks impressive.38 In addition, the difference between Deutsche Bank’s annualized total
shareholder return of 5.8 % and 8.0 % for the DAX over 32 years looks at first glance small and the
accumulated value by an investment in Deutsche Bank shares of EUR 60,629 quite good.39 But the
shareholder does not get the information that the investment in the DAX would get him almost twice
as much: namely EUR 118,491.
Although in Germany no specific regulations on the illustration of share price performance exist, some
normative principles in the German law set limits. All illustrations should follow the principle of
�good faith’ (“Treu und Glauben”) because otherwise the corporation or its board members can be
taken to court. Possible legal foundations are sec. 93 para. 1 or sec. 243 para. 4 of the German Stock
Corporation Act (�Aktiengesetz – AktG’), at which first outlines the duty of care and responsibility of
the board members and latter list under which circumstances shareholder resolutions can be
challenged. In some comparable cases, the German Federal Court of Justice has already revoked the
discharge of the management board,40 which could result in liability risks.41 Especially �professional
claimants’, who search for formal mistakes during a company’s annual general meeting in order to
block the decisions and often to obtain compensation for the abandonment of the action,42 could use
misleading assessments as justification of lawsuits.43
In contrast, the U.S.A. have very strict regulations how companies must present their year-end share
price and the share price performance to shareholders.44 Since 1992 the SEC requires a
�performance graph’ in proxy statements (DEF 14A).45 Starting with the 2007 proxy season, it has
34
35
36
37
38
39
40
41
42
43
44
45
See Deutsche Bank AG (2012a, p. 37).
The in the text given decrease of approximately −37 % belongs to the �EURO STOXX Banks’ price index,
although the description says �STOXX Europe [sic. 600] Banks’. Latter had been Deutsche Bank’s industry
benchmark in the two previous annual reports too and its price performance in 2011 was only в€’32 %.
For a critical review of this approach see Section 2.4 and especially Footnote 69.
In the preceding Annual Reports 1993 and 1994 it had been a trailing window of ten years.
See e.g. chart of „Long-term value“ in Deutsche Bank AG (2012a, p. 37).
The initial investment had been the equivalent of EUR 10,000 on January 1, 1980.
See e.g. Bundesgerichtshof (2009) concerning Kirch versus Deutsche Bank.
See Vetter (2003, pp. 761–762).
For a recent analysis see Baums et al. (2011).
See for an example of such a misleading statement Section 3.3.
See Beattie and Jones (1997, p. 60).
See U.S. Securities and Exchange Commission (1992) as well as e.g. Lewellen et al. (1996, pp. 229–230) or
Gollnick (1997, pp. 185–189).
10
been moved to the annual report.46 In addition, continuously updated and very detailed �Compliance &
Disclosure Interpretations’ of Regulation S-K are available.47
A SEC compliant performance graph is a line chart and provides a graphical comparison of a
company’s stock performance relative to a broad equity market index as well as an industry index or
peer group.48 Hence it is an “easily accessible visual comparison of a company’s relative to its peers
and the market, and provides a standardized source for this type of information.”49 Certain
characteristics of the formation of a performance graph are important: First, fundamental is the �yearly
percentage change in the cumulative total shareholder return’, which is equivalent to a shares return
index. Hence dividend payments are included and the dollar amount of the original share price is of no
interest. Second, exactly two benchmarks are required, whereof one is a broad equity market index
assuming reinvestment of dividends. Companies within the S&P 500 must use that index.50 The other
benchmark can be e.g. a published industry index or a peer group. If a change in the benchmarks
occurs the reason for the change must be explained in detail and the old and new data must be
provided.51 Third, it is required to present at least the performance of the five last fiscal years and the
cumulative total return as dollar amount for each consecutive fiscal year. The following Figure 2-1
provides an example of a performance graph from JPMorgan Chase’s current annual report.52
46
47
48
49
50
51
52
Together with the executive compensation disclosure rule, which had been mandating in 1938, both
“were intended to be intertwined and their purpose was to show the relationship, if any, between
compensation and corporate performance, as reflected by the stock price” U.S. Securities and Exchange
Commission (2006a, p. 6547). For further details on compensation disclosure see Byrd et al. (1998) as well
as Donahue (2008, pp. 65–67) for a good overview of its history.
See U.S. Securities and Exchange Commission (2006b, pp. 53168–53169).
See http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
For more details see Item 201(e) of Regulation S-K [17 CFR 229.201(e)].
U.S. Securities and Exchange Commission (2006b, p. 53168).
The in the regulation�s draft version the comparison with the S&P 500 had been mandatory for each
corporation; see U.S. Securities and Exchange Commission (1992, p. 48132).
See for some empirical findings on benchmark changes Porac et al. (1999, pp. 136–137).
JPMorgan Chase & Co. (2012a, p. 63)
11
mance Graph from JPM
Morgan Chase’s Annual Report 20111
Figure 22-1: Perform
The perfformance graaph consists of three partts: the descriiption, a table providing tthe dollar am
mounts of
the inveestments in each
e
year an
nd last but nnot least thee actual chaart as visual comparison
n.53 Since
JPMorgaan Chase is a company within
w
the S&
&P 500, it haad to select that
t index ass broad mark
ket index.
The S&
&P [sic. 500]] Financials index is thhe required industry ind
dex, which many other banking
competittors use too.54 Because the
t performaance during the
t last five years must bbe presented
d, in total
six meassurement pooints are listted: The inittial starting point with uniformed in
initial investtments of
USD 1000 and the resspective dolllar amount aat the last trading day of each consecuutive fiscal year.
y
The
dollar am
mount shownn equals the percentage value at thee end of the relevant obsservation perriod. E.g.
between 2006 and 2008,
2
only USD
U
69.58 reemained of th
he initial inv
vestment in JJPMorgan Chase
C
and
53
54
Nowaadays, a separate table for the yearly valuues is best praactice, but som
metimes they are also inclu
uded in the
chart. For the inauggural year 199
93, Bannister aand Newman (2006, p. 37) reports that 448 out of 141 companies
c
or rathher 29 % did not or only partly report anny dollar amo
ounts. Some companies eveen “reported return
r
data
in an electronic fillling, but exccluded numbeer on the line graph in thee hard copy pproxy statemeent sent to
sharehholders.” Butt presumably most compaanies changed
d this policy in the follow
wing proxy statements;
see Baannister and Newman
N
(2006, p. 35).
E.g. C
Citigroup, Golldman Sachs, JPMorgan C
Chase, Morgan
n Stanley. How
wever, other iindustry indicces can be
used ttoo and e.g. Bank
B
of America uses the KB
BW Bank Indeex.
A maayor differennce of these two industrry indices iss the numbeer of constituuents: at preesent, the
S&P 5500 Financials index has 81 constitueents versus 24
2 for the KBW
K
Index. On average S&P 500
corpoorations have 31
3 industry peerformance peeers, see Faulk
kender and Yaang (2010, Foootnote 18).
Howeever, omittedd in these mean
m
calculattion are corp
porations likee Anheuser-B
Bush, which uses the
Russeell Top 200 Inndex as industtry index. Duee to the large size of constiituents and noo real industry
y focus, its
correllation to the S&P 500 is clo
ose to 1 and heence it is not a very good in
ndustry index.
12
hence its total return index decreased by в€’30.42 %, which translates into an annualized return of
в€’16.6 % p.a. (not tabled). In summary, JPMorgan Chase outperformed its industry index S&P 500
Financials for each observation period and the broader S&P 500 index only in 2008 and 2009.55 Over
the entire five year period, an investment in the S&P 500 would have yield a return of в€’1.25 %, in
JPMorgan Chase of в€’23.71 % and in the S&P 500 Financials of в€’60.36 %.
Summarizing, this first section has shown that although the computation and presentation of share
price performance is not at all regulated in Europe, the opposite is true of the U.S.A. Hence, the
following sections discuss several important features of proper share price performance measurement
and its evaluation in detail, which are to some extend already implicitly included in performance
graph.
2.2 Three Different Observation Periods
To evaluate a share price performance in a given period, a particular starting and end point have to be
determined. Solely considered from a legal point, this is a simple task: Josef Ackermann became
Deutsche Bank’s Spokesman of the Management Board after the annual general meeting (AGM)
ended on May 22, 2002 and retired as its CEO with the end of the AGM in 2012, on May 31.
Determining the observation period from an economic point of view is trickier because new CEOs
tend to influence corporate decisions and structures even before they are officially in office. In the
following, two economically plausible periods are discussed in detail; however others could be
possible as well.
The first targets a period which starts very early, namely when it became public that Mr. Ackermann
would become CEO. This happened almost two years before the start of his actual tenure, on
September 21, 2000.56 On that day, Deutsche Bank’s Board of Managing Directors elected its member
Josef Ackermann to succeed Rolf-E. Breuer as Spokesman with effect from the AGM in 2002.57 The
corresponding press release was a surprise for financial markets and the public in general. In contrast,
Ackermann’s succession was the subject of wild speculation in the press in the spring of 2011 and a
lot of rumors and candidates emerged. Finally, on July 25, Deutsche Bank’s Supervisory Board
decided and announced that JГјrgen Fitschen and Anshu Jain would be the next Co-Chairmen of the
Management Board. I will call this observation period the �announcement version’ and I assume that
all decisions within can already be attributed to Ackermann as the crucial executive.
A second plausible observation period is based on important corporate decisions, which for the first
time can clearly be attributed to the upcoming CEO Josef Ackermann. I assume that January 30, 2002
55
56
57
This is quite surprising because these have been the heydays of the financial crisis.
In spring 2000, Ackermann’s predecessor Rolf-E. Breuer had proposed a merger between Deutsche Bank and
Dresdner Bank, which finally failed and hence Breuer’s leadership had been seriously tarnished and
questioned. For many observers this was the main reason why his successor was determined so early.
One month later on October 23, 2000 Deutsche Bank’s Supervisory Board officially approved this decision,
see Handelsblatt (May 25, 2012, p. 60).
13
was such a date because Deutsche Bank announced that Managing Board Member Thomas R. Fischer
would leave the bank with immediate effect. The reason had been diverging opinions concerning a
new management structure and the day after, Deutsche Bank announced the introduction of its
Group Executive Committee (GEC). I interpret these two events as the first mayor enforcements by
Ackermann foreshadowing tenure and hence call this observation period the �footprint version’.
