Jean du Plessis

German corporate governance in international and European context

Corporate governance encompasses the free enterprise system, which is treated comprehensively in this book from a German perspective. This distinguishes the book from other books written in English in this subject area, not only because of the comprehensive way it covers German corporate law and corporate governance, but also because of the fact that it provides international and European perspectives on these important topics. This second edition is an extensively revised and updated version of the first edition, in particular with a view to the worldwide debt crisis. The authors provide readers with an overview of the unique features of German business and enterprise law and an in-depth analysis of the organs of governance of German public limited companies (general meeting, management board, supervisory board). In addition, approaches for reforms required at the international level are also suggested and discussed, including, among others, the unique interplay and dynamics of the German two-tier board model with the system of codetermination, referring to the arrangement of employees sitting on the supervisory boards of German public limited companies and private companies employing more than 500 employees; also covered are significant recent legal developments in Europe. The book highlights the core function of valuation and financial reporting at the international, European and German levels, with accounting as the documentary proof of good corporate governance. It also expands the scope of the first edition by a treatment of the German financial sector, global corporate finance and governance, and by including a new chapter on compliance of corporate governance laws, rules and standards in Germany. As far as comparative law is concerned, new developments in the area of corporate governance in the EU, the OECD Principles of Corporate Governance and corporate governance in the US, the UK and Australia are covered. The book is addressed to researchers, practitioners and basically anyone with an interest in the complex, but intriguing areas of corporate law and corporate governance.

The German System of Supervisory Codetermination by Employees

Chapters 3 and 4 dealt with the primary organs of German public corporations, namely the general meeting, the management board and the supervisory board. Since the German two-tier board system is founded on the management board and the supervisory board, most attention was devoted to these two organs. In this chapter the primary focus is on the German system of supervisory codetermination by employees, and so, again primarily on the supervisory board as it is on the supervisory board that employee representatives serve. This is such an important aspect that it deserves separate chapters. Discussion includes the historical development of codetermination in Germany, its application in various industries and corporations, and the role of trade unions. In Chapter 6 we examine some recent developments and recent perceptions of codetermination in Germany and the European Union. It could be said that in the European context codetermination is at the crossroads because of some fundamental decisions by the European Court of Justice (ECJ). Further, the German rules on codetermination are under serious threat of being eroded by some European Community legislation.

An Overview of the Corporate Governance Debate in Germany

The term corporate governance was adopted directly from English into German. Although there is no exact definition of corporate governance, it seems to be a sensible approach to use the English term even in German. Any translation could have created considerable confusion and ‘corporate governance’ is nowadays considered to be an international term with several attempts being made in recent times to define it closer and make the scope of the term clearer.

An Overview of German Business or Enterprise Law and the One-Tier and Two-Tier Board Systems Contrasted

It is hardly possible to judge the merits of the German corporate governance system without also having a basic knowledge of German business or enterprise law and without analysing it within its wider cultural context and linguistic background. Whereas business law or enterprise law refer to all legal aspects pertaining to businesses or enterprises, the focus of this book is on corporate governance in context of primarily large companies or corporations. A distinctive feature of German companies or corporations is the particular relationship amongst the various corporate organs and the unique synthesis between corporations law and labour law. Understanding this synthesis is fundamental when the merits of the English and American one-tier system and the German two-tier system (the management board and the supervisory board) with employee participation are analysed and compared. These aspects have often been neglected in the academic literature attempting to analyse the German corporate governance system from a traditional Anglo-American perspective.

