Corporate Governance in Germany and the US


Essay, 2013

12 Pages, Grade: 1,3 (German Grading System)


Excerpt

Table of Content

1. Introduction

2. Corporate Governance in the United States

3. Corporate Governance in Germany

4. Analysis and Comparison of the Two Systems

5. Recent Developments

6. Conclusion and Own Opinion

Bibliography

1. Introduction

After scandals like Enron in the past years, companies have been pressured to establish Corporate Governance systems to control their management. The design of these systems is often determined on a national level, but varies substantially from country to country. This paper deals with the different systems of Corporate Governance in the United States and Germany and establishes a comparison. The focus is put on how the German system is different from that of the US. At the end, recent developments in the Corporate Governance landscape are discussed.

To begin with, it is important to understand what Corporate Governance means. It is defined as “The system of rules, practices and processes by which a company is directed and controlled”1. These rules, practices and processes are supposed to achieve values like integrity, transparency and fairness. Thereby, Corporate Governance can support a corporation to “fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term”.2 Furthermore, it strengthens a company’s reputation and has shown to increase share prices by establishing trust. Potential investors, who might not be familiar with a corporation’s processes and controlling practices in detail, can rely on statutory monitoring systems.

2. Corporate Governance in the United States

A stock corporation under US law recognizes two corporate bodies. The first one is the (general) annual meeting. It is a gathering of directors and shareholders and usually takes place once a year. During the meeting the board informs shareholders about developments at the company. Furthermore, shareholders vote on resolutions and elect the members of the Board of Directors.3

In theory, shareholders are given much power by being able to determine the course of the company through these elections at the annual meeting. In reality however, several issues limit the actual influence of shareholders. For instance, although shareholders democratically elect the Board of Directors, they can only vote for or against one candidate (or abstain) and there usually is no contest4.

The second corporate body is the Board of Directors. It is responsible for the supervision of management. This board is composed of inside and outside directors. Inside directors are employees of the company and often part of the management (executive directors) as well, whereas outside directors are not employed by the company (non-executive directors). A chairman represents and presides over the board.

The Board of Directors selects and appoints the Chief Executive Officer (CEO), establishes broad goals and objectives for the organization, and decides on how to acquire sufficient resources to finance the organization.5 The board itself, however, is not responsible for short-term decisions regarding the operations of the organization. This is part of management’s duties. Especially the CEO has wide-ranging powers to manage the corporation on a day-to-day basis and exercises control over lower level managers of the company.6

Although there is a trend to separate the roles of the chairman of the board and the CEO, the majority of US companies still have the two positions combined, meaning that the CEO also serves as the chairman.7 What implications this can have on the board’s independence and ability to supervise management is examined under “4. Analysis and Comparison of the Two Systems”.

Members of the Board of Directors (particularly the CEO) are responsible for managing the organization and supervising management simultaneously. Since members of management and outside directors are part of one single board, this system is also known as the one-tier system.

3. Corporate Governance in Germany

On the contrary, German corporate law (Gesellschaftsrecht) establishes a two-tier system consisting of two boards. These have different duties and interact with each other. Instead of only two, German corporations have three corporate bodies.

The first one, as for US corporations, is the annual meeting (Hauptversammlung). It generally has the same characteristics and duties as the annual meeting of US corporations. However, instead of electing the Board of Directors, the annual meeting elects members of the Supervisory Board, which is examined in more detail below. Just as US shareholders, shareholders of German corporations have strong power in theory, but rarely use their rights effectively to influence management of the company. Several factors, similar to those in US companies, limit their actual influence.

The second and third corporate bodies are two different boards, whose rights and responsibilities are strictly separated: On the one hand, the Management Board / Executive Board (Vorstand) is responsible for managing, coordinating and controlling business. It has to report regularly to the second board, the Supervisory Board. Decisions are made democratically and the chairman cannot overrule the majority of the board.8 This Executive Board controls lower level managers, who are in charge of day-to-day operations.

