What effects does Corporate Governance have on the banking sector? Case Study of the Deutsche Bank

Contents

Acknowledgements

1 Introduction

2 General definition of Corporate Governance

3 Corporate Governance in Germany
3.1 The role of Corporate Governance in Germany
3.2 The content of the German Corporate Governance codes

4 Corporate Governance in the banking sector:Case Deutsche Bank
4.1 A comparison between the Cromme code and the Deutsche Bank code
4.1.1 Choice of Methodology
4.1.2 Application of Methodology
4.2 Effects on the shareholders of the Deutsche Bank
4.3 Effects on the board of directors
4.4 Effects on the performance of the enterprise

5 Conclusion

References

Appendices

Acknowledgements

My thanks first of all goes to my father Serif who has helped me physically since my mother’s death. It was him who enabled me to have a phone interview with Dr. Schnorr who is responsible of the Deutsche Bank’s investor relations. I am grateful for providing me with the relevant information in a busy period.

Next thanks to Benner-Heinnacher from DSW and Schneider from SDK for taking the time to answer the questionnaires.

But also thanks to my friends Johannes, who went with me to the British Library in London to help me borrow some books, to Julia who enabled me to obtain some books from Germany, to my supervisor Richard in answering my questions in relation to this assignment.

Finally thanks to those who were available when I needed them and who continually remind me what is important in life: Martin, Selen and John.

1 Introduction

Corporate Governance is one of the critical issues today which is often a daily subject in the media world. But in combination with the banking sector this is an area which is not well researched until now. Thereby the banks had in the past and also have at the present a high responsibility in the economy and this fact should be recognised. Hence this Independent Study should provide an insight to what are the effects of Corporate Governance in the case of the Deutsche Bank.

Structure of the Independent Study

The content of this assignment is first of all to explain the Corporate Governance. Then it will more on to Germany to show the role of Corporate Governance there by focusing on the German code which was prepared and published as a recommendation by the Cromme code. Afterwards some main recommendations and suggestions of the code shall be compared with two questionnaires about the Deutsche Bank’s behaviour so far. Finally the possible effects of the Corporate Governance use by the Deutsche Bank shall be shown. Thus the focus will be particularly on the board of directors, the shareholders and the corporate performance of the Deutsche Bank.

2 General definition of Corporate Governance

The increased interest in Corporate Governance has mirrored the rise in concern in corporate behavior. Many commentators on Corporate Governance assume that the board of directors and the supervisory board can bring important performance gains. However, it is first of all important to understand the term of Corporate Governance, what Corporate Governance is and how it works. The concept of Corporate Governance is weakly defined because it potentially envelops a huge amount of distinct economic phenomenon. As a result, different people or institutions have come up with different definitions. But without doubt, one of the important definitions trace back to the Cadbury report. Corporate Governance is defined as “the system by which companies are directed and controlled.” And the Organisation for Economic Co-operation and Development (OECD) has later added, that the “Good Corporate Governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring…” (Chambers, 2003a, 94).

Against the background of the increasing impacts of the international capital markets since the mid 1990s worldwide are efforts accumulated to set up good Corporate Governance principles.

Especially, this is supported through high financial failures like Enron and WorldCom which have undermined trust in the corporate sector and send shockwaves through stock markets all over the world. Therefore many countries have brought out their own principles on the one hand based on the Corporate Governance understanding by the OECD and on the other hand on their relative different laws (Clarke, 2004). One of them is surely Germany which has established its own guidelines for the domestic market.

3 Corporate Governance in Germany

3.1 The role of Corporate Governance in Germany

In times of increasing globalization, there is no international standard in relation to the Corporate Governance code. There are wide differences between German and Anglo-Saxon corporate enterprises and capital markets as shown in the table below.

The Anglo-Saxon model is predominately in evidence in the UK, Ireland, and also represented in the USA and Australia. This model focuses on the stock market as the central element of the system of governance. Most of the larger, publicly owned companies source their capital there, and in these countries, shareholding is largely in the hands of smaller shareholders with the result that shares are broadly dispersed (Becht and Roell, 1999). Further characteristics are short term maximisation of profits and the ownership is changing frequently. With the stock market being the most important source of capital, corporations have to provide a high degree of transparency and accountability to its stakeholders especially to the shareholders. Executives are in turn increasingly remunerated with regard to their corporation’s performance on the stock market (McEwan, 2001). In the German model, corporations have tended to be embedded in a network of a small number of large investors, among which banks have played a major role. Within this network of mutually interlocking owners, the central focus was the long-term preservation of influence and power.

Next to shareholder value, the expansion of the market share, retention of employees and other not directly profit oriented goals were important for owners. The executive pay was less performance related and regarded as an issue between boards of corporations without any perceived need to publish.

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In the past few years, the international capital markets have become more important for German organizations because global growth, which it is hoped will come from stock markets, is increasing demand for capital. But the organizations were faced with the relative insufficient shareholder orientation, the inadequate transparency in spite of a current law namely the corporate sector supervision and transparency act, and the two tier system which is still not well known in the global context especially in the Anglo-Saxon world. Thus, it was necessary to improve the German system which caused the Corporate Governance discussion in Germany. It has resulted in much effort to create a system of regulations to make Germany more attractive to international investors (Mueller, 2003).

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