Corporate Governance: Germany v UK
Corporate governance refers to a comprehensive system through which the organizations are controlled and directed. It is a system through which the governance of any company is ensured. The goal here is to ensure that the themes of transparency, accountability, fairness and responsibility are properly adhered to.
In every jurisdiction, there are different sets of regimes and rules for corporate governance that have to be abided by the entities running operations in such a nation. When a geographical change comes in the business, the regime of such a changed geographical location has to be fulfilled. This is not only in sense of the changed corporate governance rules but also the changes in corporate laws of such a nation. The theme of corporate governance gives power to the shareholder and stakeholders, through these corporate laws. Hence, while making a change in the business, it is crucial to ensure that these laws and the governance rules are properly followed.
This discussion makes an attempt at highlighting the different aspects surrounding the corporate governance regime. This would begin with a comparison of the regimes of Germany and the UK, followed by the manner in which the stakeholders can challenge the decisions of the board in certain situations, a discussion on duties of directors under the Companies Act, and finally a discussion on the UK Corporate Governance Code.
Even though the theme of corporate governance is the same in UK and Germany, there are some differences between the two systems. In the UK, the Corporate Governance Code regulates the corporate governance rules and follows a soft approach. As against this, Germany follows one of the most solid systems of corporate governance across the globe.
In the UK, there is a wide dispersal of share ownership, with an outsider control and a unitary board. On the other hand, the German system has concentrated ownership, which is controlled by the insider block holders, and there is a dual board structure, which covers representatives of employees. Thus, the structure in the UK is a single one, while that in Germany is dual. The lead on corporate governance in Germany is taken by the executive board. The German system has a strict division of board roles from the supervisory function. In the UK, there is no such separation.
Thus, there is a mandatory two-tier structure in Germany. There are also rules pertaining to the composition of the management board that requires the appointment of board members needs to have a diversity aspect, with the need for proper representation of women in the management board. There is a time limit to being a member of the management of the board, which cannot cross a period of five years, and where the member is a first-time appointment, such person is not to be appointed for a period over three years. This appointment can be renewed or extended provided the extension or renewal does not cross five years. There is a need for at least there members in the supervisory board, and this person gets elected in the meeting of shareholders.
Structure of the Board
In the German system, the supervisory board gets the power of making appointments and dismissing members from board management, along with holding the responsibility for supervising the activities of the management board. Moreover, the management board handles the responsibilities surrounding the management of business. In the UK, since there is no such segregation, the role of the board of directors relates to the governance of the company as a whole.
In Germany, the responsibility for setting up the executive remuneration is with the supervisory board, which designs the compensation contracts by taking assistance from compensation consultants. This board also evaluates the performance of an individual for determining the bonus pas. The shareholders can, in the annual general meeting, put forth non-binding say-on-pay votes for showing their agreement or disagreement with the set remuneration. Basis the specific needs and features of the executive the executive’s compensation is tailored to the companies. The board members have the responsibility of applying principles of prudence and diligence. There is also the duty of responsibility on the members of the board.
In the UK, there is no statutory limitation on executive director remuneration and has to be governed by the UK Corporate Governance Code. The non-executive directors have the responsibility for the determination of the appropriate level of executive director’s remuneration. For resigning the scheme that relates to performance-related remuneration for the executive directors, there is a need for making reference to Schedule A of the UK Corporate Governance Code, by the remuneration committee. The goal for setting the remuneration of executive directors is the promotion of the company’s long-term success.
As is the case with the corporate governance regime, there are differences in the basic corporate laws of the different jurisdictions. Hence, it becomes crucial to understand these. In the context of the duties of the board of directors, in the jurisdiction of the UK, there is a need to abide by the provisions covered under the Companies Act, 2006. These are specifically covered under Chapter 2 of this act. These include the duty of acting with the power, duty of promoting company’s success, duty of exercising independent judgement, duty of exercising a reasonable degree of diligence, care and skill, and a duty of avoiding any conflict of interest, among the other duties.
Section 172 of this act requires the directors to act in a manner that the success of the company is promoted. This requires the directors to conduct their work in a manner that is deemed as being in good faith, and which would result in the success of the company being promoted and the members of the company being benefited as a whole. Hence, they have to consider the possible consequences of the decisions they take, in a long term, coupled with the need of acting in the best interest of the employees of the company. They also have to build relations with customers, suppliers and other relevant people, and ensure that there is an overall positive impact of the operations of the company on the environment and for the community. The need is to act in a fair manner and to create a reputation for the company which reflects high standards of business conduct.
Role and Responsibilities of the Board of Directors
With regards to shareholders’ challenging a resolution that has been passed by the board, there is no formal procedure for doing the same. Though, the shareholders that have 75% of the voting rights in the company can ask the board to take actions like appointment or removal of a director.
In the present case, it is the responsibility of the board to ensure that the provisions mentioned above are fulfilled. Where the board ignores the interest of its employees and gets involved in a restructuring of the business that will cause loss of job, it will be deemed as a direct breach of section 172 of the Companies Act. Apart from this, it is clear to the board that the decision which they are taking will only be fruitful in the short run and that the long-term consequences of their action are not in favour of the company. This is because they knew that these actions would lead to opposition from the shareholders and from the trade unions. This would also show that the company does not follow high standards of business conduct due to the focus on a short-term goal, instead of looking at the big picture. Although their actions cannot be changed much by the shareholders, they do have the power of outing the board members.
The corporate governance regime of the UK is regulated through the UK Corporate Governance Code. This code puts forth the standards of good practice for the listed companies, on varied parameters like audit, accountability, remuneration, development, board composition, and shareholder relations. The Financial Reporting Council has published this code on 16th July 2018, but the same become applicable from 01st January 2019. The code provides guidance regarding the role of the executive and non-executive directors, along with providing the other relevant provisions that act as guidance for their conduct.
