One of the most frequently asked questions in connection with the Wirecard scandal has been in the last few days: “When will Deutsche Börse AG finally throw Wirecard out of the DAX?” this demand in the short term. The reason for this is the regulations of Deutsche Börse AG for the DAX family. And the Wirecard scandal is a good opportunity to rethink these rules.
But let’s start from the beginning. In addition to a continuous XETRA listing, a minimum free float of 10 percent and a legal seat or operational headquarters in Germany, there are not many prerequisites for getting into the DAX: the respective share of the company must be listed in the Prime Standard and it is all that counts is the amount of market capitalization – the free float alone is decisive here – as well as the trading turnover in the relevant share certificate. If you meet the entry rules in both key figures, you will be included in the DAX. Overall, it is purely quantitative criteria that determine whether the index belongs.
This brings with it potential problems and the Wirecard example has mercilessly exposed them. The “System DAX” rewards speculative bubbles, even more so, it even promotes them. Wirecard’s share price climbed to 199 euros in summer 2018, among other things due to the foreseeable inclusion in the DAX. It was no coincidence that the Scandal Group’s share price reached an all-time high around the announcement of the DAX listing. The stock market had speculated exactly on it in the weeks before.
What the “DAX system” does not reward is good corporate governance – or more clearly: what it does not punish is poor corporate governance. That leaves Deutsche Börse alone to the market, which is always unreliable. Experience shows that speculative bubbles are not uncommon on the stock exchange. Wirecard was such a billion dollar speculative bubble, despite all the warnings that have been heard about this company for years, but which have subsided.
The system of index admission is diametrically opposed to what many investors see in the DAX: the most important quality index of the Frankfurt stock market. Much more is interpreted into the DAX than what Deutsche Börse is currently delivering with the mere order in a nasty Excel spreadsheet. A DAX affiliation is still considered a quality feature. This has consequences: Retirement provisions in stocks, for example, are often based on index-oriented funds.
Now the way to let the market decide and let the result of price formation in the form of market capitalization and trading turnover decide on DAX or not DAX is not a fundamentally wrong way. But is it the ideal way? The path Deutsche Börse is currently taking is at least the easy one. But the Wirecard case shows that it may be too easy to rely entirely on quantitative criteria and to ignore qualitative criteria, especially when it comes to fast exit rules.
The big question is: How do you define such qualitative criteria? A further public debate on this question is necessary. But here, too, the rules of the German Stock Exchange already form possible cornerstones for quickly introducing the first qualitative fast-exit regulations, which could ultimately be used by a working group to decide on indices in order to cushion hardship through no fault of their own. These relate, among other things, to one of the most important results of good corporate governance: a timely, transparent and fully certified balance sheet. Subsequent obligations for issuers include, for example, submitting the audited balance sheet for the previous financial year within the first four months of the current financial year.
Wirecard, which has always been very late in its balance sheet compared to other DAX companies, broke this rule this year – the share was still quoted at 90 euros, although the disaster was already looming. That too would have been late, but better late than never and perhaps also a wake-up call for many investors. By the way, despite the rule breach, Wirecard is still listed in the Prime Standard and is still a DAX member. The latter will probably continue until September, when an Excel spreadsheet will decide.
There is no dispute that no one, not even a stock index, is immune to fraud – this is also shown by the example of Wirecard, where there were long-standing, unrestrictedly audited balance sheets that paved the way for the Group to join the DAX. But we at the stock exchange could please make it as difficult as possible for the “bad guys”. That is certainly also the responsibility of investors and analysts, the media and auditors. Qualitative criteria for belonging to the most important stock index of a financial center are also part of it – as one of many measures that must now follow the Wirecard scandal. The pressure on companies to deliver good corporate governance must increase – especially for those who enjoy an exposed position in the indices. Index providers like Deutsche Börse must do their part.
Links with further information on the topic:
Guide to the stock indices of Deutsche Börse AG (PDF file)
Subsequent obligations for issuers after the IPO
At a glance – chart and news: Wirecard