Overview of the Basis and System of German Corporate Governance

In Charkham, the author states that on a scale with 'confrontation' on one side and 'co-operation' on the other, German approach to corporate governance would fall on the co-operation side, much further this way inclined than or the US. In Germany, large companies fall into two different types, either private firms limited by shares or public companies. Generally speaking, there is a trend of share ownership moving away from individuals and towards financial and non-financial firms. Banks have a representation on the supervisory boards of firms, either due to ownership, relationship lending or deposited share voting rights.

The basis of the German corporate governance is a dual board system of exclusively a supervisory board and a management board. The former supervises and appoints the management board which controls the management of the firm. The idea of this two-board system is to promote a long-term perspective in a firm by establishing a clear distinction between non-executive directors and executive directors. This demands employee representation on the supervisory board. Employee representation leads to greater employee satisfaction as well as less income inequality. However, employee representation has its flaws. The employee representatives can sometimes affect the decision-making process negatively on the supervisory board by not allowing them to make decisions which employees don't want but are in the best interest of the firm.

The dual board system has further issues. The structure allows management board members to move up to the supervisory board. This conceptually works as it allows more upwards fluidity as in the German system there is a distinguishing line between the executive and the supervisory board. Nonetheless, even though this means there cannot be CEOChair duality, often senior executives after retiring from managerial boards, graduate to the supervisory board in German firms. This can mean that new ideas are shut down by old board members, attached to their already implemented ideas. Furthermore, boards in Germany are heavily saturated by Germans, with 71% of supervisory board members who are German, creating an absence of diversity and the probability of group thinking.

Academic studies, such as Andres et al., looking at CEO-Chair progressions, discovered evidence that once senior executives rose to the supervisory boards, pay level of senior executives tended to rise. However, on the other hand, they found that short-term share price often rose, following the announcement of the executive move. Although no relation was found between the executive move and long-term share performance.

An arguable advantage of the corporate governance system in Germany is that it is oriented towards stakeholders. Their law (the Public Limited Companies Act) dictates that managers take stakeholder interests into account when running a firm. Stakeholder theory is when managers, instead of focussing on shareholder, choose to consider wider stakeholders of their firm (such as employees, customers and suppliers) Shareholder wealth maximisation is still important to the firm; however, it is less obvious from the businesses' activities. The choice of putting stakeholder values as a primary concern in the corporate governance system in Germany, was hailed by many academics as promoting long term success and social harmony. For example, during the 2008 global financial crisis, and more recently during COVID-19, German firms fared well due to the partnership between management and employees, championed by their corporate governance system.

However, Jenson, discusses how stakeholder theory makes managers not responsible for their actions due to the absence of definable and quantifiable aims of how stakeholder groups interests are satiated and traded off against each other. This leaves managers with an available explanation for poor performance.

Furthermore, German firms have been rife with corruption and governance scandals, such as Monsanto, Bayer, and more recently Wirecard, to name a few. Kaplan scrutinised corporate governance in German firms for encouraging self-promoting conduct from executives and delegates, causing a decrease in competition in large German firms.

As sone research advises stakeholder maximisation, as opposed to shareholder value maximisation the duty of care for NEDs is not specified clearly. Thus, making it difficult to try neglectful managers in court, causing much less accountability for NEDs. The inability of shareholders to penalise managers for making decisions without their best-interests at heart, is another significant issue in German corporate governance. This is due to the fact that shareholder delegates hold their position for four years and that shareholders only control 67% of the board and that. This originally served as a protection to directors, however, more recently, some directors have been prosecuted (in part because of political influence). Yet many of those directly involved in the scandals, such as Siemens and Volkswagen, have slipped prosecution, leading to pattern of carelessness in corporate governance procedures.

To conclude, German corporate governance system has strengths and weaknesses. The stakeholder approach and inclusion of employees on board decisions encourages long term sustainability in the firm and less income inequality, leading to better business faring in global financial trouble. However, employee representatives can be biased, and the dual board structure has its flaws with executive bias. However, the issue with the stakeholder approach is that it lacks board accountability, which can give rise to the infamous scandals.