On the other hand, the Supervisory Board (Aufsichtsrat) is responsible for controlling and monitoring the executive management and approves important corporate decisions. It also appoints members of the Management Board.9 It consists of three up to 21 members depending on the size of the company.10 No active members of management / the Management Board are allowed to be on the Supervisory Board of the same corporation.11

Notable is also the strong involvement of employees in management supervision. According to German codetermination law (Mitbestimmungsgesetz), workers’ representatives have to make up 50% of the Supervisory Board of corporations with 2,000 or more employees. Passed in 1976, the law was supposed to give workers a voice in important corporate decisions and that has not changed since then. The Federal Constitutional Court rejected a constitutional appeal against the act in 1979.12 Codetermination has a major impact on Corporate Governance since it allows workers’ representatives to monitor and control management by exercising their power in the Supervisory Board. The implications of the empowerment of workers are discussed in the analysis section in more detail.

Codetermination is one of many laws that embody the social market economy, which has evolved in Germany over time.

4. Analysis and Comparison of the Two Systems

As pointed out above, the two major differences between the German and the US Corporate Governance system are the separation of management and its supervision, and the codetermination of workers’ representatives. These two systems of Corporate Governance have different advantages and disadvantages.

Most US corporations combine the position of the CEO and the Chairman of the Board, as outlined above. Since the CEO delegates tasks to lower level managers and the chairman is the head of the corporate body that is responsible for management supervision, power is not separated but concentrated on one person. Typically, the CEO recommends directors to the annual meeting, which then votes whether the suggested persons should be members of the board. Although the directors are supposed to represent the interests of the company’s shareholders, those shareholders play no remarkable role in their nomination.13 Since there generally is not much opposition from shareholders, CEOs can fill the Board of Directors with their friends and people of a similar opinion on corporate decisions. Naturally, those directors are reluctant to oppose the CEO who had them elected and, therefore, do not effectively monitor management’s actions.14

[...]


1 Definition from Investopedia http://www.investopedia.com/terms/c/corporategovernance.asp

2 Lisa M. Thomson, “What is corporate governance?”, 1/18/2009 in the Economic Times, http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance- satyam-books-fraud-by-satyam-founder

3 Definition from Business Dictionary, http://www.businessdictionary.com/definition/annual-general- meeting-AGM.html

4 Steiner & Steiner, “Business, Government and Society“, 13E 2012, p. 636, 637, 639

5 Carter McNamara, “Overview of Roles and Responsibilities of Corporate Board of Directors”, found on 11/15/2013 on http://managementhelp.org/boards/responsibilities.htm

6 Council on Foundations, “Should CEOs be on the Board“, 2010, p. 1, http://www.cof.org/files/Documents/Governing_Boards/Board%20Briefs/CEOsOnBoards.pdf

7 Michelle Lamb, ’’Should the chair and CEO roles be split?“ 8/27/2012 http://www.corporatesecretary.com/articles/boardrooms/12310/should-chair-and-ceo-roles-be-split/

8 online economic encyclopedia: http://www.wirtschaftslexikon24.com/d/vorstand-der-ag/vorstand-der- ag.htm

9 §30 IV AktG

10 §95 AktG

11 §105 AktG

12 article on codetermination on http://www.eurofound.europa.eu/emire/GERMANY/CODETERMINATION- DE.htm

13 James McRitchie, “Corporate Governance: Ethics Class”, found on 11/16/13 on http://corpgov.net/education/classes/ethics-class/

14 Steiner & Steiner, “Business, Government and Society“, 13E 2012, p. 651, 652

Excerpt out of 12 pages

Details

Title
Corporate Governance in Germany and the US
College
University of Washington
Grade
1,3 (German Grading System)
Author
Year
2013
Pages
12
Catalog Number
V301306
ISBN (eBook)
9783656975885
ISBN (Book)
9783656975892
File size
1428 KB
Language
English
Tags
Corporate Governance, Corporate Social Responsibility, One Tier System, Two Tier System, Supervisory Board, Management Board, CEO
Quote paper
Marcus Fuchs (Author), 2013, Corporate Governance in Germany and the US, Munich, GRIN Verlag, https://www.grin.com/document/301306

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