Characteristics and prospects of the German model of corporate governance
(examples on the base of Allianz SE and conclusions after the world financial crisis)
Levykina Kseniya
Nachinkin Denis
In contemporary business world efficiency of corporate governance becomes of vital
importance as it substantially influences the value of big companies. Despite the fact that
corporate governance efficiency varies from company to company and almost completely
depends on a specific organization, a national model of corporate governance (that exists in the
country where a certain company operates) has a strong impact on corporate governance.
Usually 3 classic models of corporate governance are defined: Anglo-Saxon, Japanese
and Continental. The latter is also named as German model of corporate governance as it is
most typical for Germany. There is no definite answer which of these models is the most
efficient one, because corporate governance models exist and develop in a specific economiclegal environment of a certain country from which they could not be separated.
During the last decade (before the crisis) there was an issue of “dying off” of German
model under the question among scientists and practitioners. They assumed it to be inconsistent
and inappropriate for most of the German firms and proposed that a convergence, a certain drift
towards international standards of corporate governance and convergence of the models would
take place in the nearest future and German model would eventually transform into AngloSaxon model. However, world financial crisis revealed the strengths of the German model,
which helped Germany to endure crisis with minimal losses due to its conservatism and socialorientation.
In this research the object are German corporations and subject is the German model of
corporate governance. We aimed to answer the following research question: What are the main
characteristics of the German model of corporate governance (both declared in law and found
in fact) and what are the prospects of this model in terms of after-crisis investor’s demands?
It is supposed that declared characteristics of German model of corporate governance are
the same as actually found in practice. The aim of this project is to reveal the most significant
and relevant of these characteristics, systemize and analyze which of them were of benefit to
Germany during the crisis. It is assumed that co-determination, relatively low level of foreign
investors, social cooperation, “personal union” of banks and considerably high level of capital
structure concentration where the key factors that “saved” Germany from sharp decline.
We plan to use the following methods and data:
 Theoretical and contextual research (the analysis of scientific papers, articles and
books, German laws and code of corporate governance, news reports, etc.): main
prerequisites, characteristics, structure and prospects of German model of
corporate governance and actions taken by German Government and firms in the
face of the world financial crisis.
 Case-study on Allianz SE (the analysis of web-site, annual reports, code of
conduct, corporate governance and remuneration reports, statement of corporate
management, declaration of compliance, etc.): examples of main characteristics of
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German model of corporate governance in action (particularly, on the base of
restructuring, sale of Dresdner bank), structure of the three-tier model of corporate
governance of the firm with analysis of the members of the boards.
This research covers the following key issues and have a structure as follows:
1. Analysis of prerequisite of the model
Prerequisites of this model have deep roots in the “German tradition of the economic
system based on cooperation and social consciousness to achieve national prosperity and
wealth” [23, c. 390]. For long period of time German economy has been considered as the
prototype of “corporatism” [18, pp. 64], or, in modern terms, “coordinated market economy”
[18, pp. 64]. Thereby it could be said that Germany is characterized by the “principle of social
interaction” [16, s.128], which means that all parties interested in the activities of the
corporation have a right to participate in decision-making (shareholders, managers, employees,
banks, various social organizations, etc.). Speaking of the workforce, it is worth noting the
extended rights of employees that is expressed in the co-determination. There is also a
relatively strong bias towards protecting the rights of creditors (see [32]) (this can be traced
back in the bankruptcy proceedings, as well as in the structure of corporate governance).
Concerning German stock market we can say that it has high liquidity [16, pp. 129] and
corporate securities are insufficiently developed (compared to the UK and USA). Germany is
characterized by significantly concentrated shareholding structure (in large companies "5
largest shareholders account for more than 40% of shares” [17, pp. 59]). In more than 71% of
corporations there is main owner who controls more than 50% of the shares. Divided shares
among private investors is small (accounting for only 17% [16, p.129]), whereas corporate
investors control 64% of the shares of German companies. The share of foreign investors
(14%) and state (5%) is also relatively small [17, pp. 59].
There is also so-called “high cluster value” [18, pp. 68] (i.e., high proportion of firms,
linked through common ownership to a certain company).
Moreover, it should be noted that the central role in German economy plays the banking
sector. Officially (directly) “banks own more than 20% of shares of 33 leading corporations in
Germany” [17, pp. 59]. However, in fact this figure could be doubled, since commercial banks
have a “right to vote by proxy shares deposited in these banks” [23, pp. 391] (but nowadays
there is a limitation: they need to update proxy every 15 months and receive instructions on
voting). Thus, in Germany a system of "anonymous" bank control over corporations has
developed. It has happened so due to banking history. In IPO process banks acted as
underwriters and often bought shares in larger quantities than they could sell. Consequently, the
greater capital the company wanted to attract through IPO, the greater was likelihood that the
bank will become a major shareholder and will be presented in the supervisory board of this
company.
Another existence conditions of German model of corporate governance are the medium
cost of capital and management salary [23, pp. 397], “complicated type of innovation” [23, pp.
