Corporate Governance – The German Answer to a Global Issue

Dr. Götz Schmidt-Bremme, Chief of Economic Affairs, German Embassy of Paris, and
Prof. Klaus-Peter Müller, Chairman of the Supervisory Board of Commerzbank AG and Chairman of the Government Commission on the German Corporate Governance Code


As Chief of Economic Affairs of the German Embassy in Paris, Dr. Schmidt-Bremme’s job is to accompany companies and to guarantee compliance of company actions with different stakeholder objectives. He introduced Prof. Müller by mentioning that Prof. Müller not only guides the second largest bank of Germany through the arising Corporate Government issues, but also promotes the German system of Corporate Governance having a wide acceptance in today’s business community.

Prof. Müller started by pointing out that Corporate Governance has to be seen as a global challenge. The different national perspectives have to be tackled from an international point of view. Referring to Rockefeller he saw the Council on Business and Society as a great chance to establish a platform to talk about those global issues. Especially the Asian countries should be included in Corporate Governance discussions due to their economic significance in the world.

In his opinion, good Corporate Governance means good corporate management as well as effective control of corporate management. Furthermore, the national Corporate Governance structures are decisive for the location of a company. As one major aspect of such Corporate Governance structures he emphasized the transparency principle. The German answer to this transparency issue within the German Corporate Governance system is the dualistic system where controlling and supervising activities play a major role. The self-contained bodies of the dualistic system shall ensure the independence of Management Board and Supervisory Board in particular. However, in the dualistic system the Supervisory Board does not only control the Management Board, but also gives advice to ensure better corporate management.

The dualistic system has proven to be a successful solution to the requirements of Corporate Governance. However, Prof. Müller admitted that there is no conclusive answer whether the Anglo-American monistic system or the German dualistic system is the better way of dealing with Corporate Governance. Both systems do have their advantages. The trends of Corporate Governance nowadays show that it is not enough to leave control simply to the capital markets and the shareholders of a company. Corporate Governance has to be seen from a stakeholder’s perspective. Therefore, the dualistic system takes on the stakeholder perspective by enabling the Supervisory Board to participate in the strategic management of the Management Board. The Supervisory Board thereby consists of members elected by the shareholders and employee representatives, also including union representatives. The Annual Meeting remains the “backbone” of the code.

After giving a short overview of the origins of the German dualistic system, Prof. Müller discussed its linkage to a social market economy and the social market equilibrium in an economic rather than in a political sense. The objectives of profit maximization, solidarity, responsibility of common goods, and the balancing of interests are supported by the dualistic system by including various stakeholder groups in the management process of the company.

Another important aspect of the dualistic system is its flexibility with respect to the about
90 recommendations (e.g. ensuring the independence of the Supervisory Board, etc.) suggested for the cooperation between Management Board and Supervisory Board. These recommendations are not legally binding and are based on voluntary acceptance. However, by singing the declaration of conformity submitted by the Supervisory Board the Management Board has to obey by the declaration. In case of incorrect behavior, legal actions can be taken. Prof. Müller further emphasized that “you do have to explain, but do not have to obey” as you are allowed to deviate to a certain degree if necessary and only if the reasons for the deviation are disclosed in the conduct.

Prof. Müller further highlighted that the dualistic system has a value concerning sustainability as an ethical principle. The sustainable economy is linked to the code as the German dualistic system serves as a yardstick for entrepreneurial actions. Those social and environmental issues ensure the long-term success of German enterprises by taking care of the nature and the environment as a whole as a common good.

Often, investors request transactions to entail risk in an amount resulting in excessive remuneration incentives which actually should be linked to a long-term and sustainable business performance. In Prof. Müller’s opinion, much more has to be done to link compensation to long-term performance of corporate management by e.g. including clawback provisions. He stressed out that outstanding performance should be remunerated and be rewarded, but that there must be limits to incomprehensibly high remuneration. Based on the transparency principle the dual system can make management actions more visible and thus, lead to a different behavior of those who ask for remuneration.

In addition, transparency doesn’t mean excessive regulations of Corporate Governance and control but rather might result in a uniform Corporate Governance framework. As it is difficult to come up with a uniform Corporate Governance framework, the first step is to encourage competition among the different types of corporate constitutions. He also mentioned that a flexible Corporate Governance code is favorable as enterprises have to be able to act in an entrepreneurial way as they have to respond to new questions. New questions arise on a daily basis and can’t be all regulated in advance. The same is true for the risk of failure: It can’t be eliminated in advance and will remain the price of freedom and flexible regulations. However, flexible regulations will enhance the faster reaction to new issues and risk.

In Prof. Müller’s opinion “we will never achieve more than commitment of the individual and the acceptance by the society”. As the students valued “ethical behavior” as the second highest attribute of a successful CEO, he wanted us to accept a challenge of re-thinking solutions via different systems of Corporate Governance.

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