Excerpt
Table of Contents
Abstract
Table of Contents
Table of Figures
1 Introduction
2 Explanation of terms and content of The German Corporate Governance Code
2.1 Definition of the Code and statutory provision
2.2 Content of the Code – Corporate Management
3 Evaluation of application and acceptance of The German Corporate Governance Code within DAX 30 companies
3.1 Methodology
3.2 Evaluation of literature findings
4 Critical Conclusion of the Literature Evaluation
Table of Literature
Abstract
This Thesis examines the topic of the German Corporate Governance Code and its practical application of the Corporate Management body within DAX-listed companies. Taking as a basis a general understanding of the Code, its statutory provision and relevant content, it will be analyzed how Standards are applied by the corporate body and which recommendations are not being taken into account in practice. In order to provide a holistic evaluation, different literary material and scientific studies are being used to develop a picture of the fulfillment and to stress potentials of improvement. All aspects from the findings are being critically contrasted to characterize the actual situation in Germany. Moreover, it will be analyzed to what extend the different obligations of the Code are affecting the implementation. The German Corporate Governance Code may be generally used as a guideline document of the German General Commission to aim for good and sustainable governance within capital markets and to improve a company’s reputation towards shareholders. While various law legislations are underlying the Standards as well as mandatory obligations, the Code consists of different demands which also address potential commitments for German companies in the future. Some Standards exist on a voluntary basis and do not represent compulsive requirements. This Thesis will therefore assess and analyze the current application of Standards by a group’s Corporate Management. In regards to that, a comprehensive evaluation of implementation will be presented in this analysis.
Table of Figures
Figure 1: Illustration Assignment of Permissions to Shareholders
Figure 2: Illustration Involvement of Shareholders
1 Introduction
Following the trend of Globalization, capital markets are getting more complex and interwoven. Therefore, the transparency of a company’s business approaches is even more important for stake- and shareholders. These undertakings are sometimes hard to evaluate in a holistic view. The German Corporate Governance Code represents a guidance document of the German Governmental Commission. It exists in order to lead the Corporate Management of German DAX 30 companies (Deutscher Aktien Index) to provide responsible and sustainable governance. Hence, the Code is also characterizing a control mechanism for the capital market and aims to retain a balanced German economy. It consists of various columns concerning every division of a business. While commercial law is mainly regulating the marketplace, the Code specifies Standards mostly be applied on a voluntary basis. The main principle of the guideline is to provide good governance and fairness within the firm as well as the whole macro- and microeconomic system.1
The aim of this Thesis is to understand the Standards of the Code and how these are applied by corporate bodies of a firm. It will be specifically evaluated how Corporate Managements of DAX 30 companies are adopting the guidance into their business practices and to what extent the Standards are applied. The following research question will be answered in this Thesis:
How is the German Corporate Governance Code applied by Corporate Management of DAX 30 companies?
The structure of this Thesis is separated into two main columns. The first introduces a general definition of the guidance document as well as German law legislation and obligation ranks determined by the German Governmental Commission. This is followed by a short description of content regarding the Standards for Corporate Management. Based on these theoretical findings, the second analyzes the application of Standards by this corporate body in practice. The Thesis evaluates existing literary and empirical results to answer the research question. A critical conclusion follows at the end.
2 Explanation of terms and content of The German Corporate Governance Code
2.1 Definition of the Code and statutory provision
In order to understand what the Code is, a definition by The German Governmental Commission is given: “The German Corporate Governance Code presents essential statutory regulations for the management and supervision of German listed companies and contains, in the form of recommendations and suggestions, internationally and nationally acknowledged standards for good and responsible corporate governance. The Code expresses a commitment of the economy to good corporate governance, which is why the Commission consults the Code with companies and their stakeholders, politics and the general public.”2
The German Corporate Governance Code was legitimized in 2003 by the German Federal Government. In terms of economic and monetary tradeoffs, the basic idea to formulate the guidance document consisted out of the approach of controlling and steering the German economy. In the interests of stakeholders as well as capital providers and owners (shareholders), a company should be regulated and guided by the Code from the outset. The prevention of shareholder damage, fiscally and economically, was yet another conception. Through the German Stock Corporation Act (AktG), the Corporate Management of every DAX 30 company is bound to report at least once a year to be in accordance with the Standards. If by chance, a requirement cannot be fulfilled by the Management, the company has to provide meaningful reasons of the failure to comply. It is also mandatory to constitute these causes online to enable transparency to the shareholders.3
The Federal Gazette (Bundesanzeiger für Justiz und Verbraucherschutz) discloses the Standards every year and concern obligation ranks according to the Code. These are separated into three guiding tiers: Must-obligations, should-obligation and shall-obligations. All of them differentiate by law legislation and voluntary fulfillment and concern every corporate body of a firm.
