4.4.8 Based on literature and previous studies, how is the national corporate governance code applied in practice?

Besides the annual compliance reviews by the Berlin Center of Corporate Governance as discussed below, various other German code compliance studies have been performed as well. Chapter 5 goes into more detail as regards the research methods and results, even though relevant results are also provided in this section. Goncharov, Werner et al. conclude that although there is capital market pressure, suggesting a broad adoption of the German corporate governance code, no consistent answer can be provided yet about whether the compliance declaration will provide valuable relevant information or, in other words, have pricing effects on the stock market (Goncharov, Werner et al. 2006). Nowak, Rott and Mahr analyse that, neither for the short term nor the long term, do higher levels of code compliance have a (positive) impact on stock price performance compared to lower levels of compliance (Nowak, Rott et al. 2006, p. 33). In their research on code compliance in 2006, Talaulicar and Von Werder find an overall rather high degree of compliance and this compliance tends to increase with the size of the companies (Talaulicar and Von Werder 2008, p. 257). Furthermore, a fixed set of code recommendations are applied by less than 80 per cent of the companies, especially concerning: the formation of board committees, the transparency of board compensation, the elections of the supervisory board, the age limit for board members, the design of the supervisory board compensation, and the design of the stock option compensations for the management board (Talaulicar and Von Werder 2008, p. 261).

As stated above, Seidl et al. analysed the corporate governance statements of 257 companies in the UK and Germany for the year 2006 (Seidl, Sanderson et al. 2009). They examined 128 German companies and 14.06 per cent declared full compliance. The large companies had higher compliance scores than the smaller companies (full compliance DAX 40.00%, MDAX 10.20% and SDAX 2.04%). The average number of deviations per company was 4.4 and the maximum number was 15, again with a considerable difference between large and small companies. The code provisions complied with worst of all concern the compensation of the management and supervisory board members that must be individually disclosed and the requirement of a suitable deductable for the D&O insurance policy. The reasons most often provided for non-compliance were: no explanation, principled justifications and other company-specific reasons. Seidl et al. state that the number of 'no explanations' is that high (almost 30%) because the law requires disclosure and not necessarily justification (see section 4.4.5) (Seidl, Sanderson et al. 2009). The EU comparative study on code compliance during 2008 shows a total of 19 deviations in the 15 German companies under research. No significant differences between large-cap and mid-cap companies are visible. The only noteworthy provision which several companies did not comply with concern the composition of the nomination committee (RiskMetrics Group 2009, p. 91).

Since 2003 the Berlin Center of Corporate Governance, headed by Professor Von Werder, assesses the compliance with the German code recommendations. In its Code Reports from 2003 to 2010 it repeatedly states that the very high level of code compliance of previous years remains unchanged and has stabilised in more recent years, which can indeed be seen when comparing the Code Reports side by side. In 2010 the code compliance for DAX companies is, on average, 96.3%, for MDAX 90.94% and for SDAX 85.9% (Berlin Center of Corporate Governance, Kodex Report 2010, p. 854). The report concludes that larger companies have a higher level of compliance than smaller companies (Kodex Report 2010, p. 861) (Cromme 2004). Recommendations not complied with very much in the years under research concern:

The fact that, year after year, a fixed set of the German code recommendations are not complied with was also the conclusion in the studies discussed above. Moreover, in its most recent report the Berlin research group states that future research needs to analyse the reasons provided for non-compliance, including their plausibility (Kodex Report 2010, p. 861). To summarise this key question, in the studies conducted on German code compliance a generally positive trend of acceptance can be observed. The disclosure of board compensation remains a sensitive issue that is insufficiently complied with (Cromme 2004) (Voogsgeerd 2006, p. 99), as well as the elections of the supervisory board. It is moreover concluded that larger companies have a higher level of compliance than smaller companies. The fact that a fixed set of code recommendations are not complied with is not only a German phenomenon, but an international problem that will be analysed further at the end of this chapter and in the remainder of this Part II. The same applies to more sufficient code compliance as regards larger companies compared to smaller companies.