Germany: Deutschland AG adapts
The last 10 years have seen a dismantling of the ‘Deutschland AG' network of cross shareholdings, writes Nina Röhrbein, but there is still room for improvement
Corporate governance has only become a topic in Germany in recent years. In the past, Germany was home to the so-called ‘Deutschland AG', a network of the biggest banks, insurers and companies, which was based on cross shareholdings and a concentration of board positions among the leading managers, trade unionists and politicians.
However, during the 1990s and early 2000s, particularly due to the Tax Amendment law, ‘Deutschland AG' was phased out and the cross-shareholdings unwound. From then on, with the influx and rising influence of international investors, companies have had to align themselves according to global market standards.
"Since then, German companies have done a lot of catching up and are now close to international standards," says Henning Gebhardt, head of European equities at DWS. "The peculiarity in the German system is the two-tier company board, which includes a supervisory board with a controlling function. However, despite this, the structure has to date proven itself successful, which is why I do not expect any significant changes going forward."
In the past corporate governance and voting was slightly sneered at in Germany, says Gebhardt. But in the wake of the financial crisis investors have begun to appreciate its importance. Now that corporate governance has moved up the agenda, the resources required in particular for voting processes can still overwhelm some companies. Voting and engagement activities with the investee companies have increased in the belief that well-governed companies are less risky than those that are not and may even be able to generate a higher performance.
The financial crisis has also intensified investor and regulator discussions surrounding issues such as the structure of boards and short-term remuneration. The composition, appointment and diversity of the executive and supervisory board are the most widely discussed corporate governance issues at present, ahead of remuneration models.
"The composition of the boards and committees, which preferably is a mix of different ethnicities, genders and competencies, presents a huge challenge to companies," says Gebhardt. "Remuneration models already attracted attention last year. Among executive boards, the issue is how to reward not only short-term success but also have clawbacks to achieve long-term, transparent success, for example, through measures such as remuneration through shares. With regard to the supervisory board the question is whether it should have variable or non-variable components in its remuneration policy."
Corruption is no longer the highest priority in Germany, with Gebhardt assuming that every company today complies with anti-corruption standards, following the corruption scandals surrounding Porsche, Siemens, Volkswagen and other companies in the 2000s.
"In the end, it has always been about the failure of controls either at companies, as seen with the corruption scandals, or at banks, as witnessed during the financial crisis, which has resulted in amendments to accountability rules for supervisory boards and audit committees," says Gebhardt. "The demands on supervisory boards, such as reporting standards, have also increased dramatically and will continue to rise."
But Gebhardt admits that corporate governance is rarely a topic of concern for German institutional investors, while some companies simply operate a tick-box approach to governance.
"However, those companies tend to be found out relatively quickly if you investigate only a little further," he says. "Last year's BP deepwater blowout has highlighted the jeopardy of a tick-box approach both to companies and investors."