German Corporate Governance Research Articles

The changing German corporate governance system – normative implications and empirical evidence

The objective of this article is to examine the extent to which the traditional insider-oriented German corporate government system is approaching the outsider system of the USA. In this context, the economic and legal systems, the capital market, the ownership structure, the board system as well as the executive compensation are considered determinants. Our study results verify on the one hand that the German corporate governance system is taking on Anglo-American features due to the increase in significance of external mechanisms (particularly the market for corporate control). On the other hand, the elements that have been characteristic of the insider system until now (above all strong supervisory board) are being retained. As a result, it must be emphasised that a sustained approach of the German corporate governance system to the Anglo-American outsider system with pronounced internal mechanisms is taking place. This process can be characterised as a partial formal convergence.

Compensation and Transparency of Compensation of Management Boards in Germany

Summary/Zusammenfassung Compensation and Transparency of Compensation of Management Boards in Germany The transparency of compensation of the members of the management board has become a central element of the German corporate governance system. We perform an empirical examination with respect to the structure of the compensation of the management board of DAX-30 companies. Some companies show a strong differentiation among the compensation of their board members while others do not. Furthermore, the proportion of fixed to overall compensation varies between companies. We identify those company as well as person specific variables that explain individual compensation levels. Additionally, we check which factors influence the change in compensation. Thereby, we test whether a bidding-up effect is present as suggested by some theoretical considerations. Nevertheless, the empirical results show that we are unable to detect a bidding-up effect. (JEL J33, M12, M52, O16) Vorstandsvergutung und Transparenz der V...

The Disappearing 'Deutschland AG' - An Analysis of Blockholdings in German Large Caps

The German corporate governance system changed substantially over the last ten years. Meanwhile, ownership structures of German firms changed significantly. We examine the phenomenon of changing ownership structures by studying blockholdings of German large caps between 1997 and 2006. We examine the dynamics of blockholdings by analyzing the evolution of free float and block trades, where at least 5% of voting rights change hands. Two findings emerge: First, we find that free float increases from 65% in 1997 to 75% in 2006, mainly caused by German financials and German government entities. Simultaneously, we observe a surprisingly high number of block trades: on average 1.6 block trades per firm from 1997 to 2006. Second, we find that particularly individuals and German industrials are guarantors for a stable ownership structure. German financials or German government entities as blockowners increase the free float and the likelihood of block trades. Moreover, block trades are more likely to occur in firms having foreign investors as owners. Our findings are of interest with respect to the evolution of the so-called ‘Deutschland AG’ but also with respect to the current anchor shareholder discussion.

Behind broad corporate governance aggregates: A first look at single provisions of the German corporate governance code

This study contributes to the emerging research that analyzes the relation between performance and single components of broad corporate governance aggregates, such as governance codes and ratings. Available research is confined to the U.S., Japan, and emerging markets. We enlarge the geographical scope to the German Corporate Governance Code (GCGC). For a sample of 100 large listed German stock corporations, compliance with the GCGC at large is significantly associated only with one of our performance measures (Tobin’s q); this connection is negative. Individual analysis of eleven GCGC recommendations reveals that for three of them, association with all performance measures is insignificant. Four (four) components are significantly positively (negatively) connected with at least one performance measure

Outside Director Liability: German Stock Corporation Law in Transatlantic Perspective

The role of outside directors is one of the key features in the transatlantic corporate governance debate. As their importance rises, their liability is also attracting attention. Since there are only a few cases internationally in which outside directors of listed companies have been held liable for violating company law duties, and oversight liability is considered to be dynamic, it is fruitful to consider German cases as well. In Germany, with its two-tier board system, where management and oversight are the responsibilities of, respectively, a management board and a supervisory board, supervisory boards are common for non-listed as well as listed companies. Supervisory directors have been held liable in an increasing number of cases in the last 10 years. In Germany, as in the US, courts distinguish between the decision-making and the monitoring contexts. Supervisory directors are engaged in decision-making, and in this respect are protected by a newly introduced business judgment rule. In the monitoring context, the German Federal Supreme Court traditionally denies business discretion, while in the US good faith serves as a general standard of review. It is argued that, as in the US, the stricter standard applies only when a red flag is present. Concerning the lack of out-of-pocket liability in general, the provisions of the German Corporate Governance Code concerning a suitable deductible could usefully be taken into account in the transatlantic discussion.

Global Pressure, National System; How German Corporate Governance is Changing – By Alexander Borsch

Global Pressure, National System; How German Corporate Governance is Changing – By Alexander Borsch

An empirical analysis of the 2000 corporate tax reform in Germany: Effects on ownership and control in listed companies

This paper is a first attempt to analyse the implications of the 2000 corporate tax reform on ownership concentration in Germany. The empirical results document a fall in ownership concentration and a decrease in the power of top institutional owners including the big banks. Hence, the description of German corporate governance as a bank-based system may no longer apply. However, even though the corporate tax reform had a significant effect on ownership concentration and on the power of the top-institutional blockholders, the change in the corporate income tax law did not revolutionise German corporate governance. Ownership concentration in 2005 is still high compared to the Anglo-American economies and an active market for corporate control is not observed.

