Governance & Compliance
Thinkpiece No. 3

Good Corporate Governance

by Hoefle, v. Leesen



Good corporate governance requires a supervisory board that provides responsible supervision and advice. In Germany members of a supervisory board, whether they are elected by the shareholders (i.e. the owners) or by the employees, are obliged to work in the company's interest. This obligation applies to every member of the supervisory board.

Up until the end of the last century, a network of equity cross-holdings and personal connections existed in Germany, known both at home and abroad as Deutschland AG or Germany Inc; these cross-shareholdings have now declined, mainly for tax reasons. However, Germany Inc. has not been dissolved; it has reformed as a network of people with seats on multiple supervisory boards.

Not only the capital market encourages public corporations to focus on shareholder value, investors in the guise of private equity, hedge funds and major institutions have begun to aggressively pursue their interests, unlike the more circumspect approach of custodian banks. This aggressive investor behavior was new for company directors and directly challenged their own private interests.

Often people were appointed to company boards who gave priority to their own interest as well as, or instead of, that of the company. Power-hungry and egocentric CEOs propogated visions and demanded extensive powers in order to succeed. They demanded supposedly "fair" pay packages, with high performance-related components. Some well-known cases of company failings are closely related to managerist thinking and behavior: with its characteristic over-eagerness to meet the alleged or real demands of capital markets, a weak social identity, and opportunistic behavior.

Supervisory boards are often neither independent nor decisive enough to meet their responsibilities; often it is a case of managers supervizing managers.

Parity co-determination is an ineffective counterweight. It prevents proactive responses to globalization and is a brake to technical progress. Neither does it prevent inappropriate behavior. Despite its democratic pretensions, it has tended to become a confrontational model. Board members are partisan and national issues are given priority. The German co-determination model is not only expensive and non-representative it is also undemocratic because it excludes employees outside Germany.

A supervisory board should be a prudent company trustee. This requires expertise – both professional and social – as well as independence of spirit. Boards that are too large and managers who transfer to the supervisory board are detrimental to the corporation.

Widespread improvements are needed to ensure good Corporate Governance. The recent reform made little difference to corporate bodies and procedural issues and was, therefore, inadequate. What is required is radical reform.

Good Corporate Governance starts with a commitment. Property entails obligations based on fundamental moral values. Egocentrics must be excluded from managing boards and appointments to supervisory boards should be vetted. Corporate Governance must be a well-conceived system of checks and balances on behavior which is contradictory or detrimental to the corporate good. Transparent management systems are required that reward trustworthy behavior and expose bad practice. The core element in a reform of Corporate Governance should be a reduction in short-term incentivization.

Repeated demands for regulation miss the point; this can take pressure off politicians, but often the wrong people will benefit as a result.

Six years after its introduction, the German Corporate Governance Code has failed to bring a significant improvement in supervisory practice. It is not sufficiently binding. Improper practice should be penalized by an effective supervisory body.

Some problems of Corporate Governance have been dealt with recently. Two examples of these are DaimlerChrysler and Siemens.

This paper proposes ways of solving what is a very serious problem for public corporations and for society. Corporate Governance of public corporations affects hundreds of thousands of employees (and citizens) both in Germany and abroad.


Hoefle, v. Leesen, 2008, ISBN 978-3-00-020994-9