The cultural context in corporate governance – the German answer to a global issue

Dr. Götz Schmidt-Bremme, Chief, Economic Affairs, German Embassy of Paris and Professor Klaus-Peter Müller, Chairman, Supervisory Board of Commerzbank AG; Chairman, Government Commission on the German Corporate Governance Code, tackle the cultural context of corporate governance and offer an insight of the German model of company governance.

Flowchart on a chalk board with world globe showing AmericaTo 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.

Strategy Development Goal Marketing Vision Planning Business ConGermany’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. “Companies don’t have to obey the German Corporate Governance Code; they do have to explain,” says Professor Klaus-Peter Müller. 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 deviations. This clause ultimately provides transparency to the capital markets in order for the markets to draw their conclusions.

A stakeholder orientation has become an accepted practice for German companies

178481930The 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. “Management boards are responsible for managing the enterprise in the interests of stakeholders; they have an obligation not just to shareholders but to society,” insists Professor Klaus-Peter Müller.

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.

FOOD FOR THOUGHT…

  • Is a dualistic structure of governance (Board of Management and Board of Overseers) viable for both small and large companies alike? What are the pros and cons?
  • To what extent does your organisation work within a voluntary environment for      governance? Does regulation help or hinder?
  • To what extent is transparency also a leadership quality?
  • For the regulator: should more flexibility be introduced in the choice of the Board Structure (example of France where companies can opt for the monist or dualistic structure)?

Edited from the University of Mannheim, Business School guest speaker debate at the Council on Business 1 Society 2012 Global Forum

The Council on Business & Society Global Alliance is an ongoing international dialogue between six of the world’s leading business schools and an organiser of Forums focusing on issues at the crossroads of business and society – The Council Community helps bring together business leaders, academics, students and journalists from around the world. #CouncilonBusinessandSociety

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