SAP investors sound off on boardroom departures

Investors in Europe’s largest software company, SAP, have called for the “hullabaloo” in the boardroom to end, after the departure of a string of top executives.

The revolt comes as Germany’s most valuable public company prepares to hold a virtual annual general meeting on Wednesday, in the wake of the departure of Jennifer Morgan as co-chief executive after less than six months at the helm alongside Christian Klein.

A further five members of the executive board have left SAP over the past couple of years, giving the impression “that we have landed in a US company where the ‘hire and fire principle’ is the order of the day”, said retail shareholder representatives DSW in their submission to the AGM.

While SAP is likely to be among the few Dax companies to emerge from the Covid-19 crisis largely unscathed, shareholders fear the sudden boardroom changes will further complicate the 48-year-old company’s transition to a cloud-based business.

“Even a giant can be shaken when the bloodletting is too great,” Markus Golinski, a portfolio manager at Union, one of SAP’s top 15 investors, wrote ahead of the meeting.

In his opening speech, Mr Klein, who remains as the sole chief executive, will attempt to reassure shareholders. “Generational change is normal, at all levels,” he is expected to say, adding that it is “common for executive board members to decide to leave on their own accord to pursue a different path”.

But a talent drain at the top of SAP could prove damaging “even if this heralds a generational change with all the opportunities it brings”, said Ingo Speich, the representative of Deka, which invests on behalf of German savings banks.

“The personnel hullabaloo must end and peace must return,” he added. “SAP cannot afford a construction site in top management while in crisis mode.”

Last October, after the abrupt departure of Bill McDermott, the software giant’s decade-long chief executive, chairman and co-founder Hasso Plattner handed the reins to Mr Klein and Ms Morgan, both protégés of the billionaire.

But the first woman in history to lead a Dax-listed firm, albeit from her base in the US, departed after the company said the Covid-19 pandemic had exposed the shortfalls of a transatlantic leadership structure. 

In recent months, human resources chief Stefan Ries and the head of SAP’s Digital Business Services, Michael Kleinemeier, have left the Walldorf-based firm, while board member Bernd Leukert was poached by Deutsche Bank.

Robert Enslin, once seen as a successor to Mr McDermott, now heads the sales unit of Google’s cloud business.

The chaos in SAP’s C-suite has not yet had a visible impact on its balance sheet. Operating profits remained steady at €1.2bn in the first quarter of the year.

While other Dax companies scramble for cash, SAP has €8bn in cash and cash equivalents on its balance sheet, and said that it will need neither state-aid, nor furlough schemes, to get it through the crisis.

Its high proportion of recurring revenues from maintenance contracts and an increase in interest in cloud-based enterprise software are likely to stand it in good stead over the next few months, said Mr Golinski.

However, asset manager DWS, a top six shareholder, said Ms Morgan’s departure would leave a leadership vacuum in the US — SAP’s largest market, and the country in which it has made many of its recent acquisitions, including travel management company Concur, and consumer feedback firm Qualtrics.

While SAP’s €20bn shopping spree during the McDermott era was largely devoid of mis-steps — there has yet to be a writedown of any of its purchases — investors and customers alike have been frustrated by the lack of integration with SAP’s wider suite of products.

The company’s so-called “net promoter score”, which measures how likely its clients are to recommend the software group’s services, stands at minus six, indicating that a majority are dissatisfied with SAP products.

Marco Lenck, head of the German-speaking SAP user group DSAG, which represents 3,500 businesses, including some of Europe’s largest corporations, said customers are frustrated by being locked-in to specific software.

“We need digital platforms that support open standards, so that customers can go to different manufacturers at short notice,” he added.

The threat of large-scale defections is low. But the strain of coronavirus on SAP’s 400,000 customers is beginning to show.

“Companies that are strongly affected by Covid-19 will delay upgrades to S4/Hana,” said Mr Lenck, referring to the new version of SAP’s core resource-management software.

“If they have furloughed staff, they can’t push through with projects, and they might also not have the financial resources to do so.”

Some large clients have postponed such upgrades, but with SAP still forecasting profits of more than €8bn in 2020, there is “no reason to be really concerned”, said Holger Schmidt, an analyst at German bank Metzler.

“SAP is now the core software programme for most of the important companies worldwide, and you do not change critical software from one day to another,” he said.

While the recent change in leadership “came as a little surprise”, Mr Schmidt said he is reassured by the sustained presence of Mr Plattner.

The 76-year-old chairman, who has not ruled out running for another term, “has been the person behind the major strategic shift at SAP”, he said. “He turned it from a software dinosaur to a company that can also be competitive in the cloud arena.”

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