In summary, the following three different observation periods could be used for evaluating
Ackermann’s stewardship at Deutsche Bank:
п‚·
September 21, 2000 until July 25, 2011 (пѓ Announcement version [3.959 days ≈ 10.8 years])58
п‚·
January 30, 2002 until March 7, 2012 (пѓ Footprint version [3.689 days ≈ 10.1 years])58
п‚·
May 22, 2002 until May 31, 2012
(пѓ AGM version [3.662 days ≈ 10.0 years])
The dates diverge quite considerably and hence could lead to very different assessments of
Ackermann’s stewardship at Deutsche Bank.
In my opinion, the footprint version is the best to assess the share price performance during a
stewardship because it focuses on real decisions and actions enforced by the upcoming CEO. In
contrast, the announcement version incorporates a lot of expectations and the AGM version focuses
only on legal aspects. Admittedly, the starting and end points of the footprint version are not always
easy to determine and require a lot of judgment, which could be very subjective. Nevertheless, in the
following Part 3 the results of all versions are shown.
2.3 Absolute Performance Measures: Share Price, Price Index and
-
Return Index
At first glance, calculating performance figures from current and historic share prices seems to be a
straight forward task. On the one hand and especially for short time periods this is correct, but in the
long run, sophisticated performance measures should adjust for two corporate events: capital increases
and dividend payments. Both of them include compensations or disbursements to investors, which
influence performance measures and hence should be incorporated.
During ordinary capital increases, corporations issue subscription rights for every single outstanding
share to compensate existing investors for their upcoming property dilution. Existing investors can
either exercise these subscription rights themselves or sell them. However, in both cases one share up
to and including the subscription period does not have the same fractional property right as one share
after. E.g. in the case of Deutsche Bank’s latest capital increase in September/October 2010,59 the
58
59
Given that both announcements happened during normal trading hours of Xetra and hence the closing prices
of these days are already influenced by this information, the actual starting and end points for the evaluation
of Josef Ackermann’s stewardship are Deutsche Bank’s closing share prices one trading day before.
Deutsche Bank’s subscription period had been September 22 until October 5, 2010, which equals the German
minimum by law of two weeks. The actual trading period in Germany had been even shorter by two trading
14
theoretical price for one subscription right – given the closing price at Frankfurt Stock Exchange of
€ 45.19 on September 21 – had been € 4.06.60 Hence an investor who did not want to participate in the
capital increase could theoretically sell the subscription right and invest the proceeds directly in
Deutsche Bank shares at the lowered new share price of € 41.13. He would end up owning 1.0988
Deutsche Bank shares at the new share price, which is equal to one share at the old share price. Vice
versa one Deutsche Bank share at the new share price is equivalent to 0.9101 shares of the share price
before the subscription right trading. This adjustment factor61 is essential when calculating share price
performance over a longer period which includes capital increases.62
A dividend payment is in principle the same situation because investors can reinvest the cash payout in
additional new shares.63 E.g. Deutsche Bank closed on the day of its latest annual general meeting on
May 31, 2012 at a cum-dividend share price of € 29.085. During the following trading day of June 1,
shareholders received a dividend payment for the past financial year 2011 of € 0.75 per share and
Deutsche Bank shares closed at an ex-dividend share price of € 27.15. Hence, investors could
reinvest the dividends and receive 0.0276 additional shares.64 For that day, the performance of
Deutsche Bank’s return index including dividends was −4.07 % and correctly represented the decrease
of total shareholder wealth, whereas its price index without dividends decreased by в€’6.65 %.65
The following overview in Table 2-1 shows which adjustments the performance measures original
share price, price index and return index include.
Table 2-1: Overview of Adjustments of three Performance Measures
Performance Deutsche Bank:
Capital Increase
Dividend Payment
Share Price66
No
No
в€’62.20 %
Price Index67
Yes
No
в€’58.47 %
Return Index
Yes
Yes
в€’46.14 %
60
61
62
63
64
65
66
67
AGM 2002 to AGM 2012
days due to the settlement period, ending on October 1. Finally on October 6, the new shares started trading
in Frankfurt. For minor deviations for Deutsche Bank’s shares trading at NYSE see Deutsche Bank AG
(2010).
(Closing price at FWB of € 45.19 – subscription price of € 33.00) / (subscription ratio of 2:1 + 1) = € 4,063.
See Datastream�s Mnemonic �AF’. They are calculated using Frankfurt Stock Exchange closing price instead
of Xetra due to historic data availability.
The ratio of Deutsche Bank’s original all-time high and low share price relative to its adjusted prices
provided in Table 3-1 is exactly 0.9101.
Some banks like JPMorgan Chase or Banco Santander actually offer automated dividend reinvestment
programs.
Because dividend payments are credited by banks at no specific time during a day, closing prices are decisive
for reinvestments. In contrast, subscription rights are always credited on the evening prior to its trading
period and hence theoretical ex right share price or actual opening prices are crucial for reinvestments.
Return index: (€ 27.15 x 1.0276) / € 29.085 = 0.9593 versus price index: € 27.15 / € 29.085 = 0.9335.
Equivalent to Datastream’s unadjusted price (UP).
Datastream’s standard share price (P) is adjusted for capital increases and hence equals the price index (PI).
15
The last column shows as a practical example the performance of Deutsche Bank shares based on the
three different performance measures. The capital increase as the difference between the share price
and the price index has an effect of 3.73 percentage points and dividend payments account for the
12.33 percentage points discrepancy between the price and return index.68 The following equation
summarizes the relationship between the three described performance measures:
Share Price Performance ≤ Price Index Performance ≤ Return Index Performance
Without any dividend payments or capital increases during an observation period, all three
performance measures are equal. If a capital increase took place, but no dividend payment, price and
return index are the same and outperform the share price performance. Vice versa, share price and
price index performance are equal and underperform the return index. Given that during an
observation period a capital increase and one or multiple dividend payments occur, the share price
performance indicates the lowest performance, the price index shows an average performance and the
return index signals the best performance.
In addition, the distinction between price and return indices is essential if popular equity indices are
used for benchmarking. It has to be taken into account that for almost all stock market indices at least
two index versions exist: including or excluding dividends. However, only the DAX is constructed as
a return index, most other indices like EURO STOXX 50, S&P 500 or MSCI World are constructed as
price indices. For all of them the opposite index version exist, although to some extent with shorter
time series history and their specific index values are not widely known and cited in the media. Hence
for benchmarking only a limited combination makes sense: E.g. a comparison of Deutsche Bank’s
return index performance with the ordinary DAX or the less common return index versions of the
EURO STOXX 50 or S&P 500.69 Combining return and price indices like the standard versions of
DAX and S&P 500 at one time for benchmarking reasons does not make sense and would be like
comparing apples and oranges.
In summary, the return index is the superior performance measure to evaluate share price performance
over longer periods – like the CEO stewardship of Josef Ackermann at Deutsche Bank – because it
includes adjustments for capital increases as well as dividend payments. The same is true for equity
indices as benchmarks, even if for some of them the price index versions are better known and more
cited by the media and in the general public.
68
69
However, only a single capital increase had been conducted during the research period as compared to ten
dividend payments.
As an alternative, one could benchmark Deutsche Bank’s price index performance relative to the less
common DAX price index or standard EURO STOXX 50 or S&P 500 indices.
16
2.4 Relative Comparison with Equity Indices or Peer Groups
Absolute performance measures introduced in the previous Section 2.3 have one important drawback:
during the observation period positive or negative exogenous events can happen, which are outside the
control of the management, but they influence the company’s share price.70 Hence the management
should not be credited for this performance. One possible solution is relative performance evaluation,
which filters out such random shocks that affect the whole industry. To compare Deutsche Bank’s
share price performance relative to equity markets in general, the banking sector as a whole or
individual competitors, two approaches are possible: using established benchmarks or composing an
individual peer group. Both options have advantages as well as disadvantages.
Suitable equity indices for benchmarking Deutsche Bank could be the German DAX 30, the European
EURO STOXX 50, the U.S. American S&P 500 because almost a quarter of Deutsche Bank’s revenues
come from the U.S or even the MCSI World. As specific sector indices, the European STOXX Europe
600 Banks,71 the U.S. American S&P 500 Financials72 or the MSCI World Diversified Financials73 are
mostly used.74 One advantage of do so is the broad and predefined list of constituents, which usually
are weighted by their market capitalization. The composition is done by independent index providers
based on objective rules and hence no selection problem should occur. At the same time this is also
their drawback because banks could be included, which are not comparable to Deutsche Bank.75
In contrast, individual peer groups are at most hand-selected and should therefore include only direct
and similar competitors. However, unintentional bias like the survivorship bias or even opportunistic
selection bias by including lemon peers to boost the relative performance can negatively influence the
comparison.76 Due to simplicity individual peer groups are most often equal-weighted. In this paper,
besides broad equity and sector indices, two equally weighted peer groups are used as well: One
self-constructed, equal-weighted investment banking peer group, which was composed back in 2006
for a closely related research project. It originally consisted of the following nine international banks,
which by many observers represent at that time together with Deutsche Bank the bulge bracket of
70
71
72
73
74
75
76
Examples are the 9/11 attacks or quantitative easings by many central banks.
ISIN: EU0009658806, denominated in Euro and 46 constituents (by 31.08.2012), including Deutsche Bank.
DS Mnemonic: SP5EFIN, denominated in U.S. dollar and 81 constituents (by 29.01.2012), Deutsche Bank is
not one of them.
DS Mnemonic: M2DWD2$, denominated in U.S. dollar and 68 constituents (by 30.03.2012), including
Deutsche Bank.
Specific German banking sector indices like the DAXsector Banks (ISIN: DE0009660100) comprised only of
three constituents (by 09.08.2012), including Deutsche Bank. Therefore they are too narrow to be a good
benchmark.
Porac et al. (1999, p. 139) describes this ambiguity as follows: „Commonsense categories are summaries
abstracted from organizational action. While informative, they rarely match individual cases completely, thus
providing actors with considerable latitude to customize categories according to the task at hand.“
The corresponding SEC regulation to prevent such biases is as follows: „Peer issuer(s) selected in good faith“;
U.S. Securities and Exchange Commission (2006a, p. 6547), italic highlights made by the author.
However, Lewellen et al. (1996), Byrd et al. (1998) and Porac et al. (1999) provide empirical evidence that
benchmarks returns are downward biased and thereby overstating relative reporting-firm performance.
On the contrary, Carter et al. (2009, Footnote 22) could not find such a downward bias.