Must-Obligations
Even though the Code is not determined as a complete legislative act, Must-Obligations can be seen as an applicable law and have to be fulfilled by all DAX 30 companies. The Governmental Commission entitles these Standards as natural obligations which by chance, can lead to judicial persecution in case of non-compliance.4
Should-Obligations
Should-Obligations are based on the German Stock Corporation Act and appear in line with the annual reporting by the Corporate Managements to the Governmental Commission. Such Standards are to contribute to a sustainable leading of a company and should provide good governance along the whole firm. §161 AktG, which require the reporting by the Management is hence the signpost for every underlying advice by the Code.5
Shall-Obligations
While the other commitments are mandatory and founded on legislative law, shall-obligations represent a voluntary idea. Regarding issues instancing climate and environmental change, this column consists out of pioneering suggestions by the Commission. They do not correspond to the Stock Corporation Act and can support the company’s overall image as well as sustainable perception of good governance on the capital market.6
2.2 Content of the Code – Corporate Management
In order to allow a literary evaluation of the application and acceptance of Standards by the Corporate Management of DAX 30 companies, the content focusing on the column of Corporate Management will be explained in the following.
As a whole, The German Corporate Governance Code consists of seven columns which refer to the structural development of a company, the involvement of owners and shareholders, the collaboration of Corporate Management with the Supervisory Board as well as the firm’s accounting and transparency across all strategic and holistic approaches. The Code summarizes all requirements and recommendations in so-called Standards which are unique for every corporate body. Those are updated annually by the Governmental Commission and do differentiate in their ranks of obligations (see Chapter 2.1). Hereinafter, the main requirements are examined for Corporate Management and the corporation within a company’s Management.
In contrast to the common One-Tier System in the United States, the Code entails the demand for a Two-Tier System involving a leading body of the firm as well as a controlling organ as a Supervisory Board generally does. Based on this idea, both corporate bodies combine the company’s Management and have to collaborate compulsively. This guarantees control and business leading in terms of the firm’s interests and the accounts of stake- and shareholder.7 By this, the frequent occurrence of the so-called Principal-Agent Problem should be solved. While the Principals represent the capital providers of a DAX-listed company, the Agents are the transcribing body and therefore members of the Board. Accordingly, all decision-making power comes from the Corporate Management and hence has to be regulated by the Supervisory Board to save shareholder and firm interests. The annual General Assembly of all company’s bodies and capital providers has likewise decisiveness about Management’s line-up and dividend policy and yet represents another force to diminish the impacts of the Principal-Agent Theory.8
According to the Code and the German Stock Corporation Act, the exchange of information alongside with knowledge sharing between the Corporate Management and the Supervisory Board characterize the essential governance requirement. This is also underpinned by §90 AktG to provide a sustainable risk planning in order to follow the company’s interests and economic successes. Further Standards demand a comprehensive collaboration in terms of strategic or financial steps. The law legislation of §93 AktG underlines the Code’s approach that information between the two bodies must not differ from its intrinsic content and furthermore is not used externally to harm the company’s position.9 In line with the column of Transparency within the guiding document, the Corporate Management must provide lucent data and facts to justify them to the General Commission annually. In second place, it also has to follow the firm’s Code of Conduct and compliance regulations to pursue good governance. The Standards recommend to take care of diversity when it comes to Management line-up. In addition, remuneration should be measured by taking the overall performance into account.10 Extra payments (bonuses) in the form of equity components or shares should be realized to fit the Code’s recommendations. Those financial statements have to be transparently included in the firm’s balance sheet. Yet another demand, which is forced by the German Criminal Code (Strafgesetzbuch) requires a non-competition clause for every Corporate Management of a DAX listed group (§299 StGB).11
The Supervisory Board has to control the Corporate Management as it performs its appointment duty of Management Board and supervises all strategic decision alongside all financial interaction. Therefore, the Supervisory Board is required to form diverse committees which focus on different implementations as well as an adequate risk management. According to the Standards, the line-up of the Management Board has to be formed in consideration of industrial diversity. Merely two members from Corporate Management can switch directly from its position to a seat in the Supervisory Board to maintain company’s interests and avoid saturation of power by individuals. The Code requires a deferment of personal concerns in order to provide good governance of the company.12
