Insights into the German Corporate Governance Debate - learnings, changes and Implications for Directors

The Better Boards Podcast Series

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Every country has its fair share of corporate failures. Afterwards, It is easy to point towards governance. Reflection and learning are essential. In this podcast, you hear from someone who has a critical governance role In Germany. You gain insights into the issues discussed and the perspectives of someone who hears daily from all players in the market - regulators, state officials, top managers, board members, the media and the general public.

Dr Sabine Dembkowski, Founder and Managing Partner of Better Boards, discusses current trends in German Corporate Governance with Dr. Cordula Heldt, Head of Corporate Governance and Company Law at the German Share Institute (Deutsches Aktieninstitut). She is also Head of the Secretariat to the Commission on the German Corporate Governance Code (Regierungskommission Deutscher Corporate Governance Kodex).

“Every declaration that you have to do is actually about nudging boards to do the work”
Cordula opens with Germany’s recent significant corporate failures, notably the Wirecard scandal, which led to new regulations concerning corporate governance. Following the Wirecard case, German lawmakers introduced stricter requirements for risk management, internal control systems, and auditor regulations.

“Every declaration that you have to do is actually about nudging boards to do the work”
However, despite the complaints about the administrative burden, Cordula believes the value of these declarations lies in their ability to nudge boards into taking their responsibilities seriously. By requiring formal declarations, boards are compelled to examine their risk management and internal control systems closely – and this scrutiny is not only limited to financial reporting but extends to the entire governance framework. The intent is to ensure that supervisory board members ask the right questions and engage more deeply with these systems.

“As a board chair, you're looking for people that you can propose to the board and the general meeting that can fill the whole seat”
One effective approach some companies adopt, which Cordula notes, is reporting on the different levels of expertise within the board. This means acknowledging that not every board member starts with the same level of knowledge, especially in specialised areas. She believes this trend toward acknowledging and communicating different expertise levels supports more effective board development and governance.

“Of course, they think it's burdensome, but everybody knows the alternative is regulation”
Cordula advises bringing directors and policymakers closer together to create better boards. She also understands that while directors generally support the code, they often find it burdensome, although they recognise that the more stringent regulation alternative could be worse. She explains that one approach that has been effective (at least in Germany) is the practice of direct engagement, as Clara Christina Streit, the new chair of the German Code Commission, has implemented. She started her tenure with a "listening tour."

The three top takeaways from our conversation for effective boards are:
1. Familiarise yourself with the ongoing governance debates, focusing on principle-based and effective governance. This will help you better navigate and meet reporting expectations.
2. Be aware of the potential expectation gaps in corporate reporting. Understanding these gaps can help you align reporting practices with expectations of stakeholders and regulators.
3. Consider the board a cohesive team that must work together to ask the right questions and prevent governance failures.