A.4 of the code provides the provisions related to non-executive directors. A.4.1. states that there is a need for the board to appoint one independent non-executive director who has to act as the senior independent director. This person has to provide a proper board for the chairman, and has to serve, as the other director’s intermediary where needed. This very senior independent director also has to remain available for the shareholders where they have any issues, and where the other individuals have not been able to resolve their issues. The role of non-executive directors is to check the management’s performance with regards to attainment of the agreed objectives and goals and also towards monitoring performance reporting. Their role also encompasses them to be satisfied with the financial information integrity and for the robustness and defensibleness of the financial systems and controls pertaining to the management of risk. The non-executive directors also have the responsibility for remuneration determination of the executive directors, along with the appointment and removal of the executive directors.
Rules for Setting Executive Remuneration
The significance of the independence of non-executive directors in the UK has been covered under the UK Corporate Governance Code. This is crucial for ensuring the effectiveness of the board, covering both the composition of the board and its committees. In listed companies, the non-executive directors have key roles and responsibilities that cover the theme of corporate governance area. The role that the non-executive directors have makes it crucial for them to be independent. This would allow them to put forth a degree of objectivity in the context of the deliberations that the board undertakes and also allows for effectively undertaking the management of executives. Therefore, when the independence of the directors is ensured, it is ensured that they do not have any such relations that could interfere with their judgement, in any manner, and would allow for exercising of independent judgement on their part.
The UK Corporate Governance emphasises that the board needs to have a proper combination of both executive and non-executive directors, particularly including the independent non-executive directors, to ensure that any person or group of people do not end up dominating the decision making of the board. There is thus a need for a clear division of the duties and roles between the executive leadership and the leadership of the board. The essence of non-executive directors is thus in providing an independent view of the company, which is removed from the family running. The non-executive independent directors thus bring to board impartiality, independence, wide experience, personal qualities, and special knowledge.
Conclusion
In essence, it is not wrong to state that the corporate governance measures applicable in the UK are a comprehensive set of regulations and rules that guide the conduct of the manner in which the board undertakes its operations. The provisions covered under the UK Corporate Governance Code provide the roles and responsibilities of the executive and non-executive directors, along with ensuring that there is independence in the management of operations of the company. To round up on the advice for Westlands Group PLC, it is crucial for them to abide by the UK Corporate Governance Code. This is particularly because the corporate governance regime of the UK is quite different from the one applicable in Germany. While the UK model is a unitary one, that of Germany is dual. The UK corporate governance has no segregation as is present between management and supervisory functions, as is present in the case of Germany. This also brings a difference in the manner in the executive remuneration is set between the two nations. Considering the softer approach of the UK system, it would be harder for Westlands Group PLC to conduct its business in Germany. With regards to the tough decisions that are being undertaken by Westlands Group PLC, it is advisable for them to focus on the long-term impact of their decision, especially when they are well aware that the decisions which they are considering are short-sighted. Lastly, the provisions of UK Corporate Governance as discussed in the context of number and independence of non-executive directors, along with their and executive director’s role has to be carefully fulfilled.
Primary Sources
Statue and statutory instruments
Companies Act, 2006
Secondary Sources
Books
Clarke Thomas, International Corporate Governance: A Comparative Approach (Taylor & Francis, 2017)
Mallin Christine, Corporate Governance (Oxford University Press, 2019)
Journal articles
Beck Daniel, Gunther Friedl and Peter Schäfer, ‘Executive Compensation In Germany’ (2020) 90 Journal of Business Economics.
Websites and others
Financial Reporting Council, The UK Corporate Governance Code (April 2016) <https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf> accessed 21 March 2022
Financial Reporting Council, The UK Corporate Governance Code (April 2016) <https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf> accessed 21 March 2022
Financial Reporting Council, THE UK CORPORATE GOVERNANCE CODE (July 2018)
<https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF> accessed 21 March 2022
Institute of Directors, What is the role of the Non-Executive Director? (21 November 2018)
<https://www.iod.com/services/information-and-advice/resources-and-factsheets/details/What-is-the-role-of-the-NonExecutive-Director> accessed 21 March 2022
King Peter, Lauren Pau and Rebecca Grapsas, Disclosure of executive remuneration in the UK: recent developments and US comparison (01 Feb 2013)
<https://content.next.westlaw.com/1-523-1863?__lrTS=20210213055454893&transitionType=Default&contextData=(sc.Default)&firstPage=true> accessed 21 March 2022
Sanderson Paul, David Seidl, John Roberts and Bernhard Krieger, FLEXIBLE OR NOT? THE COMPLY-OR- EXPLAIN PRINCIPLE IN UK AND GERMAN CORPORATE GOVERNANCE
<https://www.cbr.cam.ac.uk/wp-content/uploads/2020/08/wp407.pdf> (June 2010) accessed 21 March 2022
UK Legislation, Companies Act 2006 (2022) <https://www.legislation.gov.uk/ukpga/2006/46/section/172> accessed 21 March 2022
van de Sande Carsten and Sven H Schneider, The Corporate Governance Review: Germany (17 March 2022)
<https://thelawreviews.co.uk/title/the-corporate-governance-review/germany> accessed 21 March 2022
Watson Neal and Beliz McKenzie, Shareholders’ Rights in Private and Public Companies in the UK: Overview (2022)
<https://uk.practicallaw.thomsonreuters.com/5-613-3685?transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a981896> accessed 21 March 2022
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