Corporate governance and pay for performance: evidence from Germany

This paper investigates how two distinctive features of the German corporate governance system—concentrated ownership structure and representation of employees on firm supervisory boards—influence the sensitivity of managerial pay to firm profitability. There is a positive, though very small, link between pay and profitability for widely held firms. The presence of a largest owner seems hardly to affect this link in any economically significant way. However, the link between pay and profitability is smaller and indeed not significantly different from zero in firms whose largest owner is a German financial institution. This suggests that large owners tend to act as a substitute for rather than a complement to performance related pay in Germany.

Patterns of Compliance with the German Corporate Governance Code

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This study investigates whether the form of compliance with the recommendations of the German Corporate Governance Code (GCGC) appears to be idiosyncratic to a specific company or features similarities across firms. The major aim of this research is thus to explore the ability of a classification of compliance patterns to account for the similarities and differences between firms regarding their conformity with the GCGC.Research Findings/Insights: Based on seven dimensions of code compliance, cluster analysis is used to identify discrete groups of companies with similar patterns of code observance. We determine eight patterns of compliance which are characterized by distinct forms of code conformity.Theoretical Academic Implications: The identified cluster solution does not merely reflect the number of rejected code recommendations. Rather, companies with very similar rates of overall compliance with the GCGC are assigned to different clusters because they feature, at the same time, different patterns of code conformity. These findings imply that governance prediction and governance performance studies have to overcome overly aggregated measures of code compliance which only incorporate the number of rejected code recommendations.Practitioner/Policy Implications: This study provides evidence to practitioners and policy makers that firms can be classified regarding their compliance with the code recommendations. In‐depth analyses of the identified patterns of compliance furthermore reveal that some patterns may indicate less well substantiated deviations from the code and partly even decouplings of the declared compliance practices.

Recent developments in German corporate governance

This paper provides an overview of the German corporate governance system. We review the governance role of large shareholders, creditors, the product market and the supervisory board. We also discuss the importance of mergers and acquisitions, the market in block trades, and the lack of a hostile takeover market. Given that Germany is often referred to as a bank-based economy, we pay particular attention to the role of the universal banks ( Hausbanken). We show that the German system is characterised by a market for partial corporate control, large shareholders and bank/creditor monitoring, a two-tier (management and supervisory) board with co-determination between shareholders and employees on the supervisory board, a disciplinary product–market, and corporate governance regulation largely based on EU directives but with deep roots in the German codes and legal doctrine. Another important feature of the German system is its corporate governance efficiency criterion which is focused on the maximisation of stakeholder value rather than shareholder value. However, the German corporate governance system has experienced many important changes over the last decade. First, the relationship between ownership or control concentration and profitability has changed over time. Second, the pay-for-performance relation is influenced by large shareholder control: in firms with controlling blockholders and when a universal bank is simultaneously an equity- and debtholder, the pay-for-performance relation is lower than in widely held firms or blockholder-controlled firms. Third, since 1995 several major regulatory initiatives (including voluntary codes) have increased transparency and accountability.

A proteção ao investidor no Código de Governança Corporativa alemão

Este artigo analisa o código de governança corporativa alemão como um instrumento para aumentar a confiança dos investidores e do público em geral no funcionamento das sociedades anônimas. Baseado em padrões aceitos nacional e internacionalmente, o código contém recomendações que procuram favorecer uma cooperação mais eficiente entre a diretoria e o conselho de administração. O artigo também ressalta a conexão entre a governança cooperativa e a promoção da transparência na administração das empresas.

Setting a fox to keep the geese — Does the comply-or-explain principle work?

The German Corporate Governance Code works according to the comply-or-explain principle. One of its recommendations was to publish the remuneration of the members of the executive board on an individual basis. We examine the characteristics of the firms that complied with the code requirement. Our results indicate that firms that paid higher average remunerations to their management board members were less likely to comply, whereas firms with higher Tobin's Q were more likely to comply. We also document a non-monotonic relation between ownership concentration and the probability of compliance that is consistent with standard corporate governance arguments. Due to the fact that the number of firms complying with the disclosure requirement was low, a new law was passed that mandates disclosure unless the shareholders' meeting (with a 75% majority) decides otherwise. We find that this “loophole” in the new legislation is exploited by smaller firms, firms with comparatively high levels of executive remuneration, and firms with concentrated ownership. We discuss the implications of our results for the effectiveness of the comply-or-explain regulation.

Is the German system of corporate governance converging towards the Anglo-American model?

This paper analyses whether the German corporate governance is converging towards Anglo-American practices. We summarise the extant empirical evidence on the various governance mechanisms that economic theory suggests ensure efficiency and describe recent legal developments. We find no clear signs of convergence in form, i.e. the main distinctive features of the German system have remained largely unaltered. However, changes occurred over the last decade (specially in the legal framework) suggest a certain convergence in function, i.e. some governance mechanisms have effectively incorporated aims and/or goals generally associated with the Anglo-American model.