397] and “long-term investment horizon” [23, c. 397].
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2. Analysis of key characteristics of the model
As it was showed previously, in general the German model of corporate governance is
characterized as “closed” [16, s.128] as its activity is determined by banks.
In Germany exists “three-tier model of corporate governance” [17, pp. 59] (or, as often
defined in English sources, but denied by German scholars, the so-called "two-tier" or
"bicameral" structure of the board). There are three fundamentally different in membership and
functions boards (see Fig. 1): General Shareholders Meeting, Supervisory Board and
Management Board.
Fig. 1. Corporate governance structure.
Furthermore, “cross-shareholding” [16, p.129] is typical for German economy. Currently,
the main purpose of mutual shareholding is to strengthen the long-term relationship and
interdependence between different companies and investment institutions. Such a system
allows companies to engage in “complex systems of interrelated holdings” [16, p.129] and
thereby ensure “the highest density of connections” [18, pp. 65] and “small path length between
firms” [18, pp. 68]. In this situation it is often difficult to determine the parent company, it can
constantly change. For example, before 2000 insurance company Allianz was included in 12 of
the 33 largest management pyramids in Germany, before 2001 Dresdner Bank owned Allainz,
and since 2001 it was the contrary.
It is worth to mention another important feature of German system. According to JSC law
company founders (even hiding behind men of straw) have full economic responsibility. And
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large companies disclose the real names of shareholders, that allows to understand the balance
of forces in the upcoming general shareholders meeting.
Banks and insurance companies play a central role in this system [16, p.129] as they often
head holdings and implement the so-called multilevel control and corporate governance in the
pyramid (and these pyramids include up to 2/3 of all large firms in Germany at that) . Also,
full-service banks frequently appear to be the main source of funding for the companies [23,
pp. 390].
Another phenomenon is a “personal union between the banks and corporations” [17, c.
60] or, in other words, the external execution of the relationship between them through mutual
representation in the Supervisory and Management Boards. In this case, unlike in other models
of corporate governance, information asymmetry occurs not only within managers but also
within “Home” (parent or head) bank [23, pp. 397].
As for workforce, the key aspect is co-determination. This is active participation of
employees in management of the company. This system consists of two levels [16, pp. 129]:
 Level 1 - the system of works councils or labor councils, which have the right to
participate in all personal and social affairs of companies and have extensive
rights in employment relations. Note that the right of workers to foundation of
works council requires taking initiative on their part. Thus, in 2000 among
companies with workforce over 1000 people works councils were established in
95% of cases.
 Level 2 - the system of direct representation of workers in boards of the company.
According to the co-determination law, in companies with the number of
employees more than 500 workers elect their representatives for the 1/3 of all
seats in the Supervisory Board, and with more than 2000 staff - 50% of seats. The
law also establishes a simple majority election by the employee-representative
members of the Supervisory Board of one of the members of the Management
Board - the so-called working director who is responsible for social issues and
issues related to personnel and labor relations.
Thus, we can say that the Supervisory Board is the key mechanism for implementing the
principle of social interaction in the company.
3. Case-study analysis
This part of research is in process. It would be based on
case-study on Allianz SE
(particularly, on the base of restructuring, sale of Dresdner bank).
4. Analysis of future prospects of model development (views “before” and “after”
the world financial crisis)
As shown above, the German model has several unique features, but this does not mean
that they are all positive. Everything has its downside.
Most commonly the shortcomings of this model include the following:
 lack of flexibility of the company, which is expressed in the inability to make
important development decisions quickly (such as restructuring, downsizing,
liquidation or sale of inefficient businesses);
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


risks avoidance and employee-participation in management (that lead to low
profitability);
inadequate social interaction (whereas there is a strong protection of creditors and
employees, there is a weak protection of minority shareholders, which violates the
essence of social interaction, that declares a balance of interests);
insufficient possibilities of shareholders control over the activities of members of
the Management Board.
The last few years before the 2008 global financial crisis, researchers questioned the
crisis of the German model of corporate governance that was reflected in:
 "flight" of German companies (in other EU countries);
 beginning of cross-shareholdings (since 2002 profits from the sale of shares
between corporations almost exempt from taxes);
 sales of shares by banks and gradual decrease of banks representation in the
Supervisory Boards of companies.
It was assumed that the Germany model of corporate governance may have the following
development:
 convergence of the models (in order to meet the standards of international
investors);
 gradual elimination of cross-shareholdings;
 restructuring and disintegration of corporate networks and holdings;
 lowering of employees’ influence at corporate decision-making;
 strengthening of minority shareholders rights and a gradual decrease in the
concentration of capital;
 development of the market for corporate securities and increase in liquidity of the
stock market.
In other words, it had been predicted that the German model would slowly drift towards
international standards of corporate governance and transform into the Anglo-Saxon model of
corporate governance.
However, the global financial crisis canceled or at least delayed these trends. And
revealed the strengths of the German model, which helped Germany to endure crisis with
minimal losses.
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