« Open CRS Network - CRS Reports for the People | Main | Offshoring: Salary Differences in Tech Support and Related Occupations »

July 12, 2005

Mrs. Tilton Says 'Corporate Governance' in German

Mrs. Tilton of the Sixth International surveys German corporate governance:

A Fistful of Euros: How do you say 'corporate governance' in German?: ...corporate governance as it is (or is not) implemented in Germany... two particularly interesting items: a corporate governance scandal of colossal proportions at a major firm, and now a significant governance reform that is unlikely to make top German managers very happy.

First, the scandal... Volkswagen.... If asked for a concrete example of the peculiarly German consensus approach -- ’partnership’ among capital, labour and state -- that drove the Wirtschaftswunder, not a few people would point to VW.... So imagine the fun had by all as amazing revelations began to emerge from Wolfsburg. VW management, it seems, had a long-term policy of keeping the Betriebsrat -- the works council -- sweet. Sensible enough, you might say, and in keeping with that German consensus approach. But even Ludwig Erhard would surely have scowled at some of the sweeteners: front firms set up to ladle secret cash to top labour representatives; all-in junkets to Brazil, including (if the rumours are true) the services of a profession rather older than auto-making....

Prof. Baums of Frankfurt, who has long crusaded for better corporate governance, thinks that state involvement is to blame... state involvement ’transfers the role of the risk-bearing owner with a personal stake to a functionary who is not affected [by the success or otherwise of the firm].’... the problem Baums notes is nothing new, and nothing peculiar to state involvement; Berle and Means made it the centrepiece of their seminal work even before the regime under which VW was founded came to power....

Now for the good news, unless you are managing director of an exchange-listed German firm.... This morning the Bundesrat, the German parliament’s upper house, appoved a bill that will require listed corporations, as from the 2006 fiscal year, to make detailed disclosure of executive compensation on an individual basis.... This isn’t something that will go away if and when Angela Merkel becomes chancellor in September....

If you hold shares in a firm (or are considering buying some), surely you are entitled to know how much you are paying the people who manage your property for you. In particular, you’d want to know how much of their pay was variable (bonuses, options, SARs and similar schemes), and under what conditions they get their swag. All too often firms shovel money at managers who are destroying the firm’s value. As a shareholder, there might be little you can do to stop this; but armed with adequate disclosure, you can at least decide to sell (or decline to buy in the first place).

Posted by DeLong at July 12, 2005 02:47 PM