German Corporate Governance Research Articles

The German Two-Tier Board and the German Corporate­ Governance Code

This paper deals with some interesting recent corporate governance developments in Germany. The focus is in particular on the German Corporate Governance Code, its parts, layout and how it deals with the various organs of German public corporations. The German Code is quite unique since it applies a Code of Good Practice to a two-tier board system, thus making it necessary to deal with the role and functions and the relationship between the management and the supervisory board. This paper concludes that several changes to the German law relating to public corporations since the middle of the 1990s and the introduction of the German Code will ensure that the two-tier board system will remain the favoured board structure for public corporations in Germany. It is, however, submitted that employee participation at supervisory board level will provide particular political challenges for Germany in the near future.

Ideas, Institutions and the Exhaustion ofModell Deutschland?

[Editors’ Note: This is the fourth consecutive article published in German Law Journal since July 2004 that is dedicated to the ongoing debate over the fate and prospects of the German model of Capitalism, welfare policy and corporate governance. The 22 July 2004 acquittals of all six defendants in the criminal proceedings against former Mannesmann CEO, Klaus Esser; Deutsche Bank's CEO (Vorstandssprecher) and then Member of Mannesmann's supervisory board, Josef Ackermann, and other members of Mannesmann's Supervisory Board have, once more, highlighted to German, European and International observers the particular features of law and politics in “Germany Inc.”, “Rhenish Capitalism”, or “Rhineland Capitalism”. As begun in the aftermath of Josef Ackermann's inthronization at the head of Deutsche Bank in May 2002 (exactly two years and two months before his acquittal before theLandgerichtDüsseldorf) and Ackermann's subsequent transformation of the Board's control structure,German Law Journalhas published several contributions to the ongoing changes in German corporate governance and its embeddedness within the specific German economic and legal system (seehttp://www.germanlawjournal.com/article.php?id=156). In the Journals July issue, Peter Kolla, a law student of Osgoode Hall Law School of York University in Toronto, meticulously traced the background debates to the closely observed criminal proceedings in the Mannesmann aftermath (http://www.germanlawjournal.com/article.php?id=460), and in our August issue, Jürgen Hoffmann, Professor of Sociology in Hamburg, surveyed the current interdisciplinary debate over the future fate of so-called Rhineland Capitalism and reconstructed Germany's recent history in an international context of globalization and privatisation (http://www.germanlawjournal.com/article.php?id=485). Also in the August issue, Max Rolshoven, writing his Ph.D. in law at the University of Münster, offered a first assessment of the acquittals in the Mannesmann case (http://www.germanlawjournal.com/article.php?id=480). In the article, published here, Professor Christopher Allen of the University of Georgia further deepens this inquiry from an economic point of view, while placing the contemporary debate over the possible end of Rhineland capitalism in the historical context of Germany's development in the 20th Century. The Editors ofGerman Law Journalare very pleased and honored to be able to provide for a further forum for this important debate, bringing together lawyers, economists, political scientists and sociologists, for a much needed exploration of the historical and political origins as well as of the legal framework of Germany's much critizised and, at the same time, ardently praised system of corporate governance and industrial relations. We invite our readers to contribute to this debate, which has so far found too little resonance in Germany itself.The Editors.]

Capital, Labor, and the Firm: A Study of German Codetermination

Under the German corporate governance system of codetermination, employees are legally allocated control rights over corporate assets through seats on the supervisory board—that is, the board of nonexecutive directors. The supervisory board oversees the management board—the board of executive directors—approves or rejects its decisions, and appoints its members and sets their salaries. We empirically investigate the implications of this sort of labor participation in corporate decision making. We find that companies with equal representation of employees and shareholders on the supervisory board trade at a 31% stock market discount as compared with companies where employee representatives fill only one-third of the supervisory board seats. We show that under equal representation, management board compensation provides incentives that are not conducive to furthering shareholders' interests, possibly because labor maximizes a different objective function than shareholders. We document that, under equal representation, companies have longer payrolls than their one-third representation peers have. Finally, we provide evidence that shareholders respond to the allocation of control rights to labor by linking supervisory board compensation to firm performance and by leveraging up the firm. (JEL: G32, G34)

Co-ordinated Continental European Market Economies Under Pressure From Globalisation: Germany's “Rhineland capitalism”

