Corporate governance today: Why we need a far-reaching corporate governance reform – and why we should rethink the Government Commission

Most of you will know Goethe’s sorcerer’s apprentice, who tries out his master’s spells – but then is not up to his power.

The same is true of the Government Commission on the German Corporate Governance Code, which has continually expanded its influence and confirmed, at the latest with the current draft of the Code, that its role is overstretched and that it has become a location risk. I am therefore firmly convinced that what we need is not a reform of corporate governance, but a revolution.

This demand may surprise some, especially since I presumably lack the habitus of a revolutionary. But joking aside, because the matter is serious: Corporate governance is not about legal and business subtleties, but about the future viability of our companies and thus of Germany as a business location.

Let me summarize my criticism, which I have expressed in the last weeks in a series of comments in the GermanBoardNews, again in three theses.

  • One:The government commission does not represent the economy.

Instead of entrepreneurs, management boards and supervisory boards, the Commission is dominated by investors, shareholder protectors, auditors and representatives of the financial sector. Thus a small circle of outside stakeholders – appointed by the Federal Ministry of Justice and the Federal Chancellery – defines what constitutes “good corporate governance”.

There can be no question of the self-regulation of the economy as it was once intended: We experience an external obligation; companies are put on bridles under the guise of self-regulation.

  • Secondly, the Corporate Governance Code is restrictive rather than helpful.

The consequence of this external obligation is a small-scale code that is far removed from practice, which patronises supervisory boards and management boards regardless of industry, size and ownership structure and nips discussions in the bud. Let’s not kid ourselves: In many places, the Code’s recommendations are simply ticked off instead of discussing what would be best for the company.

This tight corset is all the more dangerous because, in times of artificial intelligence, cyberspace and digital transformation, companies would need more freedom of movement than ever to master the enormous challenges they face.

  • Thirdly, the corporate code must become the focus of debate.

The root of the evil is the assumption that there is ONE optimal corporate governance. And please let all those responsible, regardless of industry and ownership structure, strive for them. What’s more, they should “correspond” to it – or declare in a lowered head in the Declaration of Conformity that they have not achieved the class goal.

But who knows better than we supervisory board members: Every company is unique, and every company needs tailor-made solutions. A code may therefore not make rigid “one-size-fits-all” specifications. Instead, it should help companies to develop their own individual culture and code in order to become even better.

In other words, decentralized corporate governance – and not state-controlled corporate governance.

Time for a liberation strike

We are miles away from such self-responsibility for our own corporate governance. And the forthcoming reform of the Code will not change that. For with its discouraged proposal, the government commission falls far short of what is necessary. And in the consultation process, which is now being carried out at a rush pace, at most minor changes are to be expected, especially as nobody knows which proposals the committee will take up and for what reason. The consultation should be completed on 31.01.2019. Who knows who will succeed Mrs. Barley as Attorney General?

That brings me back to Goethe’s sorcerer’s apprentice. Some of you will remember that the Commission was originally supposed to explain German corporate governance primarily to foreign investors. Instead, it has developed ever smaller standards, taken up criticism at best in a measured manner and ensured that new members are in line.

And the successively increased influence is now causing damage: Many managers only tick off instead of discussing tailor-made corporate governance structures and corporate culture. This formalistic habit prevents companies from getting better and setting important course for the future.

I am also convinced that less regulation and regulation would free up new entrepreneurial resources – true to the motto of the 14th German Supervisory Board Conference: “Good governance – less is more”.

So it’s time for a liberation strike. We need a comprehensive corporate governance reform that moves from heteronomy to self-regulation and focuses on individual company codes. To this end, we need a completely new Code Commission that represents the diversity of the economy.

I have therefore written an open letter to Federal Justice Minister Katarina Barley asking her to initiate a discussion and reform process.

Help to represent the interests of supervisory boards in dialogue with politicians. I am convinced that together we have a great opportunity to decisively improve the corporate governance culture in Germany – for the benefit of companies, the business location and all stakeholders. Thank you so much.

Note: This editorial is also the manuscript for the keynote address I gave today at the 14th German Board Conference in Düsseldorf. Current impressions can be found on Twitter (#dart14).

Any additions, comments, objections? I look forward to your feedback:

Editorial by Peter H. Dehnen -> About the Person.