According to a 2003 Financial System Stability Assessment by the International Monetary Fund, Germany has taken steps to improve corporate governance in line with international best practices. Germany is often viewed as a "stakeholder" model of corporate governance, as opposed to the "shareholder-oriented" structures that prevail in Anglo-American corporate governance systems. In 2002, the Government Commission of the German Corporate Governance Code (Cromme Commission) established a Corporate Governance Code for listed companies based on the comply-or-explain principle. On July 26 of the same year, the government enacted the Transparency and Disclosure Law, including new Article 161 of the Stock Corporation Act requiring a Declaration of Conformity with the Corporate Governance Code. Since the promulgation of the Code, according to a 2005 report by Heidrick & Struggles, there have been continuous improvements regarding the transparency and independence of most German boards, as well as the use of external auditors. The disclosure of management compensation is still of great concern, however. Also, per the Heidrick & Struggles report, Germany's two-tier company structure, which clearly divides the management board and the supervisory board, falls behind international best practices. The Corporate Governance Code was revised in June 2006 to incorporate provisions of the 2005 Law on the Disclosure of Management Compensation, as well as the 2005 Law on Corporate Integrity and Modernization of the Right of Avoidance.

General Overview

Germany has taken steps to improve corporate governance, in line with international best practices, as stated in a 2003 Report on the Observance of Standards and Codes by the International Monetary Fund (IMF). However, the IMF report recommended strengthening corporate governance in credit institutions. According to a 2002 report by KPMG, German companies operate under a two-tier system that clearly divides the management board and the supervisory board. While the management board has operational responsibility under the Stock Corporation Law (Aktiengesetz, or AktG), the supervisory board has supervisory control. Per the same report, the supervisory board's control authority over the management board was further strengthened by the 1998 Law on Control and Transparency in Business (Gesetz zur Kontrolle und Transparenz im Unternehmensbereich, or KonTraG). Germany is often viewed as a "stakeholder" model of corporate governance, as opposed to the "shareholder-oriented" structures that prevail in Anglo-American corporate governance systems, as stated in a 2004 report by Jackson et al. This not only refers to the concentrated shareholdings and substantial cross-shareholdings between large companies and banks that have characterized German corporate culture, but also to one of the most far-reaching employee codetermination models among member states of the Organization for Economic Cooperation and Development (OECD). In the recent past, however, major banks have been reducing their cross-shareholdings however.

In 2002, the Government Commission of the German Corporate Governance Code (Cromme Commission) established a Corporate Governance Code for listed companies. The Code is voluntary but based on the comply-or-explain principle. On July 26, 2002, according to a 2004 report by Nowak et al., the government enacted the Transparency and Disclosure Law, including Article 161 of the AktG. This article requires a Declaration of Conformity with the Corporate Governance Code. Since the promulgation of the Code, as stated in a 2005 study by Heidrick & Struggles, there have been continuous improvements regarding the transparency and independence of most German boards. Progress has also been made in the use of external auditors to review the performance of boards and in the implementation of recommendations to increase effectiveness. Nonetheless, the two-tier structure is "increasingly at odds with international best practices" (p. 22), as noted by Heidrick & Struggles (2005). Strenger reported in 2004 that improvements in the efficiency and structure of boards are crucial, as is the clarification of the liabilities of management and supervisory board members.

The Corporate Governance Code was revised in June 2006 to incorporate provisions of the 2005 Law on the Disclosure of Management Compensation (Vorstandsvergütungs-Offenlegungsgesetz, or VorstOG), which requires companies to disclose individual compensation for all members of their executive board.as well as the 2005 Law on Corporate Integrity and Modernization of the Right of Avoidance, according to a 2007 Global Survey of the Institute of International Bankers (IIB). These provisions specify the disclosure of management compensation and strengthen the rights of the annual general meeting chairman. Per the same report, amendments to the Code have been well received by companies. Following the 2004 EU Directive No. 2004/25/EC on Takeover Bids, the government implemented a Takeover Act in 2006 to ensure greater transparency for takeovers, as stated in the 2007 U.S. Department of Commerce (DoC) Country Commercial Guide report.

According to the IMF's 2003 report, the regulation of stock and derivatives exchanges is the responsibility of the relevant Exchange Supervisory Authority (Boersenaufsicht, or ESA) in each German state (Länder). The Frankfurt Stock Exchange -- Deutsche Börse -- is not only the most important stock exchange in Germany, but also the largest exchange organization worldwide. As of 2007, the Deutsche Börse included 230 listed companies. As noted in the 2007 U.S. DoC report, although cross-shareholding took place among some large German companies, major banks have been reducing their cross-shareholdings in recent years.

In 2003, as noted in the 2007 U.S. DoC report, the Federal Ministry of Justice (Bundesministerium der Justiz, or BMJ) and the Federal Ministry of Finance (Bundesministerium der Finanzen, or MoF) jointly established a ten-point plan to, inter alia, improve investor protection, increase the liability of boards of directors, and enhance oversight of auditing operations. According to the World Bank's 2008 Doing Business report, investor protection in Germany in 2007 was slightly lower than the OECD average. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Germany scores 5 in the disclosure index against an OECD average of 6.4. It scores 5 in the Director Liability Index against an OECD average of 5.1 and 5 in the Shareholder Suits Index against an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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According to KPMG's 2002 report, German companies operate under a two-tier system that clearly divides the management board and the supervisory board. While the management board has operational responsibility under the AktG, the supervisory board has supervisory control. Per the same report, the supervisory board's control authority over the management board was further strengthened by the 1998 KonTraG. The two-tier structure is, however, "increasingly at odds with international best practices" (p. 22), according to a 2005 report by Heidrick & Struggles.

