The Economist - January 29th, 2005

Corporate governance in Germany
No time for consensus
Jan 27th 2005
From The Economist print edition
German companies have been far too resistant to change
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SOMETHING is rotten in the state of Germany's joint-stock companies, and it is robbing them of
competitiveness in a harshly competitive world. Banks, carmakers, engineering and
communications companies, as well as old-fashioned conglomerates, all have struggled to keep up
with rivals abroad that are set up so that they can make quicker decisions.
Is it really that bad? After all, plenty of German companies do just fine, and the problems of
Germany's economy cannot all be laid at their door. Moreover, the corporate sector there seems
relatively free of the gross corruption that has dogged its equivalents in America and other parts
of Europe—no big scandal has made international headlines to rival America's Enron, the
Netherlands' Ahold or Italy's Parmalat.
Appearances, however, are deceptive. In aggregate, Germany's companies are falling behind their
competitors, and they know it. Big efforts are under way to try to understand why companies
seem to be less effective at innovation than those in, say, Britain or America. As for scandals, they
do happen in Germany, but the tendency when one company is embarrassed is for the others to
close ranks and pretend there is no broader problem. The latest brouhaha concerns companies
keeping parliamentarians on their payroll for no obvious reason but to gain political favour (see
article). The main targets of scorn, however, have been not the companies, but the politicians, for
failing to declare their second incomes.
As fish are said to rot from the head, so the rottenness of German companies starts with their
two-board system. In addition to an executive board of directors, they all have supervisory
boards, up to half the members of which represent the workforce rather than shareholders. Too