German Corporate Governance: Balancing Shareholder and Employee Interests
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This presentation covers a brief history of Germany's corporate governance framework, its features (including key players, board structure, and capital providers), public sector actors, two case study examples (Volkswagen & Trumpf), recent trends, and comments on the balance of powers.
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German Corporate Governance: Balancing Shareholder and Employee Interests
- 1. German Corporate Governance MacNeal Darnley Ben Fickling Jessica Gahtan Jasmine Kruschel
- 2. Roadmap 1. History 2. Features 3. Public Sector Actors 4. Corporate Culture 5. Trends 6. Game 7. Final Thoughts
- 3. HISTORY Origins of German Stock Companies • Pre-1861: Only option is a Kommanditgesellschaft (KG) • 1861-1884: General Commercial Code created joint stock corporations with limited liability • Optional 2-tier system • 1884 Reform: Mandated 2-tier board structure History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 4. FEATURES Co-Determination • Purpose: Pacify striking unions • 3 effects: 1. Makes powerful intermediaries palatable, because employees are a counterbalance in the boardroom. 2. Makes takeovers more difficult, shareholder can never capture entire supervisory board. Encourages big shareholder blocs. 3. Impedes intermediaries from pushing for rapid organizational change. History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 5. FEATURES Structure GermanyHistory Features Public Sector Actors Corporate Culture Trends Game Final Thoughts Canada Shareholders Employees Supervisory board Officers Shareholders Directors Officers Management board
- 6. FEATURES Two-Tier Model History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts Supervisory board Management board Mandate • Controls management board • Day-to-day management Fiduciary duties • Owed to corporation • Owed to corporation Size • 3-21 • Must be multiple of 3 • Depends on size of the company • At least 1-2 • Depends on value of company Composition requirements • 1/3 or 1/2 must be employees • Chair can’t be executive member • 30% women and 30% men • Sometimes labour rep is required
- 7. FEATURES Shareholders • ROLES • 1. Elect shareholder representatives to the supervisory board • 2. Appointing auditor • 3. Making decisions which may affect shareholder rights and economic position (e.g., decision to delist) • DISSENT RIGHTS • 5% can call meeting • If 5% or shares worth 500,000 euros, can request items on a shareholder meeting agenda • FIDUCIARY DUTIES: Shareholders owe duties to the company and other shareholders History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 8. FEATURES Capital Providers & Voting Power • Source of capital • Shift from banks to private investors (although banks still wield significant power) • Cross holding between companies is common • Voting / proxy powers • Usually one primary shareholder with more than 50% (bank, family, or corporation) • Through proxy votes and voting pacts shareholders can exert control History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 9. FEATURES Proxy Control by Banks • Historically, tax benefits were offered to hold stocks, effectively led to proxy control that exists today • Unregistered bearer shares are the general norm • Enable banks to exercise proxy as long as they notify • Deutsche Bank 55% of votes exercised but only held a direct stake of 8% History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 10. PUBLIC SECTOR ACTORS Legislature • Stock Corporation Act • Commercial Code • Securities Acquisition and Takeover Act • Securities Trading Act • Co-Determination Act • One-Third Participation Act • NEW: Act on Equal Participation of Women and Men regarding Leadership Positions within the Sectors of Private Economy and Public Service History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 11. PUBLIC SECTOR ACTORS Administrative Policy • German Corporate Governance Code • non-binding • ‘comply or explain’ principle History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 12. PUBLIC SECTOR ACTORS Others • Courts • Mandatory corporate governance rules enforced through private litigation in civil courts • Anti-discrimination: equal pay for equal work • Stock exchanges • Non-profit shareholder groups • Federal Financial Supervisory Authority History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 13. CORPORATE CULTURE Case Study: Trumpf • “paternalistic” culture • Female CEO • No pressure from outside investors • High level of job security • Code of Ethics (1995) • Overly focused on employees—to its detriment History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 14. CORPORATE CULTURE Case Study: Volkswagen • Volkswagen’s supervisory board: labour, union representation, and seats for politicians from the state of Lower Saxony • Problems: • Bribery and corruption scandal • Union bureaucracy • Inefficient • Costly - 40% more than its competitors • Company leadership has lost control History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 15. CORPORATE CULTURE Family Businesses vs Big Brands History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts Family Businesses Big Brands Primary Focus • Social responsibility • Profit Benefits • Employees come first • Willingness to break norms • Focus on reputation (above wealth) • Investors come first • More employees (and representation of them on the board) Disadvantages • Profit is only happy coincidence • Less willing to sell off • Layoffs as first response • Pervasive scandals • Harder to change culture
