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How the public loses out when politicians cash in

May 26,2022 - Last updated at May 26,2022

NEW YORK  —  Three months after Russia launched its second war against Ukraine in a decade, former German Chancellor Gerhard Schröder finally resigned from his post as chair of the board of directors of Rosneft, the Russian state-owned oil conglomerate. Yet, while Schröder had held this post since 2017, his entanglement with Russia’s lucrative energy sector is far older and even more dismaying.

On September 8, 2005, while still chancellor, Schröder finalised a deal with Russian President Vladimir Putin to build a natural-gas pipeline beneath the Baltic Sea. Since the project would allow the Kremlin to cut off natural-gas deliveries to Ukraine, Poland, and the Baltic states, it was controversial from the start.

Worse, Schröder lost the 2005 federal election to Angela Merkel just ten days later. She became chancellor in late November, and less than three weeks later, Schröder was offered a board position at Gazprom, the Russian state-owned gas giant that would build and operate the pipeline. Despite facing a backlash at home and abroad, Schröder did not hesitate long before accepting the offer.

A smell test is generally the best indicator of whether there is a conflict of interest, and in Schröder’s case, the co-chair of the German Greens spoke for many when he observed that, “it stinks”. Reportedly earning $600,000 annually for his board service at Rosneft alone, Schröder clung to these positions even as Russia launched a new war of aggression against Ukraine and forced his own country to foot the bill of the energy dependency that he helped create. Tone deaf to all criticism, Schröder told the New York Times in April, “I don’t do mea culpa.”

Seeing the need for a “tua culpa”, the European Parliament has now recommended that the European Commission place Schröder on the EU sanctions list, alongside other Europeans who have remained affiliated with Russian state-controlled corporations. On May 19, the German Bundestag’s budget committee revoked Schröder’s post-chancellorship privilege of running a fully staffed office, a perquisite that cost German taxpayers more than 400,000  euros ($429,000) per year, with little apparent oversight over how the funds were used. And still more responses are likely to come, including, possibly, Schröder’s expulsion from the Social Democratic Party (SPD).

Schröder is a particularly notorious example of a much larger problem: the revolving door between politics and business. Dozens of other European nationals stepped down from Russian corporate boards when Russia invaded Ukraine in February, among them a former chancellor of Austria, and former prime ministers of Italy and Finland.

Whether and when it is appropriate for former politicians to pursue lucrative business opportunities is a question of fundamental importance for democracies. Yet, strikingly, few countries have explicit rules on the matter. Though many require public servants to relinquish positions in business or insulate their stakes while in office, they remain silent on what is considered proper conduct after these officials step down.

The law of business organisations offers some interesting hints for addressing this issue. Corporate managers and directors are considered trustees, and their actions are subject to standards of care and loyalty. In the memorable words of the 1930s-era US Supreme Court Justice Benjamin Cardozo, “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behaviour.” Only by enforcing principles of “undivided loyalty”, Cardozo suggested, would courts be able to stem “disintegrating erosion” and ensure that the conduct of fiduciaries would be “at a level higher than that trodden by the crowd”.

Cardozo’s warning has not always been heeded. Courts have made exceptions on a case-by-case basis, and legislatures have sometimes exempted entire categories of fiduciary duties from liability, at least if the principal (the company) wished to do so. Under Delaware law (the preferred law for incorporation in the United States), companies may exempt their officers and directors from liability for taking a corporate opportunity for themselves, provided that their corporate charters make this option explicit.

But, absent approval by a company’s board, managers may not personally benefit from taking something that belongs to the corporation. This principle was established in a 1939 case involving Pepsi-Cola. When Charles Guth, the president of the candy company Loft, learned about an opportunity to acquire Pepsi’s secret recipe, he jumped at it. But he did so not for Loft, where he served as a fiduciary, but for his own private company. Without telling anybody, he used Loft’s resources and staff to develop the new drink.

Guth’s behaviour did not survive the court’s smell test. And, like Guth, Schröder comingled his obligations as a public servant with his private financial interests. He took a lucrative job at a company that benefitted from his decisions as chancellor. The fact that he no longer was in office when he accepted Gazprom’s offer is irrelevant. A fiduciary’s duties do not end the minute he steps down. Rather, they extend in time in the interest of the principal, which in this case is the German people.

Behavior that is wrong for a fiduciary in business can hardly be proper for a politician or any other public trustee. If anything, Cardozo’s notion of “something stricter than the morals of the market place” should apply to politicians with even greater force.

German Chancellor Olaf Scholz may want to reconsider his own efforts to protect Schröder from being added to the EU sanctions list. In the Pepsi case, Guth ultimately had to turn over his own company’s shares to Loft, the principal that had been harmed by his breach of duties. It therefore does not seem far-fetched to deny a former chancellor the benefits of the personal riches he amassed by breaching the trust of the people he had vowed to serve.

Katharina Pistor, professor of Comparative Law at Columbia Law School, is the author of “The Code of Capital: How the Law Creates Wealth and Inequality” (Princeton University Press, 2019). Copyright: Project Syndicate, 2022.

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