[Editors’ Note: The 22 July 2004 acquittals of all six defendants in the criminal proceedings against former Mannesmann CEO, Klaus Esser; Deutsche Bank's CEO (Vorstandssprecher) and then Member of Mannesmann's supervisory board, Josef Ackermann, and other members of Mannesmann's Supervisory Board have, once more, highlighted to German, European and International observers the particular features of law and politics in “Germany Inc.”, “Rhenish Capitalism”, or “Rhineland Capitalism”. As begun in the aftermath of Josef Ackermann's inthronization at the head of Deutsche Bank and Ackermann's subsequent transformation of the Board's control structure, German Law Journal has published several contributions to the ongoing changes in German corporate governance and its embeddedness within the specific German economic and legal system. In his fine piece, Jürgen Hoffmann, Professor of Sociology in Hamburg, surveys the current interdisciplinary debate over the future fate of so-called Rhineland Capitalism and reconstructs Germany's recent history in an international context. In the next issue, to be published on 1 September 2004, Professor Christopher Allen of the University of Georgia will further deepen this inquiry and place the contemporary debate over the possible end of Rhineland capitalism in the historical context of Germany's development in the 20th Century. The Editors of German Law Journal are very pleased and honored to be able to provide for a further forum for this important debate, bringing together lawyers, economists, political scientists and sociologists, for a much needed exploration of the historical and political origins as well as of the legal framework of Germany's much critizised and, at the same time, ardently praised system of corporate governance and industrial relations. We invite our readers to contribute to this debate, which has so far found too little resonance in Germany itself. The Editors.]

The Last Word? – The July 22, 2004 Acquittals in the Mannesmann Trial

[Editors’ Note: This short note concerns the most recent acquittals in the Mannesmann criminal trial against former Mannesmann CEO, Klaus Esser; Deutsche Bank's CEO (Vorstandssprecher) and then Member of Mannesmann's supervisory board, Josef Ackermann, and other members of the Supervisory Board. The Landgericht [Regional Court] Düsseldorf acquitted all six defendants on 22 July 2004, and this timely note provides but for a first rendition of the circumstances, the reactions and the thrust of the judgment. For more extensive background to the criminal proceedings against Esser, Ackermann et al. and the importance that domestic and international observers have regularly been assigning to this case in the context of a worldwide corporate governance debate, see already Peter Kolla's article in the 1 July 2004 Issue of German Law Journal. German Law Journal will publish a more extensive case commentary in the coming months. Meanwhile, the Mannesmann proceedings have, once more, highlighted to German, European and International observers the particular features of law and politics in “Germany Inc.”, “Rhenish Capitalism”, or “Rhineland Capitalism”. As begun in the aftermath of Josef Ackermann's inthronization at the head of Deutsche Bank and Ackermann's subsequent transformation of the Board's control structure, German Law Journal has published several contributions to the ongoing changes in German corporate governance and its embeddedness within the specific German economic and legal system. In this issue, we are publishing a fine piece by Jürgen Hoffmann, Professor of Sociology in Hamburg, on the current interdisciplinary debate over the future fate of so-called Rhineland Capitalism. In the next issue, to be published on 1 September 2004, Professor Christopher Allen of the University of Georgia will further deepen this inquiry and place the contemporary debate over the possible end of Rhineland capitalism in the historical context of Germany's development in the 20th Century. The Editors of German Law Journal are very pleased and honored to be able to provide for a further forum for this important debate, bringing together lawyers, economists, political scientists and sociologists, for a much needed exploration of the historical and political origins as well as of the legal framework of Germany's much critizised and, at the same time, ardently praised system of corporate governance and industrial relations. We invite our readers to contribute to this debate, which has so far found too little resonance in Germany itself. The Editors.]

Dynamics in the German system of corporate governance? Empirical findings regarding interlocking directorates

Recent discussion on German corporate governance is empirically inconclusive as to whether institutional change has been strong enough to speak of convergence tendencies towards the Anglo-Saxon outsider system. This article adds to this debate in two ways. First, structural changes in the network of interlocking directorates of large German corporations are examined from a longitudinal perspective. There is considerable continuity of structural network features on the meso- and macro-level between 1989 and 2001. Quantitative dilution of the network has not been translated into a process of structural erosion. Second, the German market for corporate control is found underdeveloped over time, because three-quarters of public take-over bids are tendered to consolidate already existing controlling stockholdings, and no critical mass of companies exists for trade in this market. It is concluded that current institutional change should not be interpreted as system change or convergence towards the Anglo-Saxon model of corporate governance.

