Anneliese Maier Research Award (1 March 2013-28 February 2018)
5-10 Year Plan and Vision
For the further Internationalisation of the German Corporate Law and Corporate Governance for Public For-Profit Companies or Corporations
1. Primary aim
In line with the primary aim of the Anneliese Maier Research Award, the primary aim of this research project will be to promote research collaboration with specialist colleagues in Germany with an expectation to make a sustainable contribution towards the further internationalisation of the German corporate law and corporate governance for public for-profit companies or corporations.
The research will be undertaken as part of the broader theme of International Corporate Governance and Law or the acronym “ICGL”. Germany has always been seen to be resistant to move away from deeply embedded corporate governance structures. However by accentuating some of the best worldwide corporate law and corporate governance practices and exploring these further through collaborative research, there may be positive examples set for reform.
This may not only lead to the further internationalisation of German corporate law and corporate governance, but also developing modern templates for national and transnational structures with regard to different cultural backgrounds. In fact, this could lead to refinement, modernisation and internationalisation that can serve as first-class and World-class examples for other countries and in this way exporting refined German legal principles to other countries. In other words, legal cross-pollination from Germany.
The German corporate law and corporate governance system is by no means not internationalised, but there is considerable scope for further internationalisation, especially in certain areas.
More areas where further internationalisation is required will definitely be revealed during the initial 5-years of research collaboration. The six identified areas mentioned below will the particular focus of this research and collaborative research project:
- Legal actions against management board members and members of the supervisory boards: Germany has a deeply imbedded two-tier board system, that applies to all public for-profit companies or corporations. The two-tier board structure lead to very unique forms of enforcing directors’ duties. Who can institute legal actions against the members of the supervisory board if they are in breach of their legal duties? Who can institute legal actions against the members of the management board if they are in breach of their legal duties? Associated with these vital questions is the introduction of a statutory derivative action in German law in 2005, but does it work? Furthermore, there is worldwide an enormous growth of “sponsored litigation” or, to put it differently, litigation based on contingency fees. Ultimately, the concept of “class actions” against companies also come into play. How do all of these international developments affect the German law? How must the German law respond to keep up with these international developments? These developments require in-depth research.
- A very important issue, Worldwide, is “board diversity”. This includes gender diversity, but also nationality, age, cultural, race etc. diversity. The German two-tier board system with employees sitting on the supervisory board adds another diversity-dimension that not many other systems have. Also, the Personnel Director (Arbeitsdirektor) required for some management boards promote the concept of board diversity. However, which other ways are there to ensure board diversity in Germany? Apart from the German Corporate Governance Code (2010) promoting diversity, and in particular gender diversity, what else could be done to enhance board diversity in Germany? Should creditors and other stakeholders not be allowed to have seats on supervisory boards to improve board diversity further? In-depth research in this area could also lead to further internationalisation as well as modernisation of the German corporate law and corporate governance model.
- There is little doubt that in future there will be more regulation required in the area of corporate law and corporate governance. The model of self-regulation has largely been proven to be a failure and was probably one of the causes of the Global and European Debt Crisis. There are many Regulators that regulate financial markets generally, but the role of the primary Corporate Regulator in Germany is not as clearly defined as in for instance, Australia, where the Australian Securities and Investments Commission (ASIC) plays a very active role. ASIC not only regulates matters relating to the Australian Stock Exchange (ASX), but also brings action on behalf of shareholders for breaches of directors’ statutory duties. Two areas of particular interest should be investigated in detail as part of the aim of further internationalising of the German corporate law and corporate governance:
- The role of the primary Corporate Regulator in Germany to bring actions against members of supervisory boards and management boards for breaches of their statutory duties. Instituting actions against members of supervisory boards and management boards has for many years been seen as problematic in Germany. If the Regulator (instead of the supervisory board or the shareholders) takes up a greater responsibility to bring these actions on behalf of the company, it could lead to supervisory and management board members being more diligent in fulfilling their duties. This will lead to better corporate governance. However, this does not mean that supervisory boards will no longer be able to initiate actions against management board members for breaches of duties; or that the general meeting may not institute action against members of the supervisory board for breaches of their duties; or that statutory derivative actions (poorly developed in Germany) could no longer be brought. The role of the Regulator is an additional role to ensure enforcement of directors’ statutory duties. However, it will require in-depth research of the role of the primary German Corporate Regulator, using ASIC as example, to determine the advantages of the primary Regulator playing a more dominant role in instituting actions against members of supervisory and management boards. This will also lead to a prominent focus on modern sanctions like civil penalty orders, compensation orders, disqualification orders, orders for showing cause, infringement orders or infringement notices etc.