17
global investment banking: Bear Stearns, Citigroup, Credit Suisse, Goldman Sachs, JPMorgan Chase,
Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS. Three of them merged or went bankrupt
during the financial crisis in 2008, but their share price performance is included until the delisting.
Hence no survivorship bias is present.
The second one is provided by Deutsche Bank itself. At the latest in 2001 it introduced as part of its
Management Board compensation a peer based annual bonus component, the Mid-Term-Incentive
(MTI).77 It was based on the ratio of Deutsche Bank’s total shareholder return and the corresponding
average figure for a peer group of banks over a two-year period. Since 2010 the period has been
extended to three years and the program is now called Long-Term Performance Award (LTPA).78 Its
equal-weighted peer group consists of six international banks,79 which have been selected by
Deutsche Bank based on comparable business activities, size and international presence:80
п‚·
Eurozone:
Banco Santander & BNP Paribas81
п‚·
Europe, Non-Eurozone:
Barclays & Credit Suisse82
п‚·
USA:
Goldman Sachs & JPMorgan Chase83
Deutsche Bank does not apply any currency alignment for the LTPA performance measurement
although four different currencies (Euro, pound sterling, Swiss franc and U.S. dollar) are involved. I
discuss this issue in the next section and show, upon which terms and conditions this is correct or not.
2.5 Currency Alignment
If one compares not only national, but international competitors, the problem of share prices in
different currencies arise, e.g. when comparing Deutsche Bank (Euro) with Swiss (Swiss franc),
British (pound sterling) or American banks (U.S. dollar). Most often, over longer periods, the
exchange rate at the beginning and the end of period are not equal but rather differ quite substantially.
77
78
79
80
81
82
83
See Deutsche Bank AG (2002, p. 15).
The extension of the time period can have paradoxical consequences as some researcher criticizes:
„�Long-term� incentive plans with a time span of three years may actively encourage short-term decision
making. Incentive related to short-term share price movements, may in fact be more supportive of long-term
decision making because share prices are generally more forward looking than historic accounting data.“,
Kay (2012, Paragraph 11.11).
The average number of compensation peers for S&P 900 corporations had been 18 in the financial year 2006,
see Faulkender and Yang (2010, p. 261).
See Deutsche Bank AG (2012a, p. 144).
The exact constituents of the MTI peer group have never been published, but it is assumed them to be equal
to today’s LTPA peer group. For an empirical analysis of the benefits and costs of voluntary disclosure of
compensation peer groups of S&P 500 companies see Byrd et al. (1998, pp. 33–34).
Banco Santander lists Deutsche Bank as one out of astonishing 21 peers for executive compensation, see
Banco Santander, S.A. (2012, p. 149). BNP Paribas does not specify any specific competitors.
Both banks list Deutsche Bank as a constituent of their own peer group for executive compensation, Barclays
out of eleven peers and Credit Suisse out of twelve, see Barclays PLC (2012, p. 61) and Credit Suisse Group
AG (2012, p. 182).
Interestingly, Goldman Sachs and JPMorgan Chase do not include Deutsche Bank in their own competitor
group, which consist of five respectably six U.S. American banks. For more details see Goldman Sachs
(2012, p. 5) or JPMorgan Chase & Co. (2012b, p. 22).
18
Hence these currency fluctuations can have a great influence on performance comparisons and the
decisive question is: Currency alignment – yes or no?
The answer depends on the business model of the competitors in general and in particular in which
currencies their revenues and earnings are generated. Let’s assume first that e.g. company A and B are
identical, but located and listed in different countries and that they generate revenues in their
respective home currencies. If one wants to compare the share price performance of both companies,
no FX adjustment should be applied because they are doing business in different currencies. In
contrast, if both companies A and B would do business only in a single common country, one of them
had to convert its earnings for accounting purposes back into its home currency. Given that share
prices should reflect in some way current and future earnings, their movements would depend on the
exchange rate. This can be an advantage if the company’s home currency had devaluated or a
disadvantage if it had revaluated. Hence for performance evaluations, one should convert the share
price into a single currency, thereby eliminating this accounting induced difference. Which currency is
chosen as the base currency is not essential because the relative performance of company A and B
– defined as (1+ rA) / (1+ rB) – are always the same. Only the absolute share price performance
depends on the base currency.84
For this clinical study I now have to determine if Deutsche Bank regenerates its earnings in the same
currency regions as its competitors or if they differ substantially. As a first indication Deutsche Bank
describes itself since 2002 as a �global provider of [integrated] financial solutions’85 or a
�global investment bank’86. In the last ten years on average 65.2 % of total net revenues87 come from
abroad or 60.3 % have been generated by the Corporate and Investment Bank division, the
headquarters of which are located in New York and London. Drawing a conclusion from these
indications, the earnings mix by region of Deutsche Bank and other global investment banks should
only differ slightly. Hence a currency alignment into one single base currency is necessary for the
different peer groups used in this study, whose constituents’ share prices are denominated in Euro,
Swiss franc, pound sterling as well as U.S. dollar.
However, this need not be the case for other possible peer groups. E.g. if one would compare
Deutsche Bank with British retail banks like Royal Bank of Scotland and Lloyds Banking Group or
with Chinese banks like Industrial & Commercial Bank of China and China Construction Bank, no
currency alignment would be appropriate because the earnings mix by region is too different.
84
85
86
87
See for details Footnote 96.
Deutsche Bank AG (2003, p. 2), identical wording in Annual Report 2003 and with slight difference in
Annual Report 2004.
Deutsche Bank AG (2012a, p. 23), identical wording since Annual Report 2005.
In detail total net revenues (before provisions for credit losses) without Corporate Investment and
Consolidation & Adjustments.
19
That nowadays most performance comparisons like e.g. Deutsche Bank’s LTPA program are done in
local currency, is in my opinion only owed to simplicity but not based on theoretical arguments as
described above.
2.6 Time-Weighted versus Dollar-Weighted Returns of Peer Groups
Time-weighted and dollar-weighted returns are two different methods of measuring performance:
the first one is essentially a geometric mean of returns compounded over time; the second is equal to
the internal rate of return. Because they treat the size and timing of cash flows differently, in practice
the time-weighted return is applied for evaluating investment managers and the dollar-weighted return
for investment decision by shareholders.88
For single computation periods without any cash flows they always produce the same results.
However, if the return computation takes place over consecutive periods, the aggregated results can
differ. The following example in Table 2-2 illustrates this difference between time-weighted and
dollar-weighted peer group returns.
Table 2-2: Example Time-Weighted & Dollar-Weighted Returns of a Peer Group
Share A
Share B
Period t0
100.0
100.0
Period t1
110.0
190.0
Period t2
121.0
361.0
Period t3
133.1
685.9
The hypothetical peer group consists of only two competitors: share A, yielding constantly 10 % per
year and share B, yielding constantly 90 % per year. For the observation period t0 until t1 both peer
group returns are equal: 50 %.89 However, the annualized returns for the observation period t0 until t2
are different:
п‚·
Time-weighted: [ (121/100)1/2 + (361/100)1/2 ] / 2 в€’ 1 = 50.00 %
п‚·
Dollar-weighted:
( [121 + 361] / 200 )1/2 в€’ 1 = 55.42 %
For the observation period t0 until t3 the difference gets even bigger:
88
89
п‚·
Time-weighted: [ (133.1/100)1/3 + (685.9/100)1/2 ] / 2 в€’ 1 = 50.00 %
п‚·
Dollar-weighted:
( [133.1 + 685.9] / 200 )1/3 в€’ 1 = 59.99 %
For details see Sharpe et al. (1999, pp. 826–828).
[(110/100)1/1 + (190/100)1/1] / 2 − 1 = ([110 + 190] / 200)1/1 – 1 = 50.00 %.
20
Hence, the difference between the time-weighted and dollar-weighted peer group return is variable and
changes proportionally to the observation length and to the variance in the returns of the shares. As
consequence dollar-weighted peer group returns in the second period depends on the individual returns
in the first period and so on. This assumptions is more appropriate from a shareholder perspective
because it does not assume a continuously adjustment of the individual weightings within a peer group
in each period, which would be time-consuming and costly.
After so far a lot of theoretical issues in assessing share price performance have been discussed and
some best practice solutions been presented, the next part applies all these issues on Deutsche Bank’s
share price performance during the stewardship of Josef Ackermann.
3
Empirical Data
3.1 Source of Capital Market Data
For this study share price data from Datastream by Thomson Reuters has been used. Time series are
based on Xetra closing price for Deutsche Bank (D:DBKX) and all other German corporations or
standard closing quotes for all other banks and indices from their home exchange in local currencies.
The presented performance data is either based on Datastream’s price index (PI), which adjusts the
original share price for corporate actions, but not for dividends, or on its return index (RI), which
incorporates dividends, too.90 Currency adjustments have been made by three foreign exchange time
series (USEURSP, SWISFUS and BRITPUS).
The following Table 3-1 provides some landmarks for the announcement, footprint and AGM versions
of Deutsche Bank’s share price as well as its all-time high and low. The original share price at that
time as well as the for corporate actions adjusted share price are shown. The latter is the better
benchmark relative to the current share price.
Table 3-1: Overview of Deutsche Bank’s Share Price on Selective Landmark Dates
Date
Comment
Original Share Price91
Adjusted Share Price91
21.09.2000
Announcement Ackermann
€ 95.1092
€ 86.54992
30.01.2002
Footprint Ackermann
€ 73.2592
€ 66.66492
22.05.2002
AGM 2002
€ 76.95
€ 70.031
11.05.2007
All-time High
€ 117.96
€ 107.353
23.01.2009
All-time Low
€ 16.875
€ 15.358
25.07.2011
Announcement Successors
€ 38.69592
€ 38.69592
07.03.2012
Footprint Successors
€ 33.3392
€ 33.3392
31.05.2012
AGM 2012
€ 29.085
€ 29.085
90
91
92
The performance of the latter one is sometimes also called total shareholder return (TSR).
See Datastream’s Mnemonic �UP’ (unadjusted price) as well �P’ (price).
Closing price of the previous trading day, see Footnote 58 for details.
21
3.2 Discussion Performance Measures
3.2.1 Deutsche Bank absolute as well as relative to German Competitors and the DAX
The assessment of Deutsche Bank’s share price performance under the stewardship of
Josef Ackermann starts with its absolute performance during the three observation periods. For the
relative performance, in a second step the share price development of some German competitors in the
financial sector are shown as well. Nowadays, in Germany Commerzbank is the only remaining
comparable bank, which is listed.93 Therefore Allianz and Munich Re as large German insurance
companies complement the sample of financial institutions. As benchmark for the share price
performance of other large German stock companies in general, the DAX 30 is added too. For all
constituents the development of their price and return indices are shown in Table 3-2. Because they are
all listed in Euro, no currency alignment is necessary.
