4.4.5 What is the judicial corporate governance arrangement in the country under review?

As stated under section 4.4.2, the German code makes a distinction between recommendations (Empfehlungen) and suggestions (Anregungen). The recommendations are marked in the text through use of the word "shall" (soll). Companies may deviate from these obligations but have to disclose this. According to the corporate governance commission this enables companies to reflect sector and enterprise specifics and contributes to more flexibility (German Code 2010, Foreword). It is remarkable that the code's foreword does not ask for an explanation of the deviations, only for a disclosure of non-compliance. It seems that the German code itself does not contain a comply or explain principle, but a comply or disclose principle. Nevertheless, the German code must be seen in relation to the Transparanz- und Publizitätsgesetz, more specifically article 161 through which the code gains a legal foundation (Nowak, Rott et al. 2006, p. 11). However, in literature it has often been claimed that article 161 AktG neither did not contain the comply or explain principle either, as the article 1 stated that the management board and supervisory board shall either declare once a year that the recommendations of the code are being complied with or which of the recommendations are not being applied. Again, this involves the comply or disclose principle and not the comply or explain principle (Nowak, Rott et al. 2006, p. 12) (Ulmer 2002, p. 172). Although the ambiguity and discussion continued in legal doctrine, it was referred to in politics and bythe commission itselfas the complyorexplain principle (Voogsgeerd 2006, p. 97), also because of recommendation 3.10 of the code, that states that the management board and supervisory board shall each year provide a corporate governance report that includes an explanation of any deviations from the recommendations of the code. The confusion ended on 29 May 2009 by the coming into force of the Gesetz zur Modernisierung des Bilanzrecht (BilMoG), by which article 161 AktG was amended,2 and it now encompasses the comply or explain principle. Simultaneously, Directive 2006/ 46/EC was implemented. To conclude, both the law and the code encompass a comply or explain principle nowadays.

In German doctrine the distance between law laid down in legislation and law based on non-legal norms is still large (Voogsgeerd 2006, p. 99). Self-regulation and codes are a terra incognita in Germany; legislation is common practice (Du Plessis, Großfeld et al. 2007, p. 12) and the comply or explain principle was rather new to the traditional concept of legislation (Baum 2005, p. 27). Therefore, criticism mainly focuses on the precise legal form of the German code, which is considered controversial (Du Plessis, Großfeld et al. 2007, p. 31), and not so much on its contents (Du Plessis, Großfeld et al. 2007, p. 31) (Wymeersch 2005, p. 115). Critics state that the relation between the code and the Transparanz- und Publizitätsgesetz is problematic due to the principle of legality (see section 3.2.1). The legal embedding of the self-regulation code is possibly in contradiction with the constitution (the Demokratieprinzip)(Voogs-geerd 2006, p. 103) (Du Plessis, Großfeld et al. 2007, p. 31) (Ulmer 2002, p. 159) (Wolf 2002, p. 60). Despite this criticism, the German corporate governance commission made a clear choice with the formulation of recommendation 3.10. Moreover, the German government cooperated in the drafting of the code by drafting article 161 AktG. With regard to the code recommendations themselves, the prevailing legal opinion is that they are not actually legally binding, although over time could become recognised as well-accepted trade practices (Nowak, Rott et al. 2006, p. 11) (Du Plessis, Großfeld et al. 2007, p. 31).

It can be concluded from the above that judicial corporate governance arrangement D applies to Germany: regulation of self-regulation (meta-regulation) (see section 3.2.2). Legislation has more than a supporting or facilitating function. The self-regulation is 'regulated': most rules in the German code are a repetition of German legislation, with an explanatory nature (Du Plessis, Großfeld et al. 2007, p. 28) (Ulmer 2002, p. 152). Moreover, to make the code effective, simultaneous implementation of the Transparanz- und Publizitätsgesetz was a necessity (Voogsgeerd 2006, p. 103). Voogsgeerd rightly wonders whether the German code, together with article 161 AktG, can be considered an actual new judicial arrangement since most of it is a repetition of the already existing legislation (Voogsgeerd 2006, p. 84). Germany deliberately did not opt for an embedding of the code in listing rules, since it believes that the stock exchange authority is not able to perform the work involved. And the withdrawal of a company's listing as a sanction is not considered an appropriate way of protecting the shareholders (Voogsgeerd 2006, p. 96). There is very little experience with self-regulation and codes in Germany in comparison with the United Kingdom. Moreover, the code needs some legislation to gain judicial value. Although flexibility is important and overregulation lurks, important corporate governance rules need to be laid down in legislation (meta-regulation) (Nowak, Rott et al. 2006, p. 9).