3 Evaluation of application and acceptance of The German Corporate Governance Code within DAX 30 companies
3.1 Methodology
In terms of a literary evaluation of application and acceptance of the recommended Standards of the Code, this Thesis examines a comprehensive analysis of academic literature findings and studies on the issue. For this, a scientific paper by the authors von Werder and Bartz on effective application of the Standards and Management remuneration (2014)13 as well as empirical findings by Kaspereit, Lopatta and Zimmermann regarding the application besides the payoff of the Code (2015)14, a valuation by the author Bock from 201415 on company valuation in terms of Code requirements and a analysis from Drobetz, Schillhofer and Zimmermann on the expectations of stock returns in terms of Code application16 have been examined for this paper. In addition to this, the results have been consolidated of a detailed research by the German Association for Financial Analysis and Asset Management17 which present a qualitative analysis of Governance and Standard implementations of DAX-listed firms (2016). All journals and research studies were underpinned by a glossary of the Code by the authors Pfitzer and Orser (2003) as well as a standard reference by Bress18 (2007) of the German Corporate Governance Code and its impact on a company’s financial performance.19 These findings present the core information to evaluate the application of Code Standards which are encouraged by results of several other analyses of qualified journals. The literary evaluation should provide evidence of the application of Code Standards by Corporate Management by referring to actual empirical studies on that issue and fundamental findings on the application of the Code within the last decades. The analysis of this Thesis has consulted German and foreign literature to provide a holistic evaluation.
3.2 Evaluation of literature findings
The literature evidences that different perspectives of Code application have to be taken into account in order to examine the practical application. Beginning with the fundamental Standards of the Code, studies agree on the necessity of DAX-listed companies to inform the General Commission annually whether it has fulfilled the recommendations or to give profound reasoning why it was not possible in the past time period as it was explained in Chapter 2.
Underpinned by §90 AktG of the German Stock Corporation Act, every DAX-listed group has to provide this reporting sufficiently as the law forces each company to disclosure. These proofs are controlled by the Commission every year and are adjusted towards feasible changes in law legislations or the German Corporate Governance Code.20 It is foreseeable that every firm fulfills these requirements to avoid legal persecution. According to the authors Pfitzer et al. this Standard, as it is based on law statutes, can be seen as an indispensable duty and is therefore implemented by every firm on the capital market besides German SMEs (Small- and Medium-sized Enterprises).21 The statements of von Werder et al. underlines the complete fulfillment of this Standard by all DAX-listed companies as well.
Besides that, giving transparent information as well as data transfer to shareholders and the Supervisory Board represents another law-based standard. This requirement is put into practice by 100% of DAX companies according to the analysis of the German Association for Financial Analysis and Asset Management.22 Moreover, the authors Giroud et al. claim that these internal streams represent the basis of efficient Corporate Management and security of capital provider interests. It enables also risk management processes based on this accessible information. The estimation of risks of the capital market was becoming essential when several crises arose during the past decades of worldwide economic tradeoff. Data transfer within a firm to control and regulate are nowadays representing the core of a balanced power of corporate bodies. Therefore, all listed companies provide sufficient information, as §90 AktG obliges the Corporate Management to disclosure.23 According to the Code, information has to be carried carefully in business communication to avoid knowledge advancements to third-party members.
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2 Die Regierungskommission (2017). The German Corporate Governance Code. Frankfurt am Main: Die Regierungskommission
3 Bundesministerium der Justiz und für Verbraucherschutz (1956, 2016). German Stock Corporation Act AktG. Berlin: Bundesministerium der Justiz und für Verbraucherschutz
4 Die Regierungskommission (2017). The German Corporate Governance Code. Frankfurt am Main: Die Regierungskommission
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11 Bundesministerium der Justiz und für Verbraucherschutz (1871, 2016). Criminal Code StGB. Berlin: BMJV
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