GERMAN MODEL OF CORPORATE GOVERNANCE

GERMANS are increasingly questioning the way that their large public companies are run.
State prosecutors are investigating why Volkswagen kept a pair of parliamentarians on its
payroll for years, while last week a Frankfurt court ruled that a reluctant Deutsche Bank must
disclose how much it pays to members of its elite executive committee. This week, Werner
Seifert, the chief executive of Deutsche Bores, owner of Frankfurt's stock exchange, came
under attack for ignoring his shareholders' views in his eagerness to buy the London Stock
Exchange.

At the heart of German corporate governance lies its unusual two-tier board structure.
Meetings of its non-executive supervisory board are, says one veteran director, little more
than time-wasting theatre. There can be as many as 30 directors sitting round a boardroom
table. In any company with more than 2,000 employees, up to half of them might be workers'
representatives who see their main task as saving jobs in Germany, even when a majority of
their company's workforce is based abroad.

Co-determination (by workers and management), a guiding principle of German corporate

governance since 1951, is proving a hindrance these days when speed and flexibility are
essential to global competition. Yet, until a few months ago, any talk of its abolition was
taboo. Many bosses pretend to like it. In some cases their job depends on keeping on good
terms with workers' representatives who sit on the board that hires and fires them.

Moreover, top German executives look forward to moving on to their company's supervisory
board. Heinrich von Pierer is stepping down as CEO of Siemens to assume duties as
chairman of its supervisory board. That will mean that at 17 of the top 30 German listed
companies, the chairman of the supervisory board is a former chief executive.
A government-sponsored body, the Cromme Commission, published a code of corporate
governance in May 2003, and recommended that a maximum of two former executives
should sit on a company's supervisory board. A draft EUcorporate-governance code
recommends a five-year gap between executive- and supervisory-board duties at the same
companyin recognition of the risk that former executives may defend bad business
decisions that they previously initiated.
Supervisory board members are supposed to control and advise the executive board
(the Vorst and). They need to be professional, to be sparring partners for the Vorstand, says
Heinz Evers, a partner at Kienbaum, an executive-search firm. But they are not well
motivated. A recent study by Spencer Stuart, another executive-search firm, found their pay
ranged from 5,000 ($6,530) a year to 102,000. The workers' representatives, appointed by
the unions, have to give 95% of anything that they are paid above a modest 3,500 a year to
the Hans-Buckler-Sifting, a trades-union foundation.
In recent years German companies have been doling out unwarranted pay to their
executives, says Christian Stranger, a former CEO of DWS Investment and a member of the
Chrome Commission. According to a recent study by a human-resources consultancy, not
only are German executives the best paid in Europe, but the component of their bonuses
linked to short-term targets is higher even than that of their counterparts in America. This has
put pay and performance out of line. In one case, while DaimlerChrysler's market value fell
by 60%, its top executives' pay rose by 40%.
No government in the foreseeable future is likely to tackle co-determination and two-tier
boards head on. The best that can be hoped for is that shareholders, rating agencies and the
media will increase the pressure for boards to be more transparent, and thereby more
answerable to their shareholders. Since a press campaign last year, more companies have
undertaken to follow a Chrome Commission recommendation to reveal individual executive's
pay: 23 out of the 30 companies on Germany's main stock market index, the DAX 30, have
complied or said they intend to. But it is clear that some are doing so only under duress.
Deutsche Bank had devised a way round the requirement: in 2002 it set up a group executive
committee that was independent of its two-board structure. While the bank's 20-strong
supervisory board watched over its four-man executive board (whose salaries are declared),
the committee got on with running the bank without revealing its executives' remuneration.
Last week, however, a court ruled that the pay of these executives too must be revealeda
rare victory for transparency.
 GERMAN MODEL

In this model, also known as the two-tier board model, corporate governance is exercised
through two boards, in which the upper board supervises the executive board on behalf of
stakeholders. This approach to governance is typically more societal-oriented and is
sometimes called the Continental European approach, being the basis of corporate
governance adopted in Germany, Holland, and to an extent, France.