Table 3-2: Performance of Deutsche Bank, German Competitors and the DAX
DeutscheВ Bank Commerzbank
AnnoucementВ VersionВ (21.09.2000В untilВ 25.07.2011)
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (22.05.2002В untilВ 31.05.2012)
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ EUR
Allianz
MunichRe
DAXВ 30
‐55.3%
‐41.2%
‐88.9%
‐86.9%
‐71.0%
‐61.0%
‐64.4%
‐50.6%
‐20.0%
8.3%
‐50.0%
‐35.2%
‐89.0%
‐87.5%
‐63.3%
‐50.9%
‐59.6%
‐44.1%
‐2.0%
30.5%
‐58.5%
‐46.1%
‐91.3%
‐90.1%
‐66.8%
‐53.1%
‐59.1%
‐40.2%
‐6.7%
27.3%
The first finding is that Deutsche Bank’s share price performance during Ackermann’s stewardship
had been negative, irrespective which observation period or performance measure you look at. Based
on the most relevant footprint observation period, its return index decreased by –35.2 % over the
whole period or rather on average в€’4.2 % per year. The two other observation periods even come to
more negative results: −41.2 % or −4.8 % p.a. (announcement version) and –46.1 % or −6.0 % p.a.
(AGM version). Excluding reinvested dividends, the performance of the price is even worst: ranging
between –50.0 % or −6.6 % p.a. (footprint version), –55.3 % or −7.2 % p.a. (announcement version),
and –58.5 % or −8.4 % p.a. (footprint version). The difference between Deutsche Bank’s price and
return index – between 12.3 percentage points94 or 1.2 percentage points p.a. (AGM version) and
14.9 percentage points or 1.4 percentage points p.a. (footprint version) – indicates that the dividend
payout during the ten years had been quite considerable and is not negligible. In summary, during
Ackermann’s stewardship at least 1/3 of the shareholder value vanished and hence shareholders would
have been better off if they did not invest in Deutsche Bank shares at all. However, this perspective
93
94
Unfortunately Dresdner Bank and HypoVereinsbank as two other big German universal banks have been
taken over by Allianz (2001) and UniCredit (2005) and delisted on 11.06.2002 respectably 18.09.2008 and
therefore no comparison of the share price performance is possible.
This number and some following as well are larger than in Table 3-2 shown due to rounding differences.
22
does not take into account that perhaps the whole financial sector or the stock market in Germany
performed badly. This �relative’ performance of Deutsche Bank will be the topic of the next passage.
By comparing Deutsche Bank’s performance relative to its direct banking competitor Commerzbank
as well as Allianz and Munich Re as financial institution at large, the assessment reverses completely:
Now Deutsche Bank becomes the best performing German financial institution out of the DAX
corporations in almost all observation periods. In the most relevant footprint version to evaluate
Ackermann’s stewardship, Deutsche Bank’s return index outperformed Munich Re by +8.9 percentage
points or +0.9 percentage points p.a., Allianz by +15.7 percentage points or +1.5 percentage points
p.a., and Commerzbank even by +52.4 percentage points or +4.0 percentage points p.a.95
Compared to the German equity index DAX, which incorporates numerous industry sectors, the
development of Deutsche Bank’s return index becomes inferior again: −49.5 percentage points or
в€’6.1 percentage points p.a. (announcement version), в€’65.6 percentage points or в€’10.0 percentage
points p.a. (footprint version), and в€’73.5 percentage points or в€’12.4 percentage points p.a.
(AGM version). These strong underperformances can be partially attributed to dividend payments, as
the large differences between the DAX’s price versus return indices indicate: The DAX’s price index
decreased during all three observations periods whereas its return index increased; on average the
difference between both is over 30 percentage points large. In contrast Deutsche Bank’s average
difference between its price and return index is 13.8 percentage points. Focusing on the price index,
Deutsche Bank’s underperformance gets smaller: −35.3 percentage points or −3.9 percentage points
p.a. (announcement version), в€’48.0 percentage points or в€’6.3 percentage points p.a. (footprint
version), and в€’51.8 percentage points or в€’7.0 percentage points p.a. (AGM version).
From a German perspective one can summarize that the financial sector as a whole suffered a dramatic
share price decrease relative to the DAX during all three observation periods. In the light of this macro
trend, despite Deutsche Bank’s share price decline by e.g.−35.2 % in the footprint observation period,
it outperformed all German competitors. Hence Josef Ackermann’s stewardship could be rated quite
positive based on a relative performance assessment.
3.2.2 Deutsche Bank relative to International Equity Indices
Deutsche Bank is global bank and hence its earnings and as result its share price is influenced by
economics factors from numerous countries, not Germany alone. Therefore, a relative performance
assessment should not only focus on Germany as in the previous subsection but include European and
U.S. American equity indices as well. The following Table 3-3 shows the absolute performance of
Deutsche Bank and a broad European, a U.S. American and a worldwide equity index.
95
Only in the AGM observation period, Munich Re performed including dividends slightly better than
Deutsche Bank due to a strong outperformance in the six weeks prior to Deutsche Bank’s AGM in 2012.
23
Table 3-3: Absolute Performance of Deutsche Bank and International Equity Indices
AnnoucementВ VersionВ (21.09.2000В untilВ 25.07.2011)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (22.05.2002В untilВ 31.05.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
DeutscheВ Bank
EUROВ STOXXВ 50
S&PВ 500
MSCIВ World
‐55.3%
‐24.2%
‐55.3%
‐41.2%
‐0.4%
‐41.2%
‐45.1%
‐7.0%
‐45.1%
NotВ available
NotВ available
NotВ available
‐7.3%
‐7.3%
‐45.3%
13.5%
13.5%
‐33.0%
3.1%
3.1%
‐39.2%
25.7%
25.7%
‐25.8%
‐50.0%
‐23.9%
‐50.0%
‐35.2%
‐1.3%
‐35.2%
‐33.7%
0.9%
‐33.7%
‐4.7%
45.0%
‐4.7%
22.1%
22.1%
‐19.8%
49.1%
49.1%
‐2.1%
31.9%
31.9%
‐13.3%
68.7%
68.7%
10.9%
‐58.5%
‐44.6%
‐58.5%
‐46.1%
‐28.1%
‐46.1%
‐38.7%
‐18.3%
‐38.7%
‐10.2%
19.7%
‐10.2%
20.7%
20.7%
‐9.6%
47.4%
47.4%
10.5%
19.9%
19.9%
‐10.1%
54.0%
54.0%
15.4%
First of all, Table 3-3 illustrates very well the impact and necessity of currency alignments in general.
In the first row �Price Index in Local Currency’ the performance difference between the
EURO STOXX 50 and the S&P 500 – first original denominated in Euro and latter in U.S. dollar – is
quite large: 37.8 percentage points. However, if the returns are aligned to a common currency base
(U.S. dollar or Euro), the difference almost vanishes. The same is true for comparing
EURO STOXX 50 and MSCI World, although the difference only gets smaller. Hence it would be
misguided to interpret the large performance difference of Deutsche Bank in Euro compared to the
S&P 500 or MSCI World in U.S. dollar. Therefore all rows referring to �indices in local currency’ are
only shown for completeness.
Second, Deutsche Bank underperformed all international equity indices shown in Table 3-3,
irrespective of their European, U.S. American or worldwide focus. E.g. it underperformed in the most
important return index and footprint version the EURO STOXX 50 measured in Euro by
в€’30.5 percentage points or в€’3.5 percentage points p.a., the S&P 500 by в€’33.1 percentage points or
в€’3.9 percentage points p.a., and the MSCI World by в€’46.0 percentage or в€’5.9 percentage points p.a.
Measured in U.S. dollar the difference gets even bigger due to the devaluation of the Euro or rather the
revaluation of the U.S. dollar: Deutsche Bank versus EURO STOXX 50 в€’46.4 percentage points or
в€’6.0 percentage points p.a., versus S&P 500 by в€’50.4 percentage points or в€’6.7 percentage points p.a.,
and versus MSCI World by в€’70.1 percentage or в€’11.2 percentage points p.a.96
96
The reason why Deutsche Bank’s underperformance relative to equity indices fluctuates depending on the
base currency is due to the applied calculation method. Usually underperformance or outperformance is
compounded as differences between two returns: rDeutsche Bank – rEquity Index = Δ rabsolute. However, one can also
calculate underperformance or outperformance as ratio: (1 + rDeutsche Bank) / (1 + rEquity Index) – 1 = Δ rrelative.
Calculating Deutsche Bank’s performance relative to the broad equity indices as ratio, the following numbers
emerge, independent of the base currency: underperformance versus EURO STOXX 50 by в€’32.0 %, versus
S&P 500 by в€’33.8 % and versus MSCI World by в€’41.5 %. However, these figures cannot be interpreted
directly and therefore they are mostly theoretical in nature.
24
After comparing Deutsche Bank and broad international equity indices, the benchmarks in Table 3-4
are now three widely used international financial sector indices: STOXX Europe 600 Bank,
S&P 500 Financials and MSCI World Diversified Financials
Table 3-4: Absolute Performance of Deutsche Bank and International Financial Sector Indices
AnnoucementВ VersionВ (21.09.2000В untilВ 25.07.2011)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (22.05.2002В untilВ 31.05.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
DeutscheВ Bank
STOXXВ EuropeВ 600В Banks
S&PВ 500В Financials
MSCIВ WorldВ Div.В Fin.
