How Germany’s liberal approach to corporate governance works

The Benefits of a More Liberal Approach to Corporate Governance

As the UK’s relationship with Europe changes post-Brexit, it is useful to look at some of the corporate practices which exist on the other side of the Channel to understand how their governance and corporate government works. In this article we look at Germany.

The German Corporate Governance Code (Deutscher Corporate Governance Kodex or DCGK) was designed to create a more liberal and flexible attitude towards German corporate governance, and as it reaches its fifteenth year, it seems that German corporate governance has evolved hugely since the corporate crises, triggered by poor management, which led to the code being created in the first place.

The code was developed by a neutral and politics-free, voluntary commission, who designed it to clarify the German Corporate Charter for domestic companies and foreign investors, and help them to understand the principles of good corporate governance.

This included a description of the native German corporate system and its effectiveness in producing quality results. In particular, it highlighted the German dual system of: competence and responsibility, balanced with supervision and mediation. This is in contrast to the singular ways of Anglo-American companies, as well as other European countries.

Another of the code’s main features is the legal co-determination of employees, known as “Mitbestimmung”, which states that all workers have a right to get involved in the management of the companies they work for. Employees can elect trade union representatives to sit on the board of directors, making up almost 50% of the board in some cases. This is an idea that many Anglo-American companies would find very hard to grasp but that has seen German corporate governance improve continually.

One of the most interesting factors about the German Corporate Governance Code is its voluntary status. Companies are not obliged to adhere to it, nor are they expected to carry out all of its recommendations, which oddly enough, leads it to be wildly popular in Germany with a majority of companies opting to adhere to its suggestions.

It must be stated though, that if a company decides not to follow the German Corporate Governance Code, it must register that decision, giving a reason for its rejection of the code. This need to publicly register why it has opted out of the code may deter companies from doing so for fear of giving a bad impression to employees, competitors and also investors. These groups who prefer the code to be followed by companies so that they have a higher level transparency into the company workings.

Despite this pressure to adhere to its suggestions, the code gives just that, suggestions, and it only attempts to guide companies rather than force them. It uses as little detail as possible, thus giving the board and other stakeholders the freedom to decide what is and isn’t good and responsible corporate behaviour.

While this might sound foolish to some, it actually gives stakeholders the responsibility to think about what is right and wrong. The code ensures participation rather than telling them to abide by the rules, this ensures that they have influence and involvement in governance decisions.

When a company submits a declaration of compliance with the code, it is analysed by a number of impartial institutions including the Berlin Centre of Corporate Governance and the Centre for Corporate Governance at the Leipzig Graduate School for Management.

This way, companies, alongside these institutions, the media and the government, can influence corporate governance improvements in a thoughtful and unrestricted way.

With no strict laws to abide by, people are free to act as people not automatons, and companies can begin to make the necessary changes throughout the German corporate world, which are needed by employees and stakeholders alike.

Many organisations are trying to improve their governance. Whether these changes are being forced by regulation in their sector or the need to improve their growth and productivity. Board portal software has a role to play in supporting the information sharing, decision making and risk management that comes with good governance.

Governance software such as BoardPacks provides a single platform for managing board and committee meetings, risk, decision making and other governance related activities. It provides an overview of governance throughout the organisation, helping to identify any issues and drive improvement. For more information, visit our website.

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