Two-tiered living by the code: corporate governance in Germany

two tiered Corporate Governance

I recently had the honor of sharing my thoughts on German corporate governance at the January director’s briefing of the Thai Institute of Directors in Bangkok.

I love the exchange about corporate governance that takes place in international settings like this one, and it’s no surprise that I find myself fielding many questions about corporate governance in Germany. As is often the case, many of these are about the basic tenants of German corporate governance.

In Germany, these are simply part of the corporate landscape, but abroad, I am reminded that the German system is unique. Therefore, with the excellent questions about German corporate government that I’ve had here in Bangkok fresh in my mind, allow me to provide a brief crash course.

Two-tier system

One of the most unique aspects of German corporate governance is the two-tier management system. Corporate structure in Germany is divided into two parts: a management board, and supervisory board. This is a legal requirement for all stock corporations and corporations falling under the employee participation scheme (those with more than 500 employees).

The supervisory board (elected by shareholders) selects the management board, and works together with the management board on long-term strategy.

Why go to all the trouble? To put it simply: better checks and balances, especially due to the involvement of external stakeholders on the supervisory board. Opponents of the dual system argue that is makes a company less agile on the market. I argue that any sacrifices made to short-term performance are more than compensated with long-term stability.

‘The Code’

The German Corporate Governance Code: it sounds like a boardroom pact made around a large conference table, but in fact, it is a set of essential statutory regulations for the management and supervision of German listed companies.

It is reviewed by a government commission from the justice department annually, and – my favorite part – companies are required to issue a statement of compliance every year, or explain non-compliances (comply or explain). The commission maintains a list of compliance statements from every DAX company.

Comply or explain is not a concept unique to Germany (it is standard in UK, for example) but the many foreign investors and executives in German companies are often unaccustomed to it.

Keeping watch

The two-tier system and the corporate governance code means individual supervisory board members have an important role to play. Remember, these individuals – brought in from outside a company – are elected by shareholders and are required to always and only act in the interest of the company.

Much of my work as a trusted corporate governance advisor focuses on equipping board members with the tools they need to execute their mandates, and guiding companies to select candidates that will excel in their role on the supervisory board.

The supervisory board, with its outsider perspective, is essential for companies to stay on top of the latest disruptions and innovations in a rapidly changing world. A good board member will help develop tools to succeed in a given corporate ecosystem and to stay ahead of the latest global developments.

The discussions about corporate governance here in Bangkok have been inspiring and invigorating, and I am more than happy to continue the discussion online. I look forward to your questions and comments on corporate governance in Germany.

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