Skip to content
S4 V2
Summary of the CONTENT:
Stories, Metaphors, Symbols, and Archetypes:
How can we implement ethical standards in organizations?
In this video, we're having a deeper look at this question via the use of external institutions. To do so, we are first reflecting upon the role of external institutions that set and control corporate governance standards. Then, in the second step, we are reflecting upon the link between international and national standard setting, using Germany as an example. In the last step, we are examining the role of regulators and auditors for corporate governance standard control.
To do so, we will look at an example from Germany that happened a few years ago, and it's called the revolving door phenomenon. This phenomenon is something one can observe, or at least in the past observed quite frequently, in the role of politicians and governments after leaving policymaking.
Here we have the example of Ronald Pofalla, who was a politician for quite a long time. He was a member of the German Parliament for around 15 years, from 1990 to 2014, and he was also part of the government from 2009 till 2013. He was the head of the German Chancellery under Angela Merkel.
Then something happened, and this is called the revolving door phenomenon. Serving as a politician in government opened certain doors for Ronald Pofalla, and he became a businessman. He was about to join the board of Deutsche Bahn directly after leaving the German Chancellery. Deutsche Bahn is a partly state-owned company operating the German national railroad.
He joined it then in 2015, and this was due only to a public outcry when he announced that he was leaving policymaking and was about to join Deutsche Bahn. There was a big debate in Germany, and therefore his initial plan to join directly after leaving government was delayed by one year. So he entered Deutsche Bahn in 2015.
He got there in a very special position, responsible for lobbying for Deutsche Bahn in policy, and was about to earn a compensation of more than a million euros per year. There was a quite famous saying from Timo Lange—he's the spokesman for a lobby control organization—and he said, "For us, this is a clear signal that we quite urgently need a cooling-off period. Those leaving the top rank of government should wait three years before being able to lobby."
The reason behind that is, due to the contacts, the networks, perhaps also friendships that you made during your responsibility in government, you might have very special contacts, very special ways of doing lobbying for corporate organizations. This is, on the one hand, the incentive for these organizations to hire people, but on the other hand, then policymaking is not, or perhaps not, independent or is too easily influenced by organizations like Deutsche Bahn. Therefore, the idea here by Timo Lange is to have a cooling-off period so that people will not directly enter public organizations after being a member of government.
So what does this example tell us? First of all, this is highly questionable whether this was an ethical decision from policy to an organization in industry. But it also shows how perhaps external institutions or external actors can have an influence on these examples, and then of course also on these—how we call it—opening some doors because you had a prior position and now you have the opportunity that others perhaps do not have in an organization.
When looking at the definition of corporate governance, corporate governance is defined as a system, a function, and a purpose. When deep diving into the idea of corporate governance as a system, it can be said that it's a consistent system of moral values, external institutions, internal structures, and incentive mechanisms.
In this video, we're looking especially at the role of external institutions in the field of corporate governance. The role of external institutions can be defined as twofold. On the one hand, it's about standard setting—to develop binding or non-binding guidelines—and on the other hand also about standard control, like encouraging enforcing compliance and also detecting, sanctioning, and deterring noncompliance.
We are talking about both forms or both roles of external institutions, and this then as one of the pillars of corporate governance overall.
So in the first step, we're talking about standard setting, and standard setting happens at various levels. There's an international level, and at that international level, we have standards that have been developed by organizations like the OECD, who developed a set of standards called the Principles of Corporate Governance and developed them as a more or less universal standard that should be valid around the globe for all kinds of organizations.
This international framework for corporate governance is then translated onto the national level. It is adapted to the national level using also national particularities, which might differ across the globe due to special situations, culture, and so on. Therefore, single countries, single states develop national regulations—for instance, the German Corporate Governance Code, which we will also talk about in this video a little bit.
These codes are then translated into what a firm uses at the organizational level and how this firm then implements this specifically in the setup of the organization. This means that it operationalizes to some degree mandatory and non-mandatory national standards and codes into a code of conduct for the organization, like here the example of Volkswagen's own code, which is translated "Our Code," and means the guidelines that Volkswagen developed based on the German Corporate Governance Code—how people and especially decision-makers in the organization should behave, and which is legitimate to do and what not.
Let's take a look now, first of all, at the OECD governance code. It was started in the 1990s to develop such a framework, and it was initially published in 1999. The purpose when developing it and offering it to nations worldwide is the idea that there might be a selection of recommended practices and guidelines that focus on ethical behaviors of organizations. It has a special focus on listed companies—public companies which are listed at some stock exchange—but the recommendations also hold true for non-listed firms.
Importantly, because the OECD is not developing any law or something, these are non-binding recommendations, and over the years there were several revisions and guidelines on how to implement this guidance and these practices in organizations and in national law. There have been several revisions outlined and ongoing.
The structure of the OECD framework is that they basically first of all say why this framework exists, what are the rights of shareholders—so of the owners of a company—what is the role of institutional investors and intermediaries such as banks, which role stakeholders play and who are stakeholders, what do we need to disclose as a company and where do we need to be transparent, and what are the responsibilities of the board in controlling the organization.
When talking about the international standards for corporate governance, there are of course also national standards from different countries, and let's take a look at the German example here.