‐55.3%
‐24.2%
‐55.3%
‐41.2%
‐0.4%
‐41.2%
‐53.5%
‐21.2%
‐53.5%
NotВ available
NotВ available
NotВ available
‐45.2%
‐45.2%
‐67.6%
‐29.7%
‐29.7%
‐58.6%
‐43.3%
‐43.3%
‐66.5%
‐30.2%
‐30.2%
‐58.8%
‐50.0%
‐23.9%
‐50.0%
‐35.2%
‐1.3%
‐35.2%
‐59.1%
‐37.7%
‐59.1%
‐40.9%
‐10.0%
‐40.9%
‐42.7%
‐42.7%
‐62.4%
‐27.4%
‐27.4%
‐52.3%
‐37.0%
‐37.0%
‐58.6%
‐20.2%
‐20.2%
‐47.6%
‐58.5%
‐44.6%
‐58.5%
‐46.1%
‐28.1%
‐46.1%
‐67.7%
‐57.0%
‐67.7%
‐53.3%
‐37.7%
‐53.3%
‐47.4%
‐47.4%
‐60.6%
‐33.4%
‐33.4%
‐50.1%
‐46.8%
‐46.8%
‐60.1%
‐32.6%
‐32.6%
‐49.4%
As in the German context, by comparing Deutsche Bank against direct competitors represented by
specific sector indices, the assessment reverses completely: Deutsche Bank outperforms all three
sector indices in almost all combinations. Focusing again on the return index and footprint version,
Deutsche Bank’s outperformance compounded in U.S. dollar relative to the STOXX Europe 600 Banks
is +8.7 percentage points or +0.8 percentage points p.a., relative to the S&P 500 Financials
+26.1 percentage points or +2.3 percentage points p.a, and relative to the MSCI World Diversified
Financials +18.9 percentage points or 1.7 percentage points p.a. Denominated in Euro the
outperformance decreases a little bit: STOXX Europe 600 Banks by +5.7 percentage points or
+0.6 percentage points p.a., S&P 500 Financials by +17.2 percentage points or +1.6 percentage points
p.a., and MSCI World Diversified Financials +12.4 percentage points or +1.2 percentage points p.a.
In summary, also from an international perspective Deutsche Bank’s underperformed several broad
equity benchmarks, but this was mainly driven by the general trend of the financial sector. Relative to
these sector benchmarks Deutsche Bank performed quite good and therefore the assessment of Josef
Ackermann’s stewardship would be positive.
3.2.3 Deutsche Bank relative to Investment Banking Peer Group
In this subsection Deutsche Bank’s performance is compared to a hand-selected, equal-weighted peer
group of nine international investment banks. The selection of the peer group had been made back in
2006, thus before the financial crisis and it includes seven U.S. American and two Swiss banks.
Together with Deutsche Bank they formed at that time the bulge bracket in investment banking,
although during the upcoming financial crisis Bear Stearns and Merrill Lynch had been taken over and
25
Lehman Brothers declared bankruptcy. They are included in calculating of the peer group return until
their NYSE delisting: Bear Stearns on May 30, 2008; Merrill Lynch on December 31, 2008; and
Lehman Brother finally on March 5, 2012. The following Table 3-5 shows the return of the whole
investment banking peer group as well as for each single competitor.
Table 3-5: Absolute Performance of Deutsche Bank and Investment Banking Peer Group
PeerВ GroupВ ofВ DeutscheВ Bank InvestmentВ Banks
AnnoucementВ VersionВ (21.09.2000В untilВ 25.07.2011)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (22.05.2002В untilВ 31.05.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
Citi
CS
GS
JPM
MS
UBS
Bear
ML
LEH
‐55.3%
‐24.2%
‐55.3%
‐41.2%
‐0.4%
‐41.2%
‐60.3%
‐49.7%
‐70.3%
‐51.7%
‐38.8%
‐63.9%
‐91.9% ‐60.1% 14.8%
‐9.3% ‐70.0% ‐59.2%
n.a.
n.a.
‐99.9%
‐91.9% ‐12.9% 14.8%
‐9.3% ‐70.0% ‐11.1%
n.a.
n.a.
‐99.9%
‐95.2% ‐48.6% ‐32.3% ‐46.5% ‐82.3% ‐47.5%
n.a.
n.a.
‐99.9%
‐89.4% ‐49.8% 25.8% 27.2% ‐63.6% ‐52.3%
n.a.
n.a.
‐99.9%
‐89.4%
n.a.
n.a.
‐99.9%
‐93.8% ‐35.4% ‐25.8% ‐25.0% ‐78.5% ‐38.6%
n.a.
n.a.
‐99.9%
‐50.0%
‐23.9%
‐50.0%
‐35.2%
‐1.3%
‐35.2%
‐53.5%
‐46.7%
‐65.0%
‐44.1%
‐35.9%
‐57.9%
‐92.6% ‐62.7% 34.6% 22.7% ‐59.9% ‐64.6%
n.a.
n.a.
n.a.
‐92.6% ‐30.9% 34.6% 22.7% ‐59.9% ‐34.4%
n.a.
n.a.
n.a.
‐95.2% ‐54.6% ‐11.6% ‐19.4% ‐73.6% ‐56.9%
n.a.
n.a.
n.a.
‐90.5% ‐54.3% 47.8% 66.4% ‐52.1% ‐59.3%
n.a.
n.a.
n.a.
‐90.5% ‐15.4% 47.8% 66.4% ‐52.1% ‐24.7%
n.a.
n.a.
n.a.
‐93.7% ‐44.4% ‐2.9%
9.4% ‐68.5% ‐50.5%
n.a.
n.a.
n.a.
‐58.5%
‐44.6%
‐58.5%
‐46.1%
‐28.1%
‐46.1%
‐60.2%
‐55.8%
‐66.8%
‐52.4%
‐47.0%
‐60.2%
‐93.7% ‐66.3% 22.4% ‐11.7% ‐66.5% ‐68.5%
n.a.
n.a.
n.a.
‐93.7% ‐45.6% 22.4% ‐11.7% ‐66.5% ‐49.1%
n.a.
n.a.
n.a.
‐95.3% ‐59.2% ‐8.2% ‐33.8% ‐74.9% ‐61.8%
n.a.
n.a.
n.a.
‐91.9% ‐57.2% 34.8% 19.4% ‐60.0% ‐63.5%
n.a.
n.a.
n.a.
‐91.9% ‐30.9% 34.8% 19.4% ‐60.0% ‐41.0%
n.a.
n.a.
n.a.
‐93.9% ‐48.2%
n.a.
n.a.
n.a.
9.5%
25.8% 27.2% ‐63.6%
4.1%
1.1% ‐10.5% ‐70.0% ‐55.8%
First observation, for Bear Stearns and Merrill Lynch no performance data of the three observation
periods are shown because they have been delisted already before the earliest observation period ends.
However they are included in the peer group return until the day of their delisting and the same is true
for Lehman Brothers. E.g. for the footprint version the peer group return as been calculated by
dividing the whole observation period into four subperiods, which are shown in Table 3-6.
Table 3-6: Dividing Observation Period into Subperiods due to Drop Outs of Peer Group
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
SubperiodВ 1
SubperiodВ 2
SubperiodВ 3
SubperiodВ 4
Start
30.01.2002
30.05.2008
31.12.2008
05.03.2012
End
NumberВ ofВ Peers
DropВ Out
ReturnВ IndexВ inВ USDВ untilВ DropВ Out
30.05.2008
9
BearВ Stearns
‐82.2%
31.12.2008
8
MerrillВ Lynch
‐72.8%
05.03.2012
7
LehmanВ Brothers
‐99.9%
07.03.2012
6
 ‐
The overall return of the peer group is calculated as dollar-weighted return of each subperiod, which
includes the corresponding drop outs’ negative return index performances. Adding up the subperiods
peer group returns (not listed), the return index denominated in U.S. dollar in the footprint version
decreases by в€’35.9 %. Both the time-weighted return including drop outs of в€’48.2 % (not listed) or the
simple mean return based on the six remaining peers by в€’11.4 % (calculation based on Table 3-5)
would deliver a wrong result. Latter shows a clear survivorship bias because the extreme negative
returns of Bear Stearns, Merrill Lynch and Lehman Brothers are not included.
Second observation, Deutsche Bank outperformances the peer group of investment banks as a whole
in all possible combinations, independent of the observation period or currency. E.g. in the most
relevant return index and footprint version, the performance difference denominated in U.S. dollar is
26
+34.6 percentage points or +3.0 percentage points p.a. In Euro the difference gets a bit smaller:
+22.7 percentage points or +2.0 percentage points p.a. In the announcement version Deutsche Bank’s
outperformance relative to its peer group return is about the same size, in the AGM version it
decreases to +18.8 percentage points in U.S. dollar or rather +14.1 % in Euro. In a one-on-one
comparison, only two out of the nine competitors performed continuous better: Goldman Sachs and
JPMorgan Chase. Therefore both are the best performing banks of the whole investment banking peer
group. The Swiss competitors Credit Suisse and UBS outperformed Deutsche Bank in the earliest
announcement observation period, but lagged in the important footprint version as well in the AGM
version. All remaining five investment banks performed worse than Deutsche Bank.
As concluding remark of this subsection one can say that Deutsche Bank was during the stewardship
of Josef Ackermann one of the better preforming investment banks, although not the best one.
Surviving the financial crisis on its own is already an achievement, despite the shareholder value
losses because three former competitors failed or had to be taken over. This positive assessment is
confirmed independently by either an equal-weighted, hand-selected peer group of investment banks
in this subsection or by standard sector indices based on market capitalizations in the previous.
3.2.4 Deutsche Bank relative to MTI/LTPA Peer Group
Finally, Deutsche Bank’s share price performance is compared to an equal-weighted peer group of
mixed investment banks as well as commercial and retail banks, which Deutsche Bank constructed by
its own for its management compensation. Although the peer group for the �Long-Term Performance
Award’ (LTPA) has only been introduced in 2010, the same composition is assumed for its
predecessor program, the �Mid-Term-Incentive’ (MTI).97 The following Table 3-7 shows the return of
the aggregated peer group for the management compensation as well as for each single bank.
97
For more details see Footnote 80.
