Corporate Governance

Question 1

Corporate Governance

Answer 1

Depending on the corporate law of a country, there are differences in the governing system of a corporation:

• in Germany, the two-tier system is applied,
• in the US and the UK there is a one-tier system in effect.

Question 2

Two-tier system

Answer 2

A stock corporation under German law recognizes three corporate bodies:

• the management board
• the supervisory board
• the annual meeting

There is the strict division between the rights and responsibilites of the management board and the supervisory board.

Question 3

Management Board

Answer 3

• decisions are taken democratically, the chair(man) cannot overrule the majority of the management board (‚primus inter pares‘)
• responsible for managing, coordinating and controlling business
• prepares the annual plan, the budget and the annual financial statements
• has to report regularly to the supervisory board

Question 4

Supervisory Board

Answer 4

• controls and monitors the executive management
• appoints the members of the management board
• approves the operative planning and important corporate decisions
• shareholders representatives elected by the general meeting
• according to German co-determination, the so-cakked Mitbestimmmung, workers’ representatives make up half of the supervisory board

Question 5

General Meeting

Answer 5

• appropriates the distrubatable profits
• approves the annual financial statement
• ppionts external auditor
• has the right to appoint and dismiss the shareholder representatives of the supervisory board

The influence of the general meeting on the decisions of the management board is limited. It is not involved in the day-to-day management decision of the enterprise.

Question 6

German Co-Determination

Answer 6

possible advantages:

• helps minimize labour tensions, contributes to industrial peace
• increases level of the workforce’s identification with the company
• supports stability, emphasis on long-term perspective
• diversity: different points of view contribute to better decision-making

possible disadvantages:

• maximization ofshareholder value isnot guaranteed, investors‘ influence isdiluted
• complicated, time-comsuming decision-making
• clashes ofinterestmight hampera corporation‘s success
• outdated system: existing privileges do not mirror the actual needs of today‘s workforce

Question 7

One-tier system

Answer 7

A stock corporation under US law recognizes only two corporate bodies:

• the board of directors
• the annual meeting

Question 8

One-tier system

Answer 8

The one-tier system brings together executive and non-ececutive members in one single body.

The Board of Directors

• is run by the chairman of the board
• consists of inside and outside directors
• chooses the Chief Executive Officer
• retains a high-level of oversigh- is chosen by the general and basically responsible to the shareholders

The actual power varies widely form company to company

Question 9

The Chief Executive Officer (CEO)

Answer 9

• has wide-ranging powers to manage the corporation on a day-to-day basis, has the ultimate executive responsibility
• needs to get the approval of the board of directors for major actions, he reports to the company’s board
• usually is a member of the board of directors as well, often even the chairman of the board of directors

Question 10

General Meeting

Answer 10

Latest tendency: activist shareholder are gaining more influence

• “say on pay”: advisory shareholder vote on executive pay
• directors are expected to stand for election each year
• shareholders press for the right to nominate directors (“proxy access”)