The Impact of European Developments on German Codetermination and German Corporate Law

For more than a decade, developments originating from the European Union (EU) have considerably impacted on German corporate governance. First, there have been several leading decisions by the European Court of Justice (ECJ) which, to a large extent, have established for companies the freedom of settlement within the EU. These decisions, secondly, have influenced the national laws of the EU Member States. Thirdly, the EU has adopted its European Council Regulation of 8 October 2001 for the establishment of the European company (Societas Europaea (SE)) accompanied by a Council Directive on employee codetermination of the same day. Unexpectedly, the SE has become a success story within the last years in an unprecedented way. It not only serves the needs of big companies, but – to the astonishment of many observers – is also accepted as a form of incorporation by medium-sized and small companies. That success, fourthly, has spurned the struggle for the introduction of a European private company (the Societas Privata Europaea (SPE)), which shall be tailored to meet the special needs of small and medium-sized companies. There are good reasons to believe that, within the foreseeable future, the Proposal for a Council Regulation on the Statute for a European private company will successfully pass the legislative bodies of the EU. Fifthly, the EU has adopted the Directive on Cross-Border Mergers of limited liability companies of 26 October 2005 which has been implemented by the insertion, in April 2007, of new statutory provisions into the German Transformation Statute (Umwandlungsgesetz). Another topic which has been hotly debated over recent years, is the topic of cross-border transfers of companies and here there are two types of transfers possible and relevant for our discussions, namely transferring of companies’ registered seats (place where a company was incorporated or formed and where it appears on the a country’s ‘Register of Companies’) and transferring of companies’ seats of administration (place where a company has its main administrative headquarters, also called real or actual seat). There is still considerable confusion about the exact legal rules applicable and their effect on companies when there are cross-border transfers of companies and these uncertainties apply to transfers of companies’ registered seats as well as to transfers of companies’ administrative seats.

Banking on Trust: The German Financial Sector, Global Capital Markets and Corporate Finance and Governance

The remarks are based on Claus Luttermann, ‘Regulierungsperspektiven: War und ist die Finanzkrise die Folge von Hyperspekulation’, (2010) 58 OBA 444–48.

The Supervisory Board as Company Organ

In this chapter we focus on the supervisory board. A general overview of the supervisory board lays the foundation to a proper understanding of supervisory codetermination, the focus of Chaps. 5 and 6. When one analyses the German two-tier board system one should never lose sight of the fact that the supervisory board was introduced into the German law of public corporations by the General German Commercial Code (Allgemeines Deutsches Handelsgesetzbuch, ADHGB) of 1861. In other words, more than 150 years of development and refinement have taken place since its origin. It is, therefore, no wonder that some commentators would perceive the German system as complicated or unnecessarily technical.

The Significance of Moving Beyond Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) has been widely studied for a long time by, for example, management studies and political sciences (Carroll et al. 2012; Scherer and Palazzo 2011), but has for a long time only played a minor role in law and legal scholarship. One of the main reasons for this was that CSR was traditionally considered to be ‘above and beyond’ what companies are required to do by law. Characterised by a soft law approach voluntary CSR standards were typically, developed by corporations, by NGOs and by international organisations. However, recurrent reports about human rights violations in global supply chains and the actions of companies in the wake of the global financial and economic crisis have questioned the soft law approach to CSR and has put a ‘hard law’ law approach on the agenda.

Corporate Governance Codes Under the Spotlight

Although somewhat simplistic, this highlights the importance of processes that companies should institute and implement to ensure that effective practices transcend the various levels of the organisation. These were viewed at the time as necessary responses to what was considered a lack of managerial oversight which led to the spectacular corporate collapses of the Bank of Credit and Commerce International, Coloroll, the Polly Peck Group and Maxwell Communication Corporation in the late 1980s and early 1990s. These collapses not only resulted in substantial financial losses to shareholders, employees, creditors, investors as well as the government—they were also perceived as posing considerable challenges to the integrity and reputation of the City of London as an international financial centre.

The General Meeting and the Management Board as Company Organs

Three organs are required for German public companies (AGs). These are the general meeting (Hauptversammlung), the supervisory board (Aufsichtsrat) and the management board (Vorstand). For private companies (Gesellschaften mit beschrankter Haftung (GmbHs)), only two organs are required: the management organ (comparable to the management board in the AG) and the organ for the corporators (comparable to the general meeting in the AG) but codetermination legislation also make a supervisory board compulsory for some larger GmbHs.