27
Table 3-7: Absolute Performance of Deutsche Bank and MTI/LTPA Peer Group
DeutscheВ Bank
AnnoucementВ VersionВ (21.09.2000В untilВ 25.07.2011)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (30.01.2002В untilВ 07.03.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (22.05.2002В untilВ 31.05.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
MIT/LTPAВ В В В В В В PeerВ Group Santander
BNP
Barclays
CS
GS
JPM
‐55.3%
‐24.2%
‐55.3%
‐41.2%
‐0.4%
‐41.2%
‐20.7%
8.8%
‐35.8%
7.7%
49.7%
‐11.7%
‐27.9%
22.3%
‐27.9%
6.9%
81.2%
6.9%
1.5%
72.0%
1.5%
50.4%
154.9%
50.4%
‐43.2%
‐34.3%
‐61.3%
‐14.1%
‐0.7%
‐41.4%
‐60.1%
‐12.9%
‐48.6%
‐49.8%
9.5%
‐35.4%
14.8%
14.8%
‐32.3%
25.8%
25.8%
‐25.8%
‐9.3%
‐9.3%
‐46.5%
27.2%
27.2%
‐25.0%
‐50.0%
‐23.9%
‐50.0%
‐35.2%
‐1.3%
‐35.2%
‐20.0%
‐1.5%
‐35.3%
5.2%
30.8%
‐14.1%
‐25.8%
12.9%
‐25.8%
8.6%
65.2%
8.6%
‐32.4%
3.0%
‐32.4%
‐3.0%
47.6%
‐3.0%
‐56.2%
‐51.3%
‐68.0%
‐34.2%
‐26.9%
‐51.9%
‐62.7%
‐30.9%
‐54.6%
‐54.3%
‐15.4%
‐44.4%
34.6%
34.6%
‐11.6%
47.8%
47.8%
‐2.9%
22.7%
22.7%
‐19.4%
66.4%
66.4%
9.4%
‐58.5%
‐44.6%
‐58.5%
‐46.1%
‐28.1%
‐46.1%
‐37.9%
‐28.7%
‐46.6%
‐19.0%
‐6.2%
‐29.7%
‐46.4%
‐28.5%
‐46.4%
‐22.4%
3.5%
‐22.4%
‐55.5%
‐40.7%
‐55.5%
‐33.2%
‐10.9%
‐33.2%
‐70.0%
‐68.3%
‐76.2%
‐55.6%
‐53.2%
‐64.9%
‐66.3%
‐45.6%
‐59.2%
‐57.2%
‐30.9%
‐48.2%
22.4%
22.4%
‐8.2%
34.8%
34.8%
1.1%
‐11.7%
‐11.7%
‐33.8%
19.4%
19.4%
‐10.5%
In contrast to all previous comparisons with direct competitors or sector indices, Deutsche Bank
underperforms the MTI/LTPA peer group. This is true for each possible combination of observation
period, index version or currency although the difference decreases over time: In the announcement
version Deutsche Bank’s return index underperformed the aggregated peer group by −50.0 percentage
points or в€’6.2 percentage points p.a. in U.S. dollar and by в€’29.5 percentage points or в€’3.2 percentage
points p.a. in Euro. In the footprint version it decreases denominated in U.S. dollar to в€’31.2 percentage
points or в€’3.2 percentage points p.a. and denominated in Euro to в€’21.1 percentage points and в€’2.3
percentage points p.a. In the AGM version the difference is the smallest by в€’21.9 percentage points or
в€’2.4 percentage points p.a. in U.S. dollar or в€’16.5 percentage points or в€’1.8 percentage points p.a. in
Euro. In the one-on-one comparisons, only Barclays performed worst in all three observation periods
as well as Credit Suisse in the footprint and AGM version. All four others bank continuously
outperformed Deutsche Bank.
Despite the fact that the comparison in this subsection tried to replicate Deutsche Bank’s own share
price performance evaluation for its management compensation, three major deviation should be
highlighted: First, Deutsche Bank does not adjust for different currencies and all official calculation
are done in ’local currency’.98 Second, Deutsche Bank’s internal observation period is always only one
(calendar) year and for longer observation periods the arithmetic mean of annual returns are
compounded.99 But the geometric mean would be a better approach to align shareholder value and
management compensation.100 Third, there could be a structural break in assessing Deutsche Bank’s
98
99
100
Due to the development of exchange rates since 2010, Deutsche Bank’s performance relative to its LTPA
peer group is significantly larger in local currencies than with currency alignments, for details see Table 3-8.
“The LTPA is calculated from the average of the annual RTSR [Relative Total Shareholder Return] for the
last three financial years.”; Deutsche Bank AG (2012a, p. 144)
E.g. Deutsche Bank compounded a LTPA for 2008-2010 of 87 % although the RTSR for the entire period
was 67 %. For the time period 2009-2011 it was just the other way around: Deutsche Bank compounded an
28
performance relative to its MTI/LTPA peer group because the official peer group for the MTI program
has never been published. Therefore the following Table 3-8 shows Deutsche Bank’s performance
relative to the LTPA peer group only since its official introduction in 2010.
Table 3-8: Absolute Performance of Deutsche Bank and LTPA Peer Group (starting 2010)
DeutscheВ Bank
AnnoucementВ VersionВ (01.012010В untilВ 25.07.2011)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
FootprintВ VersionВ (01.012010В untilВ 07.03.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
AGMВ VersionВ (01.012010В untilВ 31.05.2012)
PriceВ IndexВ inВ LocalВ Currency
PriceВ IndexВ inВ USD
PriceВ IndexВ inВ EUR
ReturnВ IndexВ inВ LocalВ Currency
ReturnВ IndexВ inВ USD
ReturnВ IndexВ inВ EUR
LTPAВ В В В В В В В В В В В PeerВ Group Santander
BNP
Barclays
CS
GS
JPM
‐14.0%
‐13.9%
‐14.0%
‐11.0%
‐10.9%
‐11.0%
‐19.0%
‐16.2%
‐16.3%
‐15.6%
‐12.6%
‐12.7%
‐30.1%
‐30.1%
‐30.1%
‐25.7%
‐25.6%
‐25.7%
‐12.7%
‐12.6%
‐12.7%
‐6.2%
‐6.1%
‐6.2%
‐13.2%
‐12.5%
‐12.6%
‐10.9%
‐10.2%
‐10.3%
‐39.7%
‐23.8%
‐23.9%
‐35.0%
‐17.9%
‐18.0%
‐19.8%
‐19.8%
‐19.9%
‐18.6%
‐18.6%
‐18.7%
1.2%
1.2%
1.1%
3.0%
3.0%
2.9%
‐25.9%
‐32.3%
‐25.9%
‐23.4%
‐29.9%
‐23.4%
‐31.3%
‐32.5%
‐26.1%
‐27.7%
‐28.9%
‐22.2%
‐44.7%
‐49.5%
‐44.7%
‐40.3%
‐45.5%
‐40.3%
‐37.4%
‐42.8%
‐37.4%
‐32.8%
‐38.5%
‐32.8%
‐13.4%
‐15.9%
‐8.0%
‐9.0%
‐11.5%
‐3.2%
‐54.1%
‐48.3%
‐43.5%
‐50.5%
‐44.3%
‐39.1%
‐32.7%
‐32.7%
‐26.4%
‐31.0%
‐31.0%
‐24.6%
‐5.6%
‐5.6%
3.2%
‐2.5%
‐2.5%
6.7%
‐35.4%
‐44.3%
‐35.4%
‐33.1%
‐42.4%
‐33.1%
‐46.1%
‐48.2%
‐39.9%
‐42.4%
‐44.7%
‐35.9%
‐58.5%
‐64.2%
‐58.5%
‐55.2%
‐61.3%
‐55.2%
‐54.0%
‐60.3%
‐54.0%
‐48.2%
‐55.4%
‐48.2%
‐36.1%
‐39.1%
‐29.4%
‐32.5%
‐35.7%
‐25.4%
‐64.0%
‐61.7%
‐55.6%
‐59.7%
‐57.1%
‐50.2%
‐43.3%
‐43.3%
‐34.2%
‐41.7%
‐41.7%
‐32.3%
‐20.4%
‐20.4%
‐7.7%
‐17.3%
‐17.3%
‐4.0%
Now Deutsche Bank’s return index performance relative to the aggregated peer group is mixed: in the
announcement and AGM version Deutsche Bank slightly outperformed the peer group
(announcement: +1.6 % in U.S. dollar and +1.6 % in Euro as well as AGM: +2.4 % in U.S. dollar and
2.8 % in Euro), in the footprint version it underperformed by в€’1.1 % in U.S. dollar and в€’1.2 % in
Euro. All differences are on an annual basis less than 0.3 % and hence neglectable. In the one-on-one
comparison only JPMorgan Chase stick to its continuously outperformance of Deutsche Bank as in the
full observation periods shown in Table 3-7. The ranking of all other peers changed in single
observation periods or even completely. E.g. Banco Santander outperformed Deutsche Bank over the
full observations periods in each version, but now underperformed it in all observation periods starting
January 2010.
In summary, this subsection shows that during the stewardship of Josef Ackermann there had been at
least some banks which share prices performed better than Deutsche Bank’s. However, it is debatable
if the composition of the LTPA peer group is adequate to evaluate Deutsche Bank’s share price
performance until 2009. All peers came fairly well through the financial crisis and did not take
taxpayers money or repaid it very quickly.101 Hence Deutsche Bank’s underperformance over the full
observation periods could by the result of a survivorship bias in the aggregated peer group return.
101
LTPA of 101 % even though the RTSR for the entire period was 104 %. For more details see Deutsche Bank
AG (2012a, p. 148).
E.g. both JPMorgan Chase and Goldman Sachs received on October 28, 2008 a $ 25 billion as well as a
$ 10 billion preferred stock investment through the Troubled Asset Relief Program (TARP), but repaid it
already eight month later on June 17, 2009. Hence some people argue that they have been forced to take it in
the first place; see e.g. Hanson (2011).
29
Limiting the observation periods to the official LTPA implementation since 2010, Deutsche Bank
share price performance is roughly in line with the peer group. From today’s perspective, it looks like
Deutsche Bank has done a good job by selecting evenly matched competing banks for its management
compensation program. No lemons are included and therefore interest of shareholder and incentives
for the management compensation are very well aligned.
3.3 Digression: Performance Presentation during the AGM 2012
At Deutsche Bank’s annual general meeting on May 31, 2012, Josef Ackermann gave his last keynote
speech and highlighted amongst others the outperformance of Deutsche Bank shares relative to its
peers102 during his tenure. The following text passage is the corresponding quote including one
corresponding slide from the presentation:
“Over the past ten years we have been successful in this. Although we were initially far
behind our competitors, during the second phase of our management agenda, the growth
phase from 2003 to 2007, we pulled ahead of our competitors in terms of profitability
following the realignment of the bank. If we had not managed this, we would certainly
not have come through the severe financial crisis without taxpayer’s money, and this
bank would look completely different to how it does today.
When we look back at the past ten years, we have to make a distinction between two
phases: During the first five years, until 2007, we enjoyed a good market environment
and a lot of tailwind. What came then in the five years since 2008 was the biggest
financial crisis since the 1930s, followed by the subsequent sovereign debt crisis in
Europe.
102
The peer group Ackermann refers to is not equal to Deutsche Bank’s LTPA peer group: Banco Santander is
missing but Morgan Stanley, Bank of America, Citigroup, UBS and SociГ©tГ© GГ©nГ©rale have been added.