Board Models in Europe - Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy

The struggle for efficient internal management control is the centre of the corporate governance debate in Europe since the incorporation of the Dutch Verenigde Oostindische Compagnie in 1602. Recent developments in Europe illustrate a trend towards specialised rules for listed companies and indicate growing convergence of internal control mechanisms independent of board structure. The revised Combined Code in the United Kingdom and also the French revised Principles of Corporate Governance, both of 2003, strengthen the presence of independent directors on one-tier boards in Europe. Another systemic break-through for the two-tier board model is the growing tendency to separate the positions of CEO and board chairman. For the German two-tier structure, the strengthening of the strategic role of the supervisory board (Aufsichtsrat) by the new German Corporate Governance Code of 2002 means an attempt to incorporate a key advantage of the one-tier model. Similarly, the control duties of the Italian internal auditing committee (collegio sindacale) were extended by the Testo Unico of 1998 and bring the Italian second board closer to the German supervisory board. The common trend to stricter standards of independence is challenged in Germany by its rigid concept of co-determination and, to a lesser extent, by the more flexible model of labour participation in France. Director's duties and liabilities and also derivative actions are a focus of the reform debate in Germany since 1998 and are currently under review in the United Kingdom. After the Enron debacle the interplay between internal control devices and independent external auditing has become a major focus of interest in all countries considered. Driven by Anglo-Saxon codes of conduct audit committees today serve as a common denominator for good corporate governance. Though formal convergence is strong company organs in each country take on their own specific garment. Path dependent system development especially depends on shareholder structures and banking systems. The trend to greater structural flexibility on board level is strongly triggered by the introduction of a threefold board model choice under the French Loi Nouvelle Regulations Economique of 2001 and under the Italian Vietti-Reform that is in force since January 2004.

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.

Does Compliance with the German Corporate Governance Code have an Impact on Stock Valuation? An Empirical Analysis

Since 2002, listed German corporations are legally obligated to declare annually their degree of conformity to the German Corporate Governance Code (GCGC). For a sample of (big) publicly traded German companies listed in DAX 30 and MDAX we examine whether there is a pricing effect connected to the degree of compliance with the GCGC. Adding an indicator variable measuring the degree of compliance into common value relevance regression models does not give a consistent answer to the question whether the declarations provide value relevant information. We trace this finding to an endogeneity problem as the degree of compliance itself can be explained by a set of firm characteristics. Considering this endogeneity bias reveals that, in fact, the degree of compliance with the Code is value relevant information. This is consistent with the hypothesis that there are capital market incentives (or pressure) that might lead to a broad adoption of the code's recommendations even though the enforcement mechanisms connected to the code are relatively weak.

Board Models in Europe – Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy

The struggle for efficient internal management control is the centre of the corporate governance debate in Europe since the incorporation of the Dutch Verenigde Oostindische Compagnie in 1602. Recent developments in Europe indicate growing convergence of internal control mechanisms independent of board structure. The revisions of the Combined Code in the United Kingdom and of the Principles of Corporate Governance in France (from 2003) increase the presence of independent directors on one-tier boards in Europe while the German two-tier structure is incorporating a key advantage of the one-tier model by strengthening the strategic role of the supervisory board (Aufsichtsrat) in the new German Corporate Governance Code of 2002. A trend to greater structural flexibility on the board level is strongly triggered by the introduction of a threefold board model choice under the French Loi Nouvelles Régulations Économiques of 2001 and under the Italian Vietti-Reform which has been in force since January 2004.

Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards

Within the German corporate governance system, labor representation on the supervisory board is common and typically legally mandated. Because labor has detailed knowledge of firm operations, we propose that labor representation on corporate boards brings valuable first-hand operational knowledge to corporate board decision-making. We discover that labor representation, through its knowledge of operational detail, provides a powerful means of monitoring and source of information. We show that the judicious use of labor representation increases firm market value and that the greater the need for coordination within the firm, the greater the potential improvement is in governance effectiveness.

