Corporate Governance and Shareholder Activism in Germany

Corporate Governance and Shareholder Activism in Germany

Corporate Governance and Shareholder Activism in Germany 2560 1707 Le Yu

In the past, institutional investors acted more like observers of portfolio companies’ strategy. They don’t involve so much except fundamental incidents or crises. However, instead of just being passive finance providers, institutional investors are now becoming more active in changing or shaping the corporate governance of portfolio companies.

Compared to the US or UK financial market, there are fewer shareholder engagement researches in Germany. Furthermore, as shareholder activism is a topic which involves several perspectives, such as legal, economic, management and finance, the experiences and the practice in the US or UK market may not be applied to a German setting. Especially for big German companies whose investor pool and types are large and diversified, it is important for them to know how global investors conduct shareholder activism under a German setting.

Corporate Governance basically refers to the framework of rules and practices to ensure accountability, fairness, and transparency in a company’s relationship with its all stakeholders. Compared to some other countries, the governance structure of Germany has some distinctive characters.

One important distinctive factor is German “Two-tier Management System”. The German Stock Corporation Act calls for a clear separation of the Board of Management and Supervisory Board. The Board of Management is responsible for companies’ regular operation and business. The Supervisory Board monitors the work of board members but generally not involved in daily work.

Another important distinctive factor is that German corporate governance takes care not only of the interest of shareholders, but also all stakeholders. In other words, German corporate governance aims to the value maximization of stakeholders, instead of only shareholders. Taking employees as an example. Employees, as one of the most important stakeholders of a company, are integrated into the governance system and governance process of German listed companies. In comparison, US companies are more “Shareholder interests oriented”. They have a unitary board, whose members are elected directly by shareholders.

Except for that, German corporate governance is also characterized as, for example, “Large institutional investors hold large block share”, “Cross holding structure”, “Concentrated voting power”, “Dual class regime”, and “Issue shares without voting right”.

Due to the above difference between Germany and the US, historically, Germany is less attractive for activists to engage. When US companies were challenged by corporate raiders, German companies were still protected by its cross-holding structure among large companies and block holdings by banks or insurance companies. Therefore, shareholder activism did not get sufficient attention by German companies for a long time.

However, this topic is rapidly getting attention now. In Germany, more companies begin to conduct regular communication with shareholders to ensure the transparency, conformity and high quality of corporate governance. One of the most famous “shareholder activism” cases in Germany was the takeover attempt of Deutsche Börse (DB) for the London Stock Exchange (LSE). This attempt aroused DB shareholders’ strong rebellion and ended with the abortion of the bid and the leave of DB’s CEO and the President of the Supervisory Board. Except for that, shareholder engagement cases in Germany also happened in construction (Bilfinger SE), automobile (Volkswagen AG), engineering (ThyssenKrupp AG, IWKA AG, KUKA AG), telecommunication (Deutsche Telekom AG) industries with triggers such as unsatisfactory share price, diversifying merger or acquisition, composition change of management or supervisory board, etc. The engaged activists’ include local German activists, European activists as well as US activists.

In Germany, shareholder activism is mainly related to German Stock Corporation Act (AktG), EU Regulation on Short Selling, German Securities Trading Act, German Securities Acquisition and Takeover Act. To supplement the above legislative requirements, German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK) offers recommendations and suggestions on companies’ corporate governance according to international standards. DGCK is an essential statutory regulation for the management and supervision of German listed companies. its commission revises the code on an annual basis to ensure the best practice is up to date.