Corporate Governance,the Cultural Context

Mannheim-logoThe Cultural Context: Corporate Governance – The German Answer to a Global Issue 

To increase Germany’s companies and capital markets attractiveness to investors, its corporate governance code establishes both standards and 90 recommendations for good governance. Stakeholder-oriented in nature, they emphasize underlying principles of a social market economy such as transparency and sustainability. Compliance is voluntary (though non-compliance requires an explanation), providing companies with flexibility, and in all evidence, the governance code, along with Germany’s dualistic board structure, has worked well for the country, creating a vibrant, entrepreneurial business climate that is respected across the globe.

A dualistic structure is a defining characteristic of German business, and has proven quite successful

Most countries have a one-tier corporate structure, with one governing board that is often controlled by members of management. In contrast, explains Professor Müller, Chairman of the Supervisory Board at Commerzbank AG, Germany requires two boards: a management board that operates the enterprise and a supervisory board that oversees and advises the management board. These two boards are completely separate and independent, with supervisory boards increasingly involved in strategic planning.

A convergence is occurring between countries with one-tier boards and those with dualistic structures. Increasingly, countries with one-tier structures are separating the CEO and chairman roles or are appointing an independent lead director. Both approaches can work and the dualistic approach has proven successful in Germany.

Germany’s voluntary code on corporate governance helps strengthen Germany’s businesses

10 years ago, a government commission was formed in Germany to develop a corporate governance code and standards for listed German companies. The purpose of this code was to increase the attractiveness of Germany’s companies and capital markets to international investors, as well as taking into account all stakeholder groups and including 90 recommendations on the rights and duties of management and supervisory boards. These deal with topics including the management board’s duty to provide information to the supervisory board and its independence. Importantly, companies have no legal obligation to follow these recommendations; voluntary in nature, boards must, however, indicate in the Declaration of Conformity if the recommendations have been followed and explain when they have not.

The code is flexible, with deviations from it being both legally admissible and sometimes necessary. Such deviations are not automatically considered an expression of bad governance, the essential point being that there has to be an explanation when there are 26

Transparency is critical for good governance

To make capital markets work effectively, the solution is not increased regulation. What is indeed needed is even greater transparency which provides investors with visibility on matters such as remuneration and gives investors more information with which to make decisions.

A stakeholder orientation has become an accepted practice for German companies

The German Corporate Governance Code has a stakeholder orientation that goes beyond just the interests of shareholders in maximizing profits. The approach of the code conveys the obligation of management and supervisory boards to act in accordance with the principles of a social market economy. Ethics, sustainability and avoidance of excessive risk are all important.

Dr. Götz Schmidt-Bremme, Chief, Economic Affairs, German Embassy of Paris
Professor Klaus-Peter Müller, Chairman, Supervisory Board of Commerzbank AG; Chairman, Government Commission on the German Corporate Governance Code

Read More in the White Paper Corporate Governance and Leadership

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One response to “Corporate Governance,the Cultural Context

  1. Pingback: Culture Shock - Invest Offshore·

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