Germany/USA - Differences in Corporate Governance

The supervisory bodies of enterprises in the USA and in Germany, the American "Board of Directors" and the German "Supervisory Board" basically fulfill the same functions in supervising the performance of the Board of Management in its management of the enterprise. There are, however, some important differences in the respective legislations as well as in the formal and informal structures and procedures.

Whereas in the USA the interests of the owners are predominantly represented by the Board of Directors, the German Supervisory Board is concerned with the interests of the owners and the employees. According to law, the German Supervisory Board is responsible for the long-term well being of the enterprise, whereas the American Board of Directors must act in the best interest of shareholders.

The culture, history and legal system of the respective countries have led to different approaches to corporate governance. Corporate regulation in the United States comes under the control of the individual states, which has led to a multiplicity of legislation, whereby most follow the main features of Delaware law. Enterprises in Germany are subject to clear and specific legislation through the Federal Government.

One of the greatest differences in comparison with structures of the American board lies in the two-tier system of German corporate governance. Under German law, simultaneous membership of the Board of Management and Supervisory Board is not permitted so as to separate the executing and supervising bodies of an enterprise. The majority of American Boards of Directors are, however, chaired by the CEO of the respective company, and in many Boards of Directors at least one further member is also a member of the Board of Management. Whilst the directors of American Boards of Directors are largely independent, their chairmen also represent the interests of the management.

Another difference in the supervisory organization of the two corporate governance systems is in the different perception of the relationship between the members of the supervisory bodies and the enterprise. In the United States, great value is placed on a composition of the Board of Directors, in which the majority of the members are independent and come from outside the enterprise, while few members come from the enterprise management. This is based on the conviction that members without any other connection to the enterprise can judge the interests of the shareholders more objectively.

Due to the Co-determination Act in Germany employees are granted big influence. Their role in the Supervisory Board is based on the principle that employees in Germany have an almost equal right of co-determination in corporate governance as the owners. In the USA there is, apart from rare exceptions, practically no employee representation on the Boards of Directors.

Furthermore, there is a great difference in the structures of the supervisory bodies and their formal procedures. The size of the German Supervisory Board is determined by law and, depending on the number of employees, generally comprises between 12 and 20 members, whereby the latter is more common. In the United States, the number of members in supervisory bodies is not stipulated by law. However, a comparatively smaller number of 10 to 12 members is usual, which makes for greater consensus among committee members. Besides the size of the supervisory body, there is a further difference in the frequency of meetings. Whereas German Supervisory Boards have to meet twice a year, their American counterparts, the Boards of Directors, usually hold their meetings six times a year, sometimes even once a month.

As a result of the regulations of different stock exchanges and the Securities Exchange Commission, US enterprises listed on a national stock exchange are obligated to set up a number of committees. The committees to be appointed in accordance with the listing standards of the NYSE are an Audit Committee, which supervises the corporation's internal setting up of the financial statements and the external auditors and a Compensation Committee, which has the task of specifying the remuneration of the top managers and its relation to the performance of the enterprise, as well as a Nomination Committee, that is responsible for the selection of the Boards. Furthermore, nearly every Board has set up additional optional committees, e.g. for board matters, corporate governance, finance, environment and technology. Through the delegation of tasks to the committees, which report regularly to the Board of Directors, the members can fulfill their obligations more effectively.

Under German law, Supervisory Boards are only legally bound to establish a Mediation Committee, which only meets in the case of disagreements regarding the appointment of members to the Board of Management. Nonetheless, most Supervisory Boards have set up additional committees, which make their work easier. Usually a Presidential Committee is appointed, which is responsible for the nomination and compensation of Board of Management members or for the contracts of employment for the members of the Supervisory Board. Furthermore there is usually an Audit Committee for examining the annual financial statements and for discussing financial matters.