- The role of the Primary Corporate Regulator in Germany in applying to a court for persons to be disqualified to act as members of supervisory boards or management boards is not common. This should not be confused with persons being “automatically disqualified”, because they were for instance declared “bankrupt” etc. In the UK, Australia and in South Africa, the Primary Corporate Regulators play an important role in applying to the courts for people to be disqualified to act as directors and it will be part of the internationalisation of German corporate law to consider these regulatory arrangements and how some of them could be transplanted in to the German law.
- It is to be expected that the European Debt Crisis would put many European companies, including German companies, under financial strain. It will, therefore, be of considerable interest in future to have a modern and internationalised system of “business rescues” in place in Germany. In other words, instead of simply resolving to winding-up or insolvency procedures, to have in place schemes and arrangements to ensure that companies could be rescued rather than being liquidated. New provisions in the South African Companies Act, based on UK and USA principles and concepts, may provide for interesting comparative research and the internationalisation of the German corporate law in this area.
- Codetermination is part of the German law and there should be no attempt to get rid of it. However, it is a model that developed over many years and apply in different ways to different industries and different types of companies, which leads to considerable complexities and confusion, especially as far as external observers of the German system of codetermination is concerned. An immediate and serious attempt should be made to standardise and harmonise the system of codetermination and all the legislation, rules and regulations applying to it. This requires in-depth research and will enhance a better understanding of and appreciation of codetermination internationally. Codetermination in Germany is a highly politically driven subject. That is why in-depth academic discussion and deliberation is required to focus on the advantages and flaws of codetermination rather than getting bogged down by political agendas.
2. Summary and vision
The six areas of initial focus seem narrow, but they affect some of the most fundamental aspect of corporate law and corporate governance as they affect fundamental structures and have the potential to change corporate behavior considerable. This becomes apparent by summarising the six identified areas:
1. Legal actions against management board members and members of the supervisory board (it determines the way in which board members behave as they will only fulfill their legal duties diligently if there are consequences if they breach these duties, in other words if there are effective ways of suing board members for a breach of their duties);
2. Board diversity (affecting both the supervisory and the management board);
3. The role of the primary Corporate Regulator: Giving it a more prominent role to enforce duties against supervisory board members and management board members will have a significant effect on their behavior and thus on corporate behavior. In addition, it addresses a fundamental issue relating to the difficulties of enforcing duties in a two-tier system;
4. The role of the primary Corporate Regulator: Making it a responsibility of the primary Corporate Regulator to play a greater role in applying for the disqualification of supervisory board members and management board members to “to keep corporate Germany clean from rogues”. This will not only affect behavior of members of the supervisory or management boards, but also corporate behavior;
5. Improving business rescue legislation: A massively important area in times of crisis and building future business and economic prosperity for Germany.
6. Codetermination (an integral and vital part of the German corporate law and corporate governance mode).
In all these areas, the biggest challenge would probably be to overcome the difficulties associated with “path dependency” or, to put it differently, to ensure that the transplantation of foreign concepts or ideas are not so overwhelming that “organ rejection” is experienced. These aspects will make the further internationalisation of German corporate law and corporate governance particularly challenging, but the vision is that much will be achieved on this challenging but exciting journey.
Professor of Law, Deakin University, Australia