Three Models of Corporate Governance from Developed Capital Markets

ign="justify">      While the supervisory board includes no “insiders”, it does not necessarily include only “outsiders”. The members of   the supervisory board elected by  shareholders are usually representatives of banks and corporations which are substantial shareholders. It would be more appropriate to define some of these as “affiliated outsiders”.

 

       

      For a pictorial explanation of board composition in the German model, please refer to the diagram of the German model at the end of this article. 

Regulatory Framework in the German Model 

      Germany has a strong federal tradition; both federal and state (Laender) law influence corporate governance. Federal laws include: the Stock Corporation Law, Stock Exchange Law and Commercial Law, as well as the above-mentioned laws governing the composition of the supervisory board are all federal laws. Regulation of Germany’s stock exchanges is, however, the mandate of the states. 

      A federal regulatory agency for the securities industry was established in 1995.  It fills a former void in the German regulatory environment. 

Disclosure Requirements in the German Model 

      Disclosure requirements in Germany are relatively stringent, but not as stringent as in the US. Corporations are required to disclose a wide range of information in the annual report and/or agenda for the AGM, including: corporate financial data (required on a semi-annual basis); data on the capital structure; limited information on each supervisory board nominee (including name, hometown and occupation/affiliation); aggregate data for compensation of the management board and supervisory board; any substantial shareholder holding more than 5 percent of the corporation’s total share capital; information on proposed mergers and restructurings; proposed amendments to the articles of association; and names of individuals and/or companies proposed as auditors. 

      The disclosure regime in Germany differs from the US regime, generally considered the world’s strictest, in several notable ways. These include: semi-annual disclosure of financial data, compared with quarterly disclosure in the US; aggregate disclosure of executive compensation and supervisory  board  compensation,  compared  with  individual  data  on  executive  and  board compensation in the US; no disclosure of share ownership of members of the supervisory board, compared with disclosure of executive and director’s stock ownership in the US; and significant differences between German accounting standards and US GAAP. 

      One key accounting difference in Germany is that corporations are permitted  to amass considerable reserves.   These reserves enable German corporations to understate their value.  This practice is not permitted under US GAAP. 

      Until 1995, German corporations were required to disclose shareholders holding more than 25 percent of the total share capital. In 1995, this threshold was lowered to 5 percent, bringing Germany in line with international standards. 

Corporate Actions Requiring Shareholder Approval in the German Model 

      The routine corporate actions requiring shareholder approval under the German model are: allocation of net income (payment of dividends and allocation to reserves); ratification of the acts of the management board for the previous fiscal year; ratification of the acts of the supervisory board for the previous fiscal year; election of the supervisory board; and appointment of auditors. 

      Approval of the acts of the management board and supervisory board are basically a “seal of approval” or “vote of confidence.”  If shareholders wish to take legal action against individual members of either board or against either board as a whole, they refrain from ratifying the acts of the board for the previous year.

 

       

      In contrast with the Anglo-US and the Japanese models, shareholders do not possess the authority to alter the size or composition of the supervisory board. These are determined by law. 

      Other common corporate actions which also require shareholder approval include capital authorizations (which automatically recognize preemptive rights, unless revoked by shareholder approval); affiliation agreements with subsidiaries; amendments to the articles of association and/or charter (for example, a change of approved business activities); and increase of the aggregate compensation ceiling for the supervisory board. 

      Non-routine corporate actions which also require shareholder approval  include mergers, takeovers and restructurings. 

      Shareholder proposals are common in Germany. Following announcement of the agenda for the meeting, shareholders may submit in writing two types of proposals. A shareholder counterproposal opposes the proposal made by the management board and/or supervisory board in an existing agenda item and presents an alternative. For example, a counterproposal would suggest a dividend higher or lower than that proposed by the management board, or an alternative nominee to the supervisory board. A shareholder proposal requests the addition of an issue not included on the original agenda. Examples of shareholder proposals include: alternate nominees to the supervisory board; authorization of a special investigation or audit; suggestions to abolish voting rights restrictions; and recommendations for changes to the capital structure. 

      Provided that such proposals meet legal requirements, the corporation is required to publish these shareholder proposals in an amended agenda and forward them to shareholders prior to the meeting. 

Interaction Among Players in the German Model 

      The German legal and public-policy framework is designed to include the interests of labor, corporations, banks and shareholders in the corporate governance system. The multi-faceted role of banks has been described above. 

      On the whole, the system is geared towards the interests of the key players. There is, nevertheless, some scope for participation by minority shareholders, such as the above-mentioned provisions concerning shareholder proposals. 

      There also exist several obstacles to shareholder participation, especially in terms of banks’ powers as depositories and voting agents. 

      The majority of German shares are issued in bearer (not registered) form. Corporations with bearer shares are required to announce their annual general meeting in an official government bulletin and forward the annual report and agenda for meeting to custody banks. The banks forward these materials to the beneficial owners of the shares. This often complicates the procedure for receipt of materials, especially for foreign shareholders. 

      In Germany, most shareholders purchase shares through a bank, and banks are permitted to vote the shares of German they hold on deposit. The procedure is as follows: The beneficial shareholder grants a general power of attorney to the bank, and the bank is permitted to vote the shares for a period up to 15 months. The corporation sends the meeting agenda and annual report to its custody bank. The bank forwards these materials and its (the bank's) voting recommendations to the German shareholder. If the beneficial shareholder does not provide the bank with his/her specific voting instructions, the bank may vote the shares according to its own interpretation. This leads to a

 

      

potential conflict of interest between the bank and the beneficial shareholder. It also increases the potential voting power of the bank, because some shareholders might not provide specific voting instructions and the bank may exercise the votes according to its interpretation. Because the level of individual share ownership in Germany is very low, this is not a huge problem.  Nevertheless, it reflects a certain pro-bank and anti-shareholder tendency of the system. 

      Other obstacles to shareholder participation include the above-mentioned legality of voting right restrictions, and the fact that shareholders may not vote by mail. As noted above, shareholders must either attend the meeting in person or to be represented in person, i.e., by their custodian bank. 

      Despite these obstacles, minority German shareholders are not inactive. In fact, they often oppose management proposals and present a wide range of counterproposals and proposals at the AGMs and EGMs of many German corporations each year. In Austria, minority shareholders are less active, perhaps because the Austrian government is, directly or indirectly, a large shareholder in many companies. 

Conclusion 
 

      The article has introduced each model, describe the constituent elements of each and demonstrate how each developed in response to country-specific factors and conditions. It should reflect the fact that it is not possible to simply select a model and apply it to a given country. Instead, the process is dynamic: the corporate governance structure in each country develops in response to country-specific factors and conditions. 

      With the globalization of capital markets, each of these three models is opening (albeit slowly) to influences from other models, while largely retaining its unique characteristics. Legal, economic and financial specialists around the world can profit from a familiarity with each model.