Corporate Governance Going by the Book

Germany's newly tightened corporate governance code is a good thing. But the voluntary guidelines also underscore the fact that many business leaders seem to need to be told to do the right thing. That's worrying.
The new rules have come too late for Ferdinand Piëch, former supervisory board chairman of Volkswagen.

How indifferent we’ve become.

The wonderfully named Government Commission on the German Corporate Governance Code has just updated what the country's mighty supervisory boards and boards of directors should and should not be doing.

Company bosses should not remain in their chairs for eternity; supervisory board candidates should set aside enough time to do their jobs; members who don’t attend meetings should suffer harsh criticism and ridicule, etc.

Yet the response to these missives is nothing more than debates among business experts.

In contrast, when the commission began work in 2001, an intense public debate raged about whether it was necessary to lay down rules for corporate governance. The men and few women on the supervisory boards and boards of directors believed they already knew what they should and shouldn’t do and, most of all, how they were to do it.

Now, 14 years later, there is widespread consensus that many business leaders really didn’t know and still don’t.

It certainly became clear during the financial and economic meltdown that many executive boards and even more controllers weren’t taking the necessary diligence seriously. In many cases, there was reasonable doubt about whether they were suited to their jobs.

Committees should make certain that prospective candidates have enough time to cope with their expected duties. Excuse me? No one asked that until now?!

A generally accepted standard with rules for good corporate governance and its supervision are logical. They may not prevent scandals, but they will help to promote qualified personnel in management and supervisory boards while identifying undesirable developments in a timely manner.

Germany's existing corporate governance code, known as code 83, contains such recommendations. That’s reason enough for some critics to warn of an impending orgy of new regulations. And reason enough for the commission's acting chairman, former Daimler chief financial officer Manfred Gentz, to insist no code in any comparable nation is as “clear, as short and as liberal” as Germany’s code.

But the degree of freedom the code gives companies or how it is packaged isn’t the subject here. The latest amendments by the commission lead to a completely different conclusion. It is amazing such recommendations must be voiced to highly qualified, experienced and very well-paid business leaders.

For example, in the future, supervisory board appointment committees should make certain that prospective candidates have enough time to cope with their expected duties. Excuse me? No one asked that until now?! It’s hard to imagine.

And shouldn’t other changes in the code be framed in terms of a culture of critical debate?

The code recommends that future supervisory boards set a maximum shelf-life for their members. Ferdinand Piëch, who just resigned as chairman of the supervisory board of Volkswagen at 78 years, and RWE chairman Manfred Schneider, 78, are extreme examples, but with DAX company bosses having an average age of 63, an argument can be made for rejuvenation.

The third new feature is a call for frequently absent supervisors to be named and shamed. This sounds pretty brutal at first, but don’t shareholders have the right to know who is taking the job seriously?

Many of the code rules can be reduced to issues that should be taken for granted. These are principles for which a responsible manager should need no guidance.

But reality obviously shows things don’t work without paragraphs, statutes or regulations. No one is forcing the committee to establish these rules. Experience is driving it. It is testimony to the incompetence of so many boards, which have too often demonstrated that they have no understanding of responsible corporate governance.

 

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