German Corporate Governance – What Works? Where Next?


The performance of Germany’s major companies is highly regarded internationally, especially the ability to export high quality products that consumers want to buy. What role does governance play in Germany’s business performance?

The German system of corporate governance is fundamentally different from that of the UK or USA. It operates under a two-tier Board system, rather than a unitary Board. The German Supervisory Board also includes employee representatives – the collaboration of capital and labour is a central tenet of Rheinland capitalism.

“For over a century, corporate governance evolved differently in Germany than in English-speaking countries: with a two-tier board system, where labor representatives often hold sway.” – Gilbert Kreijger: Handelsblatt Global

Traditionally, international institutional investors have had reservations about the unfamiliar German governance structure, perceived to be more opaque and less flexible.

More recently, however, concerns about short-termism in the UK and US have prompted investors and politicians to revisit German corporate governance as a possible framework which allows German companies to invest for the long-term. Equally, UK politicians are now warming to employee representation, long-enshrined in German practice through the Betriebsverfassungsgesetz (Works Constitution Act).

Based on Fidelio’s longstanding experience of supporting German public companies, in this Overture, we take the opportunity to review the Deutscher Corporate Governance Kodex (German Corporate Governance Code), 15 years after it was first introduced.

We explore what is working and where shareholders are looking to increase their influence. Read below for more information.


Background and Implementation

As Fidelio has previously explored in recent Board breakfasts, including “Employee Representation – What Government and Shareholders Expect” with Hans Hirt, Executive Director of Hermes Equity Ownership Services: to understand German corporate governance is to recognise a different starting point.

German corporate governance principles, which can be traced back to the economic hardships of the 1920s, ensure collaboration between capital and labour through a two-tier Board system, with the Supervisory Board providing oversight and the Management Board developing and implementing strategy.

Ownership of German companies was, for many years, dominated by the banks and cross-holdings. Prior to the 1990s, German corporates had limited need for international capital.

This changed with the fall of the Berlin Wall in November 1989, and the re-unification of Germany in 1990. Germany needed international capital and so did German companies. While international investors were keen to participate in the growth opportunities provided by Reunification and the opening up of Eastern Europe, they were wary of an unfamiliar form of governance, a high degree of employee representation including at Supervisory Board level, and considerable opacity in the form hidden reserves.

As German companies went from strength to strength, they increasingly needed to access international capital markets. For this access, investors sought assurance on matters of corporate governance.

This resulted in the introduction of the first Deutscher Corporate Governance Kodex in 2003.

The German Code looked to the UK, where the Cadbury Report had been introduced 12 years earlier. Perhaps surprisingly, the German Code also adopted the UK’s ‘comply or explain’ method. German companies are specifically required to publish a corporate governance report annually and to set out reasons for non-compliance. However, not all elements of the Code are subject to comply or explain, with some guidelines functioning more as suggestions, which may or may not be accepted, depending on stance of individual businesses.


15 Years on: Does it Work?

Progress has been made. Of course, there have been major scandals in German corporate governance in the intervening years; but there have in other markets, too. In the meantime, the Code has become a framework for providing assurance to investors and also providing periodic review of key investor concerns.

Of course, there are areas where both investors and legislators would like to see a further uptick in governance. These include:

  • Independence of the Supervisory Board: The Code recognises the importance of the independence of the Supervisory Board, advising Members must not have conflicts of interests. Investors argue, however, that the Code does not provide concrete definitions of either independence, no of conflict of interest, and that shareholders need greater comfort. It should also be noted that Supervisory Board Members are not subject to an annual shareholder vote as in the UK, although there does not seem to be great appetite for this particular expansion of shareholder influence.

“Bei der Neuauflage des Kodex sollten die wesentlichen Kriterien für Unabhängigkeit noch deutlicher aufgeführt werden. Ergänzende Klarstellungen durch den Kodex-Kommentar würden das Bild hoffentlich vervollständigen” – Prof. Christian Strenger: Supervisory Board Member, International Corporate Governance Network

(“In the new edition of the code, the numerous criteria for independence should be even more clearly presented. Supplementary clarification through comments in the code would hopefully complete the picture.”)

  • Remuneration: Executive Pay, however, is a bone of contention and an area where many shareholders of Germany companies would like to expand their influence. There is a read across to other markets where investors have acquired a much bigger say on pay: in the UK, for example, remuneration policy is formally put to a vote. Worldwide, the Remuneration Committee Chair is becoming a “hot seat” in Corporate Governance.
  • Diversity: The German Corporate Governance Code does set out the conditions for companies relating to diversity, saying it must be considered when making any appointment, be it at Management or Supervisory level. This aspect of governance that has evolved more slowly in Germany than in other markets, with shareholder and political frustration growing at the pace of change.
  • In 2015, the German government introduced the so called Frauenquote: legislation demanding that Supervisory Boards are composed of at least 30% women, and 30% men. Earlier this year, this quota was achieved across the DAX 30 Supervisory Boards. However, diversity at Management Board level remains weak. A recent study carried out by EY revealed that only 7.3% of Management Board Members across DAX, MDAC, SDAX, and TecDAX companies are women.
  • Fidelio has been an advocate of greater Board diversity and supported Chairs in achieving that goal. We have long argued that there is much to be learned from the UK and German markets. To that end, we will be hosting our third Panel Discussion on Frauenquote in October in Frankfurt. We have also been delighted to welcome German female Executives and Directors on Fidelio’s “A Seat at the Table” programme, which has been recognised for its contribution to developing the pipeline of female CEOS and Chairs.



Fidelio is seeing that the demand for greater transparency and good governance is increasing internationally. Germany is no exception: the debate about the German Corporate Governance Code is healthy. Moreover, it is important to find governance mechanisms which provide assurance internationally, but also work for companies locally, reflecting legal systems and culture.  Fidelio is pleased to support German companies and also contribute to the debate into developing Boards fit for the future: for example through our recent Board breakfast  Fidelio Board Breakfast on Board Evaluation and what shareholders want. As Hans Hirt argued, “not doing a Board Evaluation should be a warning sign for investors”. This applies to companies in Germany, as it does in the UK.

Good governance is a key attribute of Boards which are well placed for challenge and agile in the face of disruption and Fidelio looks forward to an ongoing contribution.

For further information on how Fidelio supports Chairs in building Boards fit for the future through Search, Development, and Evaluation, or of our research and Board breakfasts, please subscribe here.

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