German corporate governance

If it was a debate, Thursday revealed arguments both for and against the resolution that: "Germany's corporate governance is on an improving trend". For the proposition, Heinrich von Pierer's resignation as supervisory board chairman of engineering group Siemens (NYSE:SI), is evidence of a heightened sense of responsibility. In the past, German executives have tended to ride out any scandals. The opposing team, on the other hand, would argue that the re-election of VW chairman, Ferdinand Piëch, and his ever-expanding powers, highlight the continued flaws inherent in German governance.

Who is right? The answer, in reality, depends on the audience. For shareholders that believe that flexibility, transparency and accountability are essential to maximising returns, German companies still lag their international peers. For example, it was only when Siemens had to file in the stricter US, was the extent of its naughtiness revealed. But for employees and politicians that desire stability and work place harmony, structures such as two-tier boards provide some comfort that all stakeholder views are represented.

Trends in corporate governance also come and go. During the decades of rapid post war growth, the more consensual approaches of Germany and Japan were much admired. Business cycles also play a part: a major reason for the well behaved shareholders at VW's annual meeting was that the company is now performing pretty well and its shares have more than tripled since the beginning of 2005. It will be interesting to see whether Germany's ongoing economic recovery actually mutes further calls for reform.

But, for management that has decided that change is needed now, one route is to become European. In one swoop, this new legal status allows for a significantly reduced supervisory board, including the number of required worker representatives. Companies can even choose to do away with a second board altogether. So far, insurer Allianz is the highest profile convert - but should German managers fail to placate shareholders in future, more may follow.