In a recent post I noted that, despite some improvements, good corporate governance isn’t something Germans have an easy time getting their heads round. The Financial Times Deutschland reports that there might be a good reason for this: in Germany, it doesn’t seem to matter much how well a corporation is governed.
As the FTD reports, a new study from the consultancy Ergo Kommunikation maintains that ‘investors do not reward German firms that abide by the Corporate Government Code…. Their share prices profit just as little from a high level of transparency or disclosure of managing directors’ compensation.’ [My translation.]
It’s hard to credit, I realise, but by comparison with many other jurisdictions, Germany’s is in some ways a paradisically libertarian corporate governance regime. For all the thicket of sometimes absurd companies laws, German management can, on many fronts, do pretty much whatever it likes. They are free to withhold lots of information from shareholders and, even if the shareholders find out, there is usually nothing they can do. And that Corporate Governance Code [.pdf] mentioned above? It contains a number of good ideas (many of which would go without saying in other countries). But it’s voluntary. To the extent the Code’s provisions do not simply mirror already-binding legal requirements, companies are free to deviate from them as they wish. When they deviate from one of the Code’s ‘recommendations’, they must disclose the fact; they need not disclose deviation from its ‘suggestions’ at all.
A few years ago, lots of Germans thought the country’s old way of doing business (with companies in effect answering not to their owners but to banks, and a feeling that shareholders should count themselves fortunate they were permitted to invest at all) had produced stagnation. Econopundits uttered the phrase ‘creation of an equity culture’ in tones of solemn hope; ‘transparency’ was the battle-cry. In short, many argued, the country needed an Anglo-Saxon shot in the arm. (Quite literally. The title of my previous post was a trick question. The way you say ‘corporate governance’ in German is: corporate governance. There is no German-language term for it.) Only crystalline transparency and good corporate governance would allow Germany to compete in the brave new global marketplace. What’s more, good governance made financial sense: the capital markets would put a premium on good governance, and punish those firms that lack it. So the path for corporate management is clear: uphold the Code (and make sure you trumpet the fact), and your firm will be showered with cash; slither off and ignore it if you like, but then you will be reduced to begging in the streets for finance.
Except that this is not what has happened.
The Ergo study tracked 270 firms (230 from the major German indices as well as 40 smaller firms listed under the Prime or General standard) for three years. Ergo measured these firms’ degree of compliance with the Code against their performance. The result: you’d actually have done better by buying a basket of the firms that adhered to the Code least.
So all the excitement about ‘good corporate governance’ was sound and fury signifying nothing, was it? Not quite.
As a spokesman for the Hermes funds noted in the FTD article, most studies from other countries show a definite correlation between governance standards and performance. An Ergo spokesman concluded that German money managers simply lag behind their global counterparts in their concern for good governance. Foreign institutionals investing in Germany demand (and get) far more information from the firms they invest in; and the information they demand goes far beyond what the Code requires. And they also lay greater stress on true independence of supervisory board members.
The new chairman of the International Corporate Governance Network doesn’t think there’s anything wrong with the Code; it just needs more time to see its effects. The consultant and the fund manager disagree. They think the Code needs a bigger stick; simply having to disclose (some) deviations from its provisions is an insufficiently negative incentive. If compliance is not legally mandated, it should at least be a requirement for admission to the Prime Standard. And the Code should provide for much more detailed disclosure of management compensation, especially bonus structures. What’s more, it should require firms to reduce the terms of service of supervisory and management board members; manifest losers are difficult (and expensive) to get rid of. And on that last point, even the ICGN’s sceptic agrees.