Corporate Governance in Germany: An Economic Perspective

A financial system can only perform its function of channelling funds from savers to investors if it offers sufficient assurance to the providers of the funds that they will reap the rewards which have been promised to them. To the extent that this assurance is not provided by contracts alone, potential financiers will want to monitor and influence managerial decisions. This is why corporate governance is an essential part of any financial system. It is almost obvious that providers of equity have a genuine interest in the functioning of corporate governance. However, corporate governance encompasses more than investor protection. Similar considerations also apply to other stakeholders who invest their resources in a firm and whose expectations of later receiving an appropriate return on their investment also depend on decisions at the level of the individual firm which would be extremely difficult to anticipate and prescribe in a set of complete contingent contracts. Lenders, especially long-term lenders, are one such group of stakeholders who may also want to play a role in corporate governance; employees, especially those with high skill levels and firm-specific knowledge, are another. The German corporate governance system is different from that of the Anglo-Saxon countries because it foresees the possibility, and even the necessity, to integrate lenders and employees in the governance of large corporations. The German corporate governance system is generally regarded as the standard example of an insider-controlled and stakeholder-oriented system. Moreover, only a few years ago it was a consistent system in the sense of being composed of complementary elements which fit together well. The first objective of this paper is to show why and in which respect these characterisations were once appropriate. However, the past decade has seen a wave of developments in the German corporate governance system, which make it worthwhile and indeed necessary to investigate whether German corporate governance has recently changed in a fundamental way. More specifically one can ask which elements and features of German corporate governance have in fact changed, why they have changed and whether those changes which did occur constitute a structural change which would have converted the old insider-controlled system into an outsider-controlled and shareholder-oriented system and/or would have deprived it of its former consistency. It is the second purpose of this paper to answer these questions.

The disintegration of organised capitalism: German corporate governance in the 1990s

Assesses corporate governance in Germany in the 1990s. Changes in corporate governance; Role of social responsibility on entrepreneurship; Reorientation towards investment banking.

Corporate Governance in Germany: Transition to a Modern Capital-Market-Based System?

The German corporate governance system has long been the standard example of what Franks and Mayer [1994] have called an insider-controlled and stakeholder-oriented system. This may not be an appropriate characterisation any more today. One of the factors that drive developments in the fields of corporate governance is the general trend towards internationalisation and globalisation. It is often argued that this factor exposes countries to pressure to adopt a good corporate governance system, and very often a good system is assumed to be one that follows the capital-market-based Anglo-Saxon model (for an early example see Walter [1993]). The past decade has seen a wave of developments that seem to have brought considerable innovations and improvements into the German corporate governance system and the German financial system. These developments are often assumed to be shifting both systems towards the Anglo-Saxon model.1 Our comments concentrate on the question whether the main developments relating to German corporate governance are already indicating or foreshadowing such a paradigm shift. In earlier work we have tried to identify an inner logic of the German corporate governance system and analysed the development of the German financial system in a comparative perspective.2 There we argued that the German systems have in the past exhibited a surprisingly high degree of stability and resilience to change and that therefore the German corporate governance system is still insider-controlled and stakeholder-oriented. In the present comment we want

European Corporate Governance Reform and the German Party Paradox

This paper addresses the current discussion on links between party politics and production regimes. Why do German Social Democrats opt for more corporate governance liberalization than the CDU although, in terms of the distributional outcomes of such reforms, one would expect the situation to be reversed? I divide my analysis into three stages. First, I use the European Parliament's crucial vote on the European takeover directive in July 2001 as a test case to show that the left-right dimension does indeed matter in corporate governance reform, beside cross-class and cross-party nation-based interests. In a second step, by analyzing the party positions in the main German corporate governance reforms in the 1990s, I show that the SPD and the CDU behave paradoxically in the sense that the SPD favored more corporate governance liberalization than the CDU, which protected the institutions of Rhenish, organized capitalism. This constellation occurred in the discussions on company disclosure, management accountability, the power of banks, network dissolution, and takeover regulation. Third, I offer two explanations for the paradoxical party behavior. The first explanation concerns the historical conversion of ideas. I show that trade unions and Social Democrats favored a high degree of capital organization in the Weimar Republic, but this ideological position was driven in new directions at two watersheds: one in the late 1940s, the other in the late 1950s. My second explanation lies in the importance of conflicts over managerial control, in which both employees and minority shareholders oppose managers, and in which increased shareholder power strengthens the position of works councils.