30
Figure 33-1: Originaal Slide No. 8 from Ackeermann’s Prresentation @ AGM 20112
Inn good times, we generatted the best ooperating ressults in the history
h
of thiss bank, and we
w
w
were able to please you, our sharehoolders. Our share
s
price rose
r
to 118 euros and our
o
diividend to 4 euros,
e
50 cen
nts. We thus created subsstantial valuee for you.
Inn difficult tim
mes, we dem
monstrated exxceptional ressilience. Seen across thee entire decad
de,
wee succeededd in surpasssing our ppeers and delivering
d
a better totaal sharehold
der
reeturn.”103
Ackermaann’s speechh as well as Figure 3-1 emphasize the
t fact thatt Deutsche B
Bank only in
n the first
period uunderperform
med its peer group;
g
but inn all three rem
maing period
ds as well as in total it haad been a
better investment. Thhe presented numbers aree annualized
d returns for given
g
intervaals, always starting
s
at
N Year’s Eve. Becausse some yearrs (2003, 200
07 and 20099) appear two
ofold, the
New Yeaar’s Day to New
intervalss do not coonsist of disstinct time pperiods. In addition, th
he investor relations deepartment
acknowlledged on ennquiry104 thaat the 14 % pperformancee by Deutsch
he Bank andd the 2 % by
y its peer
group arre calculated for a time period
p
endingg at the first quarter (Maarch 30) of 22012 and not as stated
in the prresentation att the end of 2011.
2
103
104
Deutssche Bank 2012, English transcript of A
Ackermann’s keynote speeech, which hee gave in Geerman and
thereffore check agaainst delivery. Italic highligghts made by the
t author.
Phonee call with Aleexandra Nisseel (-24624), D eutsche Bank Investor Relaations on Junee 13, 2012.
31
The following sections examine if Deutsche Bank presented a correct assessment or how the
performance evaluation against its peer group is perhaps biased. At first I compare the total return
performance of Deutsche Bank against its peer group for the complete observation period starting
January 1, 2002 until March 30, 2012:
п‚·
Deutsche Bank:
в€’33.1 %
п‚·
Peer Group105
в€’26.2 %
Surprisingly, Deutsche Bank underperformed its peer group by −6.9 % and therefore Ackermann’s
statement for the entire decade is wrong! How can this be if Deutsche Bank outperformed its peer
group in three out of four sub periods and the only negative first one is the shortest and its
performance difference is not out of line compared to the remaining?106 The answer lies in two specific
calculation methods that Deutsche Bank applies but does not explicitly point out. I will discuss them
in detail and present alternative calculation methods, which first and foremost fulfill an important
condition: the performance of Deutsche Bank as well as for its peer group for all sub periods add up to
the performance of the whole period. The following Table 3-9 provides a first overview of all
adjustments, which will be discussed in detail below.
Table 3-9: Performance Calculation – Comparison Deutsche Bank and Adjustments
FocusВ onВ coreВ BoostingВ coreВ business
business
Row
Describtion
1 Deutsche Bank ‐ Slide AGM
2 OwnВ Recalculation
ManagingВ EmergingВ througВ theВ stronger
crisis
DB Peers DB Peers DB Peers DB Peers
‐7%
3%
19%
14% ‐18% ‐23%
14%
2%
‐7.2% 3.2% 18.5% 14.3% ‐18.4% ‐22.5% 14.2% 1.7%
01.01.2002В untilВ 30.03.2012
DB Peers
3
4
5
OverlappingВ TimeВ PeriodsВ (AdjustmentВ В 1)
‐7.2%
Time vs. Dollar‐weighted Average ‐ Intra‐Period (Adj. 2, incl. 1)
‐7.2%
Time vs. Dollar‐weighted Average ‐ Inter‐Period (Ad. 3, incl. 1 + 2) ‐7.2%
3.2% 11.1%
3.6% 11.1%
3.6% 11.1%
8.7% ‐22.9% ‐24.3% ‐6.6% ‐11.8% ‐33.1% ‐35.6%
9.5% ‐22.9% ‐22.1% ‐6.6% ‐11.0% ‐33.1% ‐27.8%
9.4% ‐22.9% ‐20.0% ‐6.6% ‐12.0% ‐33.1% ‐26.2%
6
7
AbsoluteВ ValueВ atВ PeriodВ End
AbsoluteВ ValueВ ChangeВ duringВ Period
107.3
7.3
153.6
46.3
8
9
10
11
PerformanceВ DifferenceВ DBВ vs.В PeersВ (RowВ 2)
PerformanceВ DifferenceВ DBВ vs.В PeersВ (RowВ 3)
PerformanceВ DifferenceВ DBВ vs.В PeersВ (RowВ 4)
PerformanceВ DifferenceВ DBВ vs.В PeersВ (RowВ 5)
86.1
‐13.9
‐10.4%
‐10.4%
‐10.8%
‐10.8%
131.2
45.1
4.2%
2.4%
1.6%
1.7%
78.1
‐53.1
4.1%
1.4%
‐0.8%
‐2.9%
98.4
‐55.3
66.9
‐11.1
12.5%
5.2%
4.4%
5.4%
73.8
‐24.5
‐33.1
‐26.2
2.5%
‐5.3%
‐6.9%
First, the conjointly used performance in the years of 2003, 2007 and 2009 influences the assessment.
E.g. in Deutsche Bank’s calculation in Figure 3-1 the yearly performance of 2003 is included in the
first period �Focus on core business (2002-2003)’ as well as in the second period �Boosting core
business (2003-2007)’. The following Figure 3-2 presents the total return for each single year for
Deutsche Bank and its peer group.
105
106
Equal weighted average of total returns in local currencies of the following banks: Goldman Sachs,
Morgan Stanley, JPMorgan Chase, Bank of America, Barclays, UBS, Credit Suisse, SociГ©tГ© GГ©nГ©rale and
BNP Paribas.
Deutsche Bank made no calculation errors for the sub periods because the same numbers have been
recomputed.
32
he Bank vs. Peer
P
Group
p – Total Retturn by Sing
gle Years
Figure 33-2: Deutsch
In the yeears countedd twofold (20
003, 2007 annd 2009) Deeutsche Bank
k outperform
med its peer group by
significaant amountss: +12.4 %,, +8.4 % aand +31.1 %.
% In most other yyears Deutsche Bank
underperrformed or only
o
slightly outperformeed is peer grroup.107 Alth
hough the givven performances for
all sub pperiods are coorrect, they do
d not add upp to the overrall performance due to thhe double co
ounting of
single yeears. Therefoore the first adjustment iis to calculatte annualized
d performancce figures fo
or distinct
time periiods:
п‚·
F
Focus on corre business
(20022-2003, unch
hanged)
п‚·
B
Boosting corre business
(20044-2007 instead of 2003-2
2007)
п‚·
M
Managing thhrough the crrisis
(20088-2009 instead of 2007-2
2009)
п‚·
E
Emerging strronger
(20100-2012/Q1 in
nstead of 200
09-2012/Q11108)
Table 3--9 shows in row three th
he updated pperformance numbers for each periood. In the firrst period
nothing changed andd Deutsche Bank
B
underpeerformed its peer group by
b в€’10.4 %, which can be
b seen in
utsche Bank still outperfo
formed its peeer group
row eighht and nine. In the three remaining pperiods, Deu
but by a much smalller margin: 2.4
2 % insteadd of 4.2 % in
n the second period, 1.4 % instead off 4.1 % in
the thirdd period, andd 5.2 % insteead of 12.5 % in the lasst period. Fo
or Deutsche Bank alone this first
107
108
An innteresting patteern emerged most
m likely byy chance: Deu
utsche Bank outperformed
o
tthe peer group
p in every
odd yyear and vice versa
v
in even years.
y
For deetails concernning the adjustted date see sta
tatement verifi
fied by footnotte 104.
33
adjustment is sufficient that compounding the annualized performance for the sub periods equals its
overall performance for the whole observation period:
(1 – 7.2 %)2 x (1 + 11.1 %)4 x (1 – 22.9 %)2 x (1 – 6.6 %)2¼ – 1 = –33.1 %
109
However, for the peer group this is not the case because the intermediate result of –35.6 % at the end
of row three does not equal the correct overall performance of – 26.2 %. The reason is the omission of
the following additional adjustments.
Firstly, for peer groups consisting of several competitors there is a difference between time-weighted
and dollar-weighted returns.110 Deutsche Bank used the first approach and compounded the aggregated
peer group returns shown in Figure 3-1 as follows: first, for each single peer its return for the
corresponding observation period is calculated; second, this result is annualized and finally, the mean
over all annualized returns is computed. By doing this, each single return has the same weighting and
the result is a geometric mean of annual returns. However, from an investor perspective, the
dollar-weighted peer group returns are the correct opportunity costs. Row four shows these new
dollar-weighted returns, which have been recalculated for each period independently. In each single
period, the values change in favor of the peer group and the new performance differences are listed in
row ten: at the start в€’10.8 % instead of в€’10.4 %, thereafter 1.4 % instead of 2.4 %, observation period
three now turns negative by в€’0.8 % instead of 1.4 %, and the last one decreases as well from 5.2 % to
now 4.4 %. The overall peer group performance increased by 7.8 percentage points from в€’35.6 % to
в€’27.8 %. Hence it is close to the correct performance, but still one more adjustment is needed.
Namely, the consequences of the dollar-weightings do not only occur separately within each of the
four observation periods, rather do they apply for all observation periods together as well, excluding
the first one. Only at the very beginning, all shares start from the same starting line. In the second
observation period, the weightings for each single peer are determined by the performance in the
previous period and so forth. Therefore, one additional dollar-weighting adjustment has to be made
and the final performance figures are shown in row five. As proof, the combined peer group
performances for each observation period now add up to the correct overall performance:
(1 + 3.6 %)2 x (1 + 9.4 %)4 x (1 – 20.0 %)2 x (1 – 12.0 %)2¼ – 1 = –26.2 %
Based on the adjustments and new data provided above, Josef Ackermann’s assessment of
Deutsche Bank’s share price during his last AGM should have been more cautious: �Although
Deutsche Bank performed quite good relative to its peers since 2004, including a drop during the
financial crisis, it could never compensate for the negative performance in the first two years. Overall,
Deutsche Bank underperformed its peer group between 2002 and Q2, 2012 by в€’6.9 percentage points
109
110
Detailed calculation of performance stated in the penultimate column in row three.