Measuring corporate governance in Germany: An integrated framework on compliance and transparency & disclosure

Compliance as well as transparency and voluntary corporate disclosure are essential within the concept of ´good` corporate governance. Consequently, there is an increasing demand for methods enabling investors to compare companies by means of country-specific criteria. However, measures in Germany do not provide a broad spectrum of criteria for evaluating corporate compliance and governance transparency & disclosure. Our framework covers all rules of the German Corporate Governance Code as well as additional criteria, enabling investors to analyse how companies are managed. Furthermore, we raise quality criteria of social sciences to confirm our findings.

Zur Notwendigkeit des Vorstandsvergütungsoffenlegungsgesetzes

Abstract Due to changes in the German Corporate Governance Code the transparency of compensation of the members of the management board has become a central element of the German corporate governance system. We analyze how the new transparency will influence the average compensation level. It can not be ruled out that average compensation levels will increase. By applying the so called unraveling theory we are able to show that a law was not necessary and a trend to a higher degree of transparency was on its way anyway.

The Marketisation of European Corporate Control: A Critical Political Economy Perspective

We are entering into a new phase in EU corporate governance. More than ever, our action plan must be focused and based on a solid assessment of actual needs of market players and investors. 1 As Ch...

On the Road to Anglo-Saxon Capitalism? German Corporate Governance Regulation between Market and Multilevel Governance

Financial internationalization and European regulatory harmonization put the German corporate governance regime under pressure to move towards a market-oriented, Anglo-Saxon model. While International Political Economy approaches expect Anglo-Saxon standards to spread across national borders, Comparative Political Economy predicts persistent diversity. In our paper, we trace the patterns and driving forces of change in two areas of corporate governance regulation, namely internal governance and accounting. In accounting, processes of multilevel coordination entailed a high degree of convergence towards Anglo-Saxon standards and institutions. A much greater stability of the domestic institutional framework can be seen in the case of internal governance. While political economy approaches offer important insights for analyzing these changes, both fail to account for the different patterns of convergence and divergence in the two cases. Therefore, we argue in favor of a policy analysis perspective to capture the sectorally distinct interplay of forces that shape the processes of regulatory change.

Behind Broad Corporate Governance Aggregates: A First Look at Single Provisions of the German Corporate Governance Code

Manuscript Type: Empirical.Research Question / Issue: This study contributes to the emerging research that analyzes the relation between performance and single components of broad corporate governance aggregates, such as governance codes and ratings. Available research is confined to the U.S., Japan, and emerging markets. We enlarge the geographical scope to the German Corporate Governance Code (GCGC).Research Findings / Insights: For a sample of 100 large listed German stock corporations, compliance with the GCGC at large is significantly associated only with one of our performance measures (Tobin's q); this connection is negative. Individual analysis of eleven GCGC recommendations reveals that for three of them, association with all performance measures is insignificant. Four (four) components are significantly positively (negatively) connected with at least one performance measure.Theoretical / Academic Implications: Most remarkably are some significantly negative associations between components and performance. Their existence might explain why the majority of studies fail to find a significant connection between the GCGC at large and performance. As the group of single components found to be significant in the literature is quite inconsistent, further research questions emerge, such as whether there is some stability in the set of significant single components across performance measures, across countries, and through time.Practitioner / Policy Implications: This study provides new impulse to both commissions setting up governance codes and to commercial providers of governance scores. Given the significantly negative associations we found, an empirical quality inspection of the GCGC at large and of its components is recommended.

Corporate governance in Germany

PurposeThe purpose of this paper is to provide an outline of German corporate governance.Design/methodology/approachThe history of the German Corporate Governance Code is highlighted. Then a short overview of the acceptance of the code by companies in practice is given which is based on an empirical survey. This is followed by the most recent changes as well as an overview of the developments of corporate governance in Europe. Finally, a summary of the current discussion of codetermination in terms of company management in Germany is provided.FindingsThis appraisal, accompanied by a high degree of approval of the code, shows that, on the one hand, its stipulations partly break with tradition and, on the other hand, have undergone frequent changes: in a period of four years, already four amendments have been made.Originality/valueThe paper offers insight into issues of corporate governance in Germany.

Does Compliance with the German Corporate Governance Code Have an Impact on Stock Valuation? An empirical analysis

Since 2002 company law requires listed German corporations to declare their degree of conformity to the German Corporate Governance Code (GCGC). We examine whether there is a pricing effect connected to the declared degree of compliance for a sample of (big) publicly traded German companies listed in the DAX 30 and MDAX. We find that the degree of compliance with the Code is value‐relevant after controlling for an endogeneity bias. This shows that the capital markets find the rules in the code meaningful and that there is capital market pressure to adopt the Code regulation. Our findings also suggest that the capital market fills a possible “control vacuum” resulting from the withdrawal of commercial banks from their (former) influential role in the German “insider control” corporate governance model.