Corporate Governance and the Role of Investment Funds

Since the mid-90\'s Germany has seen a whole range of laws on corporate governance: first and foremost the KonTraG, i.e. the law on control and transparency, followed by the NaStraG, i.e. the law on registered shares and the facilitating of proxy voting, then, more recently, the TransPuG, i.e. the law on transparency and disclosure, and - finally - the German Corporate Governance Codex issued by the Cromme Commission – and there is probably more to come during the next legislative period. What are the reasons for this striking increase in activity? What are the driving forces and is there a master plan behind these efforts?

Politics, Corporate Governance, and the Dynamics of German Managerial Innovation: Schering AG between the Wars

Conflicting interpretations of the evolution of German business between the two world wars and of Germany's corporate governance during the Third Reich are examined in this article. Alfred Chandler's view that major corporate changes emanated from managerial initiatives is contrasted with Harold James's interpretation that public and government pressures forced innovations on business. In support of James's analysis, I argue that state and political pressures, not management, initiated significant changes in German corporate governance and in the organization of German industry during the interwar period, especially in the 1930s. Using Schering AG, one of Germany's largest companies before World War II, the article traces the influences of National Socialist pressure and changes in corporate law on companies’ organizational adaptation to government social priorities during the Third Reich.

Family Capitalism and Corporate Governance of Family-controlled Listed Companies in Indonesia

This article discusses corporate governance of family-controlled companies at two levels. At the more general level, it examines the family capitalism paradigm for corporate governance of family businesses, supplementing the managerial capitalism paradigm in Anglo-American corporate governance systems, and the alliance capitalism paradigm prevailing in the Japan and German corporate governance systems. At the more specific level, the article explores family capitalism in the Indonesian context. In particular, it focuses on the question as to how family relationships and family values can influence the corporate governance of companies listed on the Jakarta Stock Exchange (JSX). Part II of this paper discusses corporate governance of family-controlled companies and introduce the family capitalism paradigm. In Part III, I sketch the formal legislative framework of Indonesian corporate governance. Part IV undertakes an empirical study to reveal the extent of family relationships among members of the corporate boards of public companies listed on the JSX. In the absence of better alternatives, I use the somewhat rudimentary method of identifying common surnames among board members. To facilitate longitudinal comparison, I use published data for two calendar years: 1997 (prior to the onset of the 1997-1999 Asian financial crisis) and 2001 (when many Asian economies had started to recover or had already recovered from the crisis). Using this methodology, I found that 59.8% of the 259 listed companies in 1997 had two or more family board members. The figure was 40.7% out of the 307 listed companies in 2001. In Part V, I discuss the potential impact of family relationships and family values on the corporate governance of family-controlled companies in the Indonesian context. In particular, I focus on the Indonesian concept of kekeluargaan (family spirit or brotherhood) which is referred to in the 1945 Constitution. Assuming that family capitalism in Indonesia operates on an organisational logic which is influenced by family values, I highlight three aspects of corporate governance which may be affected. First, the notion of a company being a separate legal entity may be blurred. This may explain the cases of expropriation of company assets by majority shareholders in Indonesia. Secondly, personal accountability of board members may be downplayed. Thirdly, supervision and authority within the two-tier board structure of Indonesian companies may be less than optimal given a hierarchical family culture.

The German Corporate Governance Code: What Implications

The German Corporate Governance Code: What Implications

The effects of convergence: internationalization and the changing distribution of net value added in large German firms

The paper examines whether and how the increasing internationalization of firms impacts on the operation of a co-ordinated market economy. Following the tenets of agency theory, it assumes that an emerging market for corporate control changes the monitoring mechanisms that oversee management. Since Anglo-American forms of monitoring are usually associated with a higher return for investors compared with Continental European firms, a change in the distribution of the net value added of firms is expected. Using financial data on fifty-nine large German companies, the paper shows that the emerging convergence of German corporate governance practices to Anglo-American standards has had a weak, but significant, impact on the distribution of net value added. This is in contrast to the impact of the internationalization of firms on product markets, which does not have an effect. Since the market for corporate control is, however, still underdeveloped in Germany, the main effects remain to be seen.