4.4.4 What are the main features of the national corporate code regarding contents and do they reflect the country's culture?

As discussed above the German corporate governance system has long been considered the standard example of an insider-controlled and stakeholder-orientated system (Hackethal, Schmidt et al. 2005, p. 397). Despite many reforms and substantial changes the main characteristics of the German corporate governance system still apply and can be seen in the code as reviewed below. This is discussed by means of two main features: (i) board structure, (ii) shareholders and stakeholders, and (iii) culture is taken into account to see whether the contents of the code reflect Germany's culture. These features are only discussed in relation to the contents of the corporate governance codes and for reasons of comparison, in order to analyse further the application of the comply or explain principle theoretically and empirically (see chapter 6), as is the case for all the countries under research.

As stated before, the German corporate governance system is characterised by a two-tier board structure consisting of a board of managing directors (the Vorstand) and a board of supervisory directors (the Aufsichtsrat). The management board is jointly accountable for the management of the company (operational activities) and the supervisory board monitors and appoints the management board. The members of the supervisory board are appointed by the shareholders and due to compulsory employee representation an employee representative is part of the Aufsichtsrat. The rules in the code regarding the supervisory board are impressive and comprehensive; apparently the improvement of the functioning of the supervisory board is a key issue (Voogsgeerd 2006, p. 89) (Du Plessis, Großfeld et al. 2007, p. 28). The German code explains above all the relationship between the supervisory board and management board, as well as their roles and functions (Du Plessis, Großfeld et al.2007, p. 28). The chapters regarding the cooperation between the management board and supervisory board and the chapter on the management board primarily contain provisions that explain the already existing legislation. Such as provision 3.7 on how the management board and supervisory board have to act in case of a public takeover offer, which is the result of the implementation of the EU's13th directive on takeover bids. A noticeable fact is that the German code, contrary to for example the English and Dutch codes, does not contain detailed criteria on the independence of supervisory board members. Although the appointment periods and the maximum number of board members can be regarded as changes in German corporate governance (Voogsgeerd 2006, p. 88), the code only states that a supervisory board is considered independent if no business or personal relationships with the company or its management board exist that can cause a conflict of interests (provision 5.4.2). Voogsgeerd believes that Germany fears that far-reaching detailed material independence criteria will interfere with the legislative system of co-determination (Voogsgeerd 2006, p. 88). With respect to the formation of board committees the code only makes an audit committee (provision 5.3.2) and a nomination committee (provision 5.3.3) obligatory. Although the formation of other committees such as a remuneration committee can be arranged by the supervisory board (provision 5.3.5), this is not an Empfehlung that has to be explained by non-compliance.

The representation of employees in the supervisory board (Aufsichtsrat)is considered a core element of the German system. This is strongly rooted in legislation and not corroded by the contents of the corporate governance code; neither the Baum commission nor the Cromme commission were instructed to discuss the Mitbestimmung (Voogsgeerd 2006, p. 81). Other important stakeholders such as the banks are not explicitly discussed in the code either, with the exception of the shareholders. The German code starts with the provisions on shareholders. Although the contents are not far-reaching or surprising, since the interests of the company prevail over the shareholders' interests in the strongly stakeholder-orientated Germany, small innovations can be seen: the code provisions are specially aimed at protecting individual or small shareholders and making them participate in the general meeting (Voogsgeerd 2006, p. 90). Given the German corporate governance characteristics (see above) of block ownership, pyramid structures and cross-shareholdings, the individual shareholders needed to be more informed and involved in the company. Internet is regarded as an important communication instrument in this respect, hence the code's attention to proxy voting and the company's website.

The design of corporate governance systems is influenced by many factors, among which the culture factor. And to be effective, corporate governance principles must be part of the culture (Mintz 2005, p. 587). In section 3.3.2 the outcomes of several studies on the cultural dimensions are reviewed. An overview of the results of these studies on the countries under review in this research is shown in table 3.3.2 and the results for Germany are repeated in table 4.4.4 below.

Germany in particular scores high on the uncertainty avoidance index, low on the power distance index and, compared to the other four countries under research, low on individualism (Hofstede 1984) (Melis 1998, p. 14). A relation between these scores and the German corporate governance system and the German code can be detected. Although the German corporate governance code and regulation are based on EU directives and international corporate governance standards, they still have deep roots in German legislation and legal doctrine (Goergen, Manjon et al. 2008, p. 175). The uncertainty avoidance index is the degree to which members of a society feel uncomfortable with uncertainty and ambiguity. Strong uncertainty avoidance societies maintain rigid rules, rigid codes of belief and rigid behaviour and are intolerant of nonconformists (Mintz 2005, p. 587) (Hofstede 1984). As discussed under key questions 1 and 4, legislation plays a very important role in Germany. A strong desire for binding legislation exists: the tendency was to incorporate new corporate governance regulation in legislation. The possible unconstitutionality of a German self-regulation corporate governance code was therefore often discussed in German doctrine (Voogsgeerd 2006, p. 71). Moreover, the first German corporate governance code explicitly needed to be linked to and based in the Transparency and Disclosure Act (later incorporated in the Aktiengesetz 1965 article 161). Corporate governance arrangement D applies (see section 4.4.5) to Germany; regulation of self-regulation or in other words the legislation has more than a supporting role as regards the corporate governance code. This is apparent because the code needed an embedding in legislation (art. 161 AktG) to gain value and the contents of most code provisions are a repetition of German legislation, with an explanatory nature (Du Plessis, Großfeld et al. 2007, p. 28) (Ulmer 2002, p. 152). As mentioned above, intolerance towards nonconformists is a characteristic of strong uncertainty avoidance as well. Section 4.4.8 discusses German code compliance research in which the compliance scores are indeed very high.

It is furthermore noticeable that Germany scores low on the power distance index. This cultural dimension deals with the extent to which the members of a society accept that power in institutions is distributed unequally. People in small power distance societies strive for power equalisation and demand justification for power inequalities. This of course coheres with the relationship-based insider controlled and stakeholder-orientated system, of which Germany is considered the standard example (Hackethal, Schmidt et al. 2005, p. 397), further strengthened by the feature of co-determination. Breuer and Salzmann claim that countries with an emphasis on the cultural dimensions of embedd-edness (conservatism), egalitarianism, and harmony, tend to have a bank-based corporate governance system, as is the case for Germany (Breuer and Salzmann 2008, p. 17). As stated above, the main goal in Germany is not the maximisation of shareholder value, but the long-term objectives of the stakeholders, i.e. ensuring stability and growth (Hackethal, Schmidt et al. 2005, p. 398). This is also reflected in the code's aim to promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed German stock corporations (German Code 2010, Foreword), notwithstanding the fact that the specific code provisions focus mainly on the supervisory board, and in, for instance, the provisions on the shareholders 'rights and instruments, the interests of the enterprise as a whole prevail

(Voogsgeerd 2006, p. 90).

Although the strict principles and criteria of the German code are in line with international corporate governance practice, the code's aims and emphases still show the cultural dimensions such as uncertainty avoidance and a low power distance, or to put it in key words: 'the legislation of the code' and 'taking the interests of all stakeholders into account' (see table 4.4.4a for a summary in key words). Nevertheless, with regard to the provisions themselves typical German cultural dimensions such as co-determination1 and the influence of the banks are not code topics but are laid down in legislation, as can be expected of the uncertainty-avoiding Germany. Only the two-tier board, which is a German feature, is discussed comprehensively.