See Section 2.6 and for further explanations see Dichev and Yu (2011, pp. 261–262). Only for single
observation periods or peer groups consisting of only one competitor, the time-weighted and dollar-weighted
returns are equal.
34
p
per year.’
y
Conse quently, thee original sliide of Ackerrmann’s preesentation
or в€’0.7 percentage points
wn in Figuree 3-3. All
shown inn Figure 3-1 should havee looked likee the followiing, updated version show
correctioons are highlighted in red
d color as weell as underlin
ned.
Figure 33-3: Updated
d Slide No. 8 from Ackeermann’s Prresentation @ AGM 20 12
4
C
Conclusions
4.1 Summary
During JJosef Ackerrmann’s stew
wardship of Deutsche Baank, its orig
ginal share pprice perform
mance in
absolute terms had been rather negative. B
Based on thee most relev
vant footprinnt observatio
on period
7 2011), its rreturn index
x denominateed in Euro deecreased by –35.2 %.
(Januaryy 30, 2002 unntil March 7,
Other obbservation peeriods even come
c
to moree negative reesults: в€’41.2 % (announccement versio
on) and –
46.1 % ((AGM version). This peerformance oof the return
n index is thee most relevvant from an
n investor
111
perspecttive because it includes dividend payyments and hence represents total sshareholder wealth.
w
mann’s stewaardship overr one third of the shareho
older value vvanished or rather on
Thus, duuring Ackerm
average в€’4.2 % per year. Conseq
quently, from
m an absolutte perspectiv
ve as a Europpean shareho
older it is
comprehhensible to evvaluate Ackeermann’s maanagement peeriod at Deuttsche Bank qquite negatively.
111
Althoough the perfoormance of thee price index – excluding reinvested
r
div
vidends – is ciited very often
n, it is not
the apppropriate shareholder valuee measure beccause it understates the real performance..
35
However, a U.S. American shareholder of Deutsche Bank could come to a different assessment
because the return index denominated in U.S. dollar112 has decreased only marginally: в€’1.3 % in the
most relevant footprint version and в€’0.4 % in the announcement version. Only in the AGM version
Deutsche Bank’s share price performance is with −28.1 % substantially negative. Due to these
diverging assessments, an evaluation in absolute terms is perhaps not the best way to come to an
overall assessment. Therefore Deutsche Bank’s share price performance has been rated against a
whole set of benchmarks too: national and international indices, broad equity and specific sector
indices as well as hand-selected peer groups. This is also some kind of simple robustness check if the
assessments depend on the benchmarks. Very important for this specific comparison between
competing banks on a global basis are currency alignments because they act in a large part in the same
countries.
These relative comparisons show that the financial sector as a whole suffered a drastic share price
decrease in all three observation periods relative to broad equity markets in general. In the light of this
macro trend, Deutsche Bank outperformed all German competitors as well as most international
investment banking peers. Currency effects do not reverse these results, although the outperformance
denominated in U.S. dollar is larger than in Euro.113 Hence, Josef Ackermann’s stewardship rated on a
relative performance evaluation would be quite favorable. What many newspapers as well as the
general public may not appreciate properly is the achievement that Deutsche Bank as a global
investment bank survived the financial crisis at all, which not all former competitors accomplished.
Hence, to quote Josef Ackermann: “Although, in the light of the current share price, this may not
actually make anyone entirely happy – myself included – it should not be entirely neglected either.”114
4.2 Alternative Assessment and Outlook
The previous summary has evaluated Josef Ackermann’s stewardship of Deutsche Bank quite
positively because it assumed first and foremost a firm-specific linkage between decisions reached by
its CEO or the management team in general and the share price development. Macroeconomic trends
influence the share price too, but they usually have an impact on peers and the whole financial sector
as well and hence do not much affect the relative performance of Deutsche Bank’s share price.
However, in the aftermath of the financial crisis several recent research papers like e.g. Ueda and Di
Weder Mauro (2012), Schich and Lindth (2012) and Noss and Sowerbutts (2012) investigate the
consequence of subsidies and guarantees on banks. They all find substantial funding cost advantages
and in contrast to explicit guarantees, governments cannot recoup the cost of implicit guarantees by
levying a charge for it. Thus, too-big-to-fail banks115 profit from implicit state backing because debt
112
Deutsche Bank’s original return index based on Xetra closing prices and converted into U.S. dollar is almost
identical to Deutsche Bank’s return index based on NYSE closing prices.
113
For details see Footnote 96, why the common outperformance measure is not independent of currency effects.
114
Deutsche Bank AG (2012b, p. 9).
115
Other descriptions are too-interconnected-to-fail banks or systemically important financial institutions.
36
investors anticipate future bailouts by the government and demand a lower risk premium.116 The
profits from cheap financing – relative to their risk profile – are captured by the bank. If a bank would
be 100 % equity financed, government guarantees would not be necessary because all losses would be
borne by the shareholder. However, the more the leverage ratio increases, the more valuable the
possible government support becomes. Thus, even the up-to-date prominent policy report Liikanen et
al. (2012) deals in detail with this topic.117
Since Deutsche Bank has one of the highest leverage ratios of its banking peers,118 it could profit quite
a lot from implicit guarantees. In addition, guarantees by the German government are very credible.
First, Germany is one of the biggest and strongest economies in the world. Second, Deutsche Bank is
the only real global bank in Germany and has in addition after the takeover of Postbank approximately
24 million retail customers, which makes it altogether systemically important for Germany. In
contrast, the UK or the U.S. have numerous global banks and even Switzerland has two, which is why
the bailout of a single bank is not for sure.119 Hence Fitch’s �Support Rating Floor� for Deutsche Bank
– which documents the government’s ability to provide support120 – is �A+’ and its individual
�Support Rating’ is �1’, which is the highest grade.121 In summary, Deutsche Bank’s share price
performance in the second half of Ackermann’s stewardship could be upwardly biased by implicit
subsidies from the German government. Although this is in general true for any bank, the size and
credibility are firm-specific. Among its international peers, Deutsche Bank should be – based on its
characteristics – one of the biggest beneficiaries and the next passage provides some estimates of the
magnitude solely for Deutsche Bank.
Measuring the value of implicit subsidy for banks is complicated because no transparent terms or
observable prices exist. Schich and Lindth (2012) estimated for 17 German banks that their yearly
reduction in funding cost due to implicit government guarantees had between USD 30 to 43 billion
and an average rating uplift of almost three notches. Ueda and Di Weder Mauro (2012) calculate for a
larger sample of 27 German banks a 4.1-5.1 notch rating bonus and estimate the general effect to be 80
basis points large, although based on a worldwide sample of 895 banks. If the estimates of the latter
were applied to Deutsche Bank, its long-term rating would be �BBB/BBB−� instead of today’s �A+’.
116
This hypothesis has in the mean time been confirmed by the current Co-Chairman of Deutsche Bank
Anshu Jain: "Many argue that universal banks enjoy an unfair premium: their 'too big to fail' status gets them
better funding rates. That point is true... but outweighed by the cost of complex regulatory intervention and
levies which fall hardest on systemically important institutions. Jain (2013, p. 8).
117
See Liikanen et al. (2012, pp. 22-23 and p. 49)
118
At the end of 2011, Deutsche Bank’s leverage ratio (total assets/total shareholder’s equity) was 40 based on
IFRS accounting figures or 21 equivalent to US GAAP, see Deutsche Bank AG (2012a, p. 126).
In contrast, JPMorgan Chase’s or Citigroup’s leverage ratio based on US GAAP was 12 and 10 respectively.
119
See Schich and Lindth (2012, p. 9) or in the specific case of Lehman Brothers Hanson (2011).
120
For more details see Ueda and Di Weder Mauro (2012, pp. 6–7) and for Moody’s approach see Schich and
Lindth (2012, pp. 6–7).
121
Fitch’s description: „A bank for which there is an extremely high probability of external support. The
potential provider of support is very highly rated in its own right and has a very high propensity to support
the bank in question.“
37
The linear upwards shift of 80 basis points in the yield curve, given Deutsche Bank’s outstanding
long-term borrowings of over EUR 175 billion,122 would increase its funding cost by approximately
EUR 1.4 billion per year. Given Deutsche Bank’s income before income taxes in 2011 of
EUR 5.390 billion, the negative impact could be over в€’25 % large. This is in line with the previous
three years.123 A direct adjustment of Deutsche Bank’s outperformance documented in the subsections
3.2.1 to 3.2.2 is however not possible because all other peers would have to be corrected as well. In
addition, the applied estimate of the increase in funding cost depends very much on the choice of
parameters.
In the end it is not clear whether the observed outperformance of Deutsche Bank’s share price relative
to sector indices and individual peer groups can be attributed to Josef Ackermann and his management
team or if it is mainly the result of implicit subsidies by the German government. From a shareholder
value perspective and for executive compensation this is a very important distinction and further
research has to be conducted.
In addition, an interesting topic for further research also might be how often misguiding presentation
of share price performance occurs. The inaccuracy of Deutsche Bank described in detail in this study
was not the only one discovered during this research. E.g. Morgan Stanley’s 10-K for 2011 also
overstates its share price performance in the performance graph because Morgan Stanley’s share price
performance is based on its return index including dividends, whereas shown performance of the
S&P 500 as well as the S&P 500 Financials is based on the price indices without dividends.124 The
sole broad analysis dates back to Lewellen et al. (1996) and they reviewed proxy statements of 1993,
which should include performance graphs for the first time. They report that 41 companies out of 813
in total disregard the new regulation in place.125 This number should have decreased over the last
20 years for sure to zero, but no one has ever since analyzed the compliance of the performance graphs.
A more fundamental question open to future research is whether the impact of financial graphs and
especially share price charts on the users’ perception of the companies carries through to influence
their (investment) decisions.126 If this was the case, which is a likely assumption, strictly regulated
performance graphs like those specified by the SEC should be introduced in the European Union
as well.
122
123
124
125
126
Basis for the calculation are long-term debts of EUR 163.416 billion and trust preferred securities of
EUR 12.344 billion at the end of 2011.
Based on the same calculation method, the effect would have been в€’36 % in 2010, в€’22 % in 2009 and в€’20 %
in 2008.
See Morgan Stanley (2012, p. 43) and compare the S&P index numbers with e.g. JPMorgan Chase & Co.
(2012a, p. 63) or Citigroup Inc. (2012, p. 291). In the previous four years this error does not occur in Morgan
Stanley’s 10-K.
See Lewellen et al. (1996, p. 233).
See Beattie and Jones (2008, p. 35).
38
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