In 2002, as noted in the 2007 U.S. DoC report, the Cromme Commission established a Corporate Governance Code for listed companies, which is voluntary but based on the comply-or-explain principle. Nowak et al., writing in 2004, reported that on July 26, 2002, the government enacted the Transparency and Disclosure Law, including new Article 161 of the AktG that requires a Declaration of Conformity with the Corporate Governance Code. The Code was revised in June 2006 to incorporate provisions of the 2005 VorstOG and the 2005 Law on Corporate Integrity and Modernization of the Right of Avoidance, as stated in the IIB's 2007 Global Survey. These provisions specify the disclosure of management compensation and strengthen the rights of the annual general meeting chairman. Per the same report, amendments to the Corporate Governance Code have been well received by companies. Following the 2004 EU Directive No. 2004/25/EC on Takeover Bids, the government implemented a Takeover Act in 2006 to ensure greater transparency for takeovers, as stated in the 2007 U.S. DoC report. According to the IMF's 2003 report, the regulation of stock and derivatives exchanges is the responsibility of the relevant ESA in each Länder. However, the information provided above does not directly address Germany's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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According to a 2004 report by Nowak et al., the 2002 Corporate Governance Code "clarifies the rights of shareholders, who provide the company with the required equity capital and who carry the entrepreneurial risk" (p. 8). However, the information provided above does not directly address Germany's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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According to a 2004 OECD Survey on Corporate Governance, the protection of minority shareholders is covered by an explicit law on groups of companies. However, oppression of minority shareholders might occur when the management board enters into an agreement with another company, giving it full and unrestricted control. Therefore, Strenger recommended in 2004 that the legal rights for redress by minority shareholders should be strengthened. Until recently, Volkswagen was the only remaining company in Germany that deviated from the "one share-one vote" principle, according to the 2005 Association of British Insurers report. On January 16, 2008, as noted on the Financial Times website, German authorities amended Germany's 48-year-old controversial Volkswagen Law (VW Law), which protected the company against hostile takeovers by limiting the voting rights of shareholders to 20 per cent. However, the information provided above does not directly address Germany's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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As noted in the 2004 OECD Survey on Corporate Governance, stakeholders' interests are well defined. Furthermore, according to the 2004 report by Jackson et al., Germany is often viewed as a "stakeholder" model of corporate governance, as opposed to the "shareholder-oriented" structures that prevail in Anglo-American corporate governance systems. However, the information provided above does not directly address Germany's compliance with this principle.

Principle V: Disclosure and Transparency

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As stated in KPMG's 2002 report, the 1998 KonTraG addresses obligations of the management boards to set up a risk management system; additional disclosure requirements; improvement of the external audit and the collaboration of the external auditor and the supervisory board; and responsibilities of the management board, the supervisory board, and the external auditor. On July 26, 2002, according to a 2004 Nowak et al. report, the government enacted the Transparency and Disclosure Law, including the new Article 161 of the AktG that requires a Declaration of Conformity with the Corporate Governance Code. As noted in the IIB's 2007 Global Survey, the Code was revised in June 2006 to incorporate provisions of the 2005 VorstOG and the 2005 Law on Corporate Integrity and Modernization of the Right of Avoidance. These provisions specify the disclosure of management compensation and strengthen the rights of the annual general meeting chairman. Following the 2004 EU Directive No. 2004/25/EC on Takeover Bids, the government implemented a Takeover Act in 2006 to ensure greater transparency for takeovers, as stated in the 2007 U.S. DoC report. However, the information provided above does not directly address Germany's compliance with this principle.

At the time of the IMF's 2003 assessment, German HGB accounting rules ("German GAAP") were in compliance with the relevant EU Directive. There were, however, discrepancies between the HGB accounting rules and the international accounting standards (IAS). In 2003, as noted in the 2007 U.S. DoC report, the BMJ and the MoF jointly established a ten-point plan to, inter alia, enhance the oversight of auditing operations. Following the IMF's 2003 report, Germany improved its regulatory framework by adopting IAS in 2005, as part of the EU-wide implementation of IAS for the consolidated accounts of listed companies. However, the information provided above does not directly address Germany's compliance with this principle. Strenger reports in 2004 on the importance of strengthening the independence of auditors, and establishing an accounting oversight board.

Principle VI: The Responsibilities of the Board

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According to KPMG's 2002 report, German companies operate under a two-tier system which clearly divides the management board and the supervisory board. While the management board has operational responsibility under the AktG, the supervisory board has supervisory control. Per the same report, the supervisory board's control authority over the management board was further strengthened by the 1998 KonTraG. Since the promulgation of the Corporate Governance Code, according to a 2005 Heidrick & Struggles report, there have been continuous improvements in the transparency and independence of most German boards. Progress was also made in the use of external auditors to review the performance of boards, and implementation of their recommendations to increase effectiveness. The disclosure of management compensation remains a great concern, however. Per the same report, the two-tier structure is "increasingly at odds with international best practices" (p. 22). Therefore, improvements in the efficiency and structure of boards, as well as liabilities of management and supervisory board members are crucial, according to Strenger's 2004 report. In 2003, as noted in 2007 by the U.S. DoC, the BMJ and the MoF jointly established a ten-point plan to, inter alia, increase the liability of boards of directors. Despite all the information provided above, however, there is little information publicly available that directly addresses Germany's compliance with this principle.