- 16. TRENDS Representation quotas • 30% requirement of men and women in the boardroom • Penalty: seats remain vacant if not filled • Effectiveness: Negligible History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 17. TRENDS Representation quotas History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts Top 100 Public Companies 3,500 Largest Companies Requirement • 30% requirement of men and women in the boardroom • Must set targets for increasing female representation Penalty • Seats remain vacant if not filled • Public scrutiny: must explain why they failed to meet the target
- 18. TRENDS Representation quotas History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 19. TRENDS Increased private equity buyouts History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 20. GAME Let’s find out who’s been paying attention! 1. Go to https.//kahoot.it (it can be on your laptop or cell phone) 2. Type in the code 3. Enter your nickname Links to game: https://create.kahoot.it/share/german-corporate-governance/a2b28e04-4dcd-48e8-bead-8820fad3138f https://play.kahoot.it/v2/?quizId=a2b28e04-4dcd-48e8-bead-8820fad3138f History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 21. FINAL THOUGHTS Balancing the interests What do you think is the balance Germany strikes between the interest of shareholders and those of other kinds of investors, those of employees, and those of parties that might be thought of as “stakeholders? • Co-determination strikes a balance between capitalism (shareholders) and socialism (employees) - with respect to employees exclusively. • On paper it strikes a 50-50 balance between employees and shareholders, in practice there’s a possibility that employees hold the balance of power when there is any disagreement among shareholders. • That said, if there is a tie, the shareholders (banks) elect supervisory board chairmen (the tie breaker) - giving their interests influence but not direct power • Debt holders and other stakeholders don’t have a seat at the table and their interests don’t need to be seriously considered by board members who have fiduciary duties to the company (as opposed to them) History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 22. FINAL THOUGHTS Balancing the interests What do you think is the balance Germany strikes between the interest of shareholders and those of other kinds of investors, those of employees, and those of parties that might be thought of as “stakeholders? • Co-determination strikes a balance between capitalism (shareholders) and socialism (employees) - with respect to employees exclusively • On paper it strikes a 50-50 balance between employees and shareholders, in practice there’s a possibility that employees hold the balance of power when there is any disagreement among shareholders • That said, if there is a tie, the shareholders (banks) elect supervisory board chairman (the tie breaker) - giving their interests influence but not direct power • Debtholders and other stakeholders don’t have a seat at the table and their interests don’t need to be seriously considered by board members who have fiduciary duties to the company (as opposed to them) History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 23. FINAL THOUGHTS Balancing the interests Do you think that the German two-tier board system could be applied in North America? • Social democracy (i.e. the two-tier board system) fits poorly with a diffused owned company • It would disincentive shareholding because voting would be significantly diluted and influence on company would be lessened • Politics influence the results of implementing the same rules - because of different histories, inserting the rules that worked in Germany in the U.S. could be problematic. • It worked in Germany because there was a long history of involving workers in decisions History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 24. FINAL THOUGHTS Balancing the interests Do you think that the German two-tier board system could be applied in North America? • Social democracy (i.e. the two-tier board system) fits poorly with a diffusely owned company • It would dis-incentivize shareholding because voting would be significantly diluted and influence on company would be lessened • Politics influence the results of implementing the same rules - because of different histories, inserting the rules that worked in Germany in the U.S. could be problematic. • It worked in Germany because there was a long history of involving workers in decisions History Features Public Sector Actors Corporate Culture Trends Game Final Thoughts
- 25. The End.
