Insights into the German Corporate Governance Debate – learnings, changes and Implications for Directors
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 with a critical governance role In Germany. You hear about the issues discussed and gain insights into 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. You benefit from the insights and learnings and can draw conclusions for your own context.
In this podcast, 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 Deutsches Aktieninstitut, which represents the interests of publicly traded companies, banks, stock exchanges and investors. She is also Head of the Secretariat to the Commission on the German Corporate Governance Code (Regierungskommission Deutscher Corporate Governance Kodex). She has a doctorate in Law from the Johann Wolfgang Goethe University in Frankfurt and has authored numerous expert articles in legal literature.
“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. While many companies already had corporate governance frameworks in place, she warns that the updated code now emphasises that management must report on the key features of their entire internal control and risk management systems—not just those related to financial reporting. Additionally, the management board is now expected to comment on the appropriateness and effectiveness of these systems.
Cordula notes that this shift aligns with similar trends in the UK, where the government updated its corporate governance code to restore trust in audit and corporate governance after several high-profile failures. The UK code now requires boards to describe in their annual reports how they have monitored and reviewed the effectiveness of their control frameworks and also to declare the effectiveness of their material controls. In both Germany and the UK, companies have expressed concerns regarding this, often comparing these measures to the burdensome requirements of the Sarbanes-Oxley Act in the United States.
“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. This focus on accountability represents a growing trend in corporate governance and regulation.
Of course, Cordula accepts that directors might not appreciate being nudged, as it can feel intrusive or unnecessary. However, nudging is often seen as a less burdensome alternative to strict regulation, allowing directors some flexibility in achieving the desired outcomes. In the context of EU sustainability regulations, for example, nudging encourages companies to take meaningful actions without being overly prescriptive, pushing them to report positively on sustainability efforts. For investors, understanding that some code recommendations are designed to nudge management and directors toward better practices can help bridge the expectation gap. She explains that these recommendations aim to prompt directors to take a closer look at governance processes, improving board work and corporate governance.
Cordula uses the example of the skills matrix. While the code recommends having a skills matrix, it doesn’t mandate that each skill be attributed to specific individuals, though doing so makes sense. Investors often criticise boards where every member is claimed to be an expert in all areas. This stems partly from legal implications, particularly in Germany, where courts require supervisory board members to have the basic knowledge and skills to assess business transactions independently. She notes that directors may be reluctant to highlight gaps in their expertise on a skills matrix, fearing it could be interpreted as a lack of competence. However, investors expect boards to be transparent about where real expertise lies, especially in areas like cybersecurity. Cordula believes the challenge is balancing these expectations with the practical realities of board composition.
“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. For example, a new audit committee member will have different skills than someone who has been in the role for several years. By reporting these varying levels of expertise transparently, companies can better reflect the reality of their boards’ capabilities and provide a clearer picture of where development is needed. She believes this trend toward acknowledging and communicating different expertise levels is practical and supports more effective board development and governance.
Cordula explains that as a board chair, you seek individuals who can “fill the whole seat,” meaning they must possess the fundamental skills to handle a wide array of business matters. Specialising too narrowly could be limiting, as boards require diverse expertise to cover all necessary areas, from finance to strategy to governance. However, she also notes that building additional knowledge in one or two areas can be beneficial, especially if you can demonstrate how this knowledge complements the broader needs of the board. The key is to ensure you have a solid foundation in general governance while also being able to offer specialised insights that can enhance the board’s overall effectiveness. Therefore, when selecting candidates for a board, she recommends that although it is natural to seek individuals who possess the specific skills you need, it is also crucial that the board ensures all members (including those with specialised expertise) continue to develop their knowledge across all relevant areas, which can be facilitated through organised internal or external training events. These training sessions help in skill-building and allow board members to understand each other better, fostering stronger collaboration.
“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 alternative – more stringent regulation – 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,” meeting with CEOs and supervisory board chairs to gather their thoughts on the corporate governance code. One key piece of feedback Clara received was the desire for more principle-based recommendations in the code. Directors appreciate the flexibility principle-based guidelines offer, allowing companies to comply in ways that best suit their unique circumstances. This ongoing dialogue between policymakers and directors is crucial, as it ensures that governance standards are both effective and practical, allowing boards to fulfil their responsibilities in a way that aligns with their company’s needs. Clara plans to continue these discussions, highlighting the importance of continuous, open communication in shaping governance practices that work for everyone involved.
“Being a board member is not a fun thing”
Cordula believes that the ideal board member possesses a blend of key attributes. First, they need strong managerial skills, especially in understanding and consulting on strategy, markets, and operations. Although supervisory boards, like those in Germany, do not directly make strategy, they must grasp it fully to provide effective oversight and input, particularly when it comes to setting targets for remuneration systems. Beyond these foundational skills, she advises that an ideal board member must continuously develop expertise in emerging areas such as ESG and sustainability reporting, especially if they serve on the audit committee, which is increasingly tasked with overseeing non-financial reporting. Cybersecurity is another critical area where board members need a basic understanding to ensure management adequately protects the company from cyber threats. She feels it is equally important to be a team player because while the focus in recent years has been on compliance and diversity – both crucial elements – it is also vital that board members see themselves as part of a cohesive team. Studies show that individuals are more likely to be critical and voice concerns when they feel like part of a team rather than outsiders, and so this sense of belonging fosters better collaboration and more effective governance. Therefore, she advises that boards should not only focus on diversity and compliance but also on building a strong team dynamic, where each member has a role and feels empowered to ask the right questions.
Cordula closes by noting that the code encourages boards to assess their effectiveness continuously. The key is that companies should conduct these internal or external evaluations and reflect on the results and plan. Despite these recommendations, there is often a reluctance to embrace new evaluation processes, which might stem from past experiences where internal evaluations were ineffective or external evaluations fell short of expectations. This is a developing issue, and while boards understand the importance of evaluating their effectiveness, achieving meaningful improvement can be challenging. Cordula feels the uncertainty around whether these evaluations improve the board might contribute to scepticism. Policymakers can help by emphasising the value of these evaluations and ensuring that the internal or external process is seen as a tool for genuine improvement rather than just a compliance exercise. Encouraging boards to approach these evaluations with an open mind and a commitment to continuous development is crucial for fostering more effective governance.
The three top takeaways from our conversation are:
- Familiarise yourself with the ongoing governance debates in Germany and the UK, focusing on principle-based and effective governance. This will help you better navigate and meet reporting expectations in different regions.
- Be aware of the potential expectation gaps in corporate reporting, particularly in Germany and the UK. Understanding these gaps can help you align reporting practices with expectations of stakeholders and regulators.
- Consider the board a cohesive team that must work together to ask the right questions and prevent governance failures. Focus on building a collaborative and proactive board culture to strengthen overall effectiveness.
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