- 26. Sources (pt.1) Becht, Marco & Ekkehart Bühmer, “Ownership and Voting Power in Germany” in Fabrizio Barca & Marco Becht, eds, The Control of Corporate Europe (2001) Benoit, Bertrand, “Overhauled: Why Germany is Again the Engine of Europe”, Financial Times (20 March 2007) Bibby, Andrew, “A German Twist on an EU Model”, Financial Times (11 December 2006) Bryant, Chris & Richard Milne, “Boardroom Politics at the Heart of VW Scandal”, Financial Times (4 October 2015) Donnelly, Shawn, “The Public Interest and the Company in Germany” in John Parkinson, Gavin Kelly & Andrew Gamble, The Political Economy of the Company (2001) Dougherty, Carter, “A Happy Family of 8,000, but for How Long?” The New York Times (11 July 2009) Espinoza, Javier & Arash Massoudi, “Elliott’s Rebuke Reflects Big Change in Germany”, Financial Times (8 August 2019) Fohlin, Caroline, “The History of Corporate Ownership and Control in Germany” in Randall K Morck, ed, A History of Corporate Governance Around the World: Family Business Groups to Professional Managers (2005) Friske, Lars, Bernhard Maluch, & Andreas Rasner, “Germany” (2016) METIS Rechtsanwälte LLP Goergen, Marc, Miguel C Manjon, Luc Renneboog, “Recent Developments in German Corporate Governance (2008) 28 International Review of Law and Economics 175 Jackson, Gregory, “The Origins of Nonliberal Corporate Governance in Germany and Japan (Labor Management: The Origins of Industrial Citizenship)” in Wolfgang Streeck & Kozo Yamamura, eds, The Origins of Nonliberal Capitalism: Germany and Japan in Comparison (2005) Jenkins, Patrick & Richard Milne, “International Shareholders Have an Average of 50 per cent of the Free Float in the Companies in the Dax Blue-Chip Index”, Financial Times (1 April 2005) Milne, Richard, “Misdirected? Germany’s Two-Tier Governance System Comes Under Fire”, Financial Times (9 May 2007) Parkin, Brian & Rainer Buergin, “Regulation: German Business Leaders Slam ‘Pure Populism’ of Pay Legislation”, The Globe and Mail (19 June 2009) Rayasam, Renuka, “Why Germany’s New Quota for Women on Boards Looks Like a Bust”, Fortune (11 March 2016) Roads, Christopher, “In a Deep Crisis, Germany Begins to Revamp Its Vast Welfare State” The Wall Street Journal (10 July 2003) Roe, MJ, “Introduction” in Political Determinants of Corporate Governance: Political Context, Corporate Impact (2003) Roe, MJ, “Corporate Ownership in Germany and Japan”, in Strong Managers, Weak Owners, The Political Roots of American Corporate Finance (2016) Shäfer, Daniel & Richard Milne, “Germany Feel Board Pressures: Corporate Governance is Under the Spotlight”, Financial Times (21 January 2010) Simensen, Ivar & Gerrit Wilesmann, “Unions Weakened on Supervisory Board”, Financial Times (12 April 2007) Slater, Joanna, “Germany’s Female Executive Quota Aims to Shift Corporate Culture”, The Globe and Mail (15 March 2015) van de Sande, Carsten & Sven H Schneider, “Germany”, in Willem JL Calkoen, ed,The Corporate Governance Review (2019) von Rosen, Rudiger, “The Storm Gathering Over Corporate Germany”, Financial Times (29 September 2004) Wilesmann, Gerrit & Ivar Simensen, “German Blue Chips Ponder Switch to SE Format”, Financial Times (12 April 2007) “A System that No Longer Works for Germany”, Financial Times (14 July 2005) “Beware, Union on Board? Why Germany’s Worker Directors Need to Justify Their Jobs”, Financial Times (30 August 2006) “Buy-out Firms Embrace Germany—And Vice Versa”, The Economist (12 August 2019) “The Bell Tolls for Germany Inc: Cozy Relations Between Business, Banks, and Labor are Unraveling” Bloomberg (18 August 2006)
- 27. Sources (pt. 2) Binder, Ulrike, and Guido Zeppenfeld, “Germany: Germany Introduces Rules on Female Quota for Supervisory Board” Mondaq (16 March 2015), online: <www.mondaq.com/germany/x/381586/ Employee+Benefits+Compensation/Germany+Introduces+Rules+on+Female+Quota+for+Supervisory+Boards> Sullivan, Arthur, “Report Highlights Lack of Female Leaders in German Business”, DW (14 May 2018), online: </www.dw.com/en/report-highlights-lack-of-female-leaders-in-german-business/ a-43747520> von Wolkin, Sebastian, “High Tech, Low Key”, Zeir Campus (9 August 2017), online: <www.zeit.de/campus/zeit-germany/2017/01/high-tech-low-key-zeit-germany> “Deutscher Corporate Governance Kodex”, Regierungskomission, online: <www.dcgk.de/en/commission.html?fbclid=IwAR03wJaGK9FeWxyrT5C-9PvKRQijd0eQSuRBJslJCsCiEqdcitHfuhRQBKc> “Executive Bodies”, VW , online: </www.volkswagenag.com/en/group/executive-bodies.html>, “Volkswagen Board Backs CEO, Chairman in Markets Case”, The Associated Press (25 September 2019), online: <apnews.com/eb07d171b4a642d1a62bba3dc0818ff2> “German Legal Forms”, Consultinghouse: Market Entry Germany, online: <www.consultinghouse.eu/solutions/business-incorporation/german-legal-forms/>