There are various legislations that have direct influence on the corporate governance standards in a country. We have, for example, the Commercial Code, but we also have, for example, the Stock Exchange Act. So there are various laws or various legislations that are referencing or that are giving recommendations to how to act and how to establish corporate governance guidelines.
Taking these together, or the summary of co-regulations in Germany, is the German Corporate Governance Code, which then summarizes recommendations on how to establish corporate governance in organizations.
Deep diving a little bit more on the Corporate Governance Code, the purpose is clearly that it's a collection of general principles of good and responsible corporate governance, and its goal is to enhance trust in corporate governance of German listed companies. So that can at the end be translated in that organizations in Germany that are acting according to the German Corporate Governance Code can be trusted because they have different standards or they have various standards implemented.
When looking at the timeline, it can be seen that the International Corporate Governance Code from the OECD was kind of initiated in the 1990s. For the German Corporate Governance Code, it started in 2001, and then again after different revision rounds—the last revision round, for example, was in 2022—the corporate governance is incorporating different new formats and formalities, like for example the ESG score, for example deep diving a little bit more into sustainability transparency, or in 2015 also implementing the gender quota.
The structure is that there is different information about shareholders and general meetings, cooperation between management board and supervisory board, of course recommendations for the management board itself, about transparency and reporting and audit. So these are the formalities that find place in the German Corporate Governance Code.
We brought here a brief snippet from the introductory part of the German Corporate Governance Code, and here it reads that this German Corporate Governance Code—the code—presents essential statutory regulations for the management and supervision, the governance, of German listed companies and contains internationally and nationally recognized standards for good and responsible management.
So we have some regulations here which are seen as a standard and not only what they call here good and responsible management. So it's not in the interest of an organization to do it just due to profit interest, but this here is more the morally correct behavior of organizations which is imposed here from external institutions on listed firms.
So the code aims at making the German corporate governance system transparent and understandable. So it's about transparency here, so that corporate governance system in Germany is to be understood by everybody, right? So it's not about only the firms and that they understand how governance in Germany is understood, but also for the greater public. Its purpose is to promote the trust of international and national investors, customers, employees, and the general public in the management and supervision of listed German stock corporations.
So it's, as said, not only about shareholders, the owners of companies, but potential investors and especially those people who might be less informed about ways of behaving in business, and that they can trust in the behavior of organizations in Germany. It's about customers, employees, and the general public, so everybody should be able to understand what companies are doing and why they are doing it due to this governance code here, because it fosters transparency and understandability of corporates in Germany.
So there's a hierarchy of these standards. There are a few things that are mandatory—so things you must do, right? It's using the laws that we saw earlier; the various laws and different things that are regulated in these various laws are reproduced here as part of the Corporate Governance Code in Germany to show what must be done in order to follow good practice.
There are things that are called recommendations. These are the things that you shall do, right? So it's good practice to do certain things; you might deviate from this, but you need to report this and explain it, why you are not following that recommendation. For instance, here based on the so-called "act or explain," that's where you should or you need to explain whether you comply or why you try to explain why you did not comply with the recommendation.
Then there are optional suggestions, things you should do. These are optional practices; deviations are permitted, and you do not need to report and explain what you're doing.
Let's look at some numbers, and we want to look at the compliance with these more optional things, right? With the recommendations that you shall do but you are not forced to do, and the optional suggestions.
Let's differentiate between the different stock indices that we have. We have the overview here on the right-hand side later for all listed companies. Then we have, for instance, the DAX stock index and some other indices. We have the Prime Standard and the General Standard.
So what's the Prime Standard? It's a special market segment at the Frankfurt Stock Exchange where German companies who are part of the Prime Standard need to fulfill higher transparency standards. So they are higher than in the General Standard, which is regulated by law. These higher standards for the Prime Standard include that they do quarterly reporting in German as well as English, follow International Accounting Standards like the IFRS or the US GAAP, and they follow these more international standards. All companies listed in these indices here on the left, in the DAX or the MDAX, belong also to the Prime Standard.
The General Standard is also a market segment at the Frankfurt Stock Exchange, and those companies belonging to the General Standard have at the minimum fulfilled the requirements regulated by German law. So it's focused on the national German market, and to be listed in the German Stock Exchange—as said, to be listed in one of the indices here on the left—you need to even fulfill higher standards than required by German law.
So let's take a look, and what we see here now for the recommendations—so these things you shall do but if you do not do it you need to explain it—we see that across all companies, 84% of the companies comply with these recommendations. We see that in the Prime Segment, the share is slightly higher than for the General Segment, especially in the indices here on the left, which are always just the top companies, right? So in the DAX, we have the biggest 30 German companies; all companies in there comply to 96% to all these recommendations, thereby exceeding the Prime Standard, exceeding the General Standard, and exceeding also the number for all listed companies.
Interestingly, those companies listed in these indices on the left—all of them—perhaps because they are the biggest and most successful in these areas, all of them exceed the average number of the Prime Segment, right? So there are many more companies than just those listed in these indices, but those who are listed, they exceed even to a greater extent than other companies in the Prime Standard, or they exceed the other companies in the Prime Standard by following these recommendations.
But as you can see here, around about a quarter of companies do not comply with all recommendations from the Prime Standard, right? A quarter doesn't fulfill all the recommendations but explain why they don't do it. There might be good reasons to do so, but here we see that at least the quarter doesn't do it.
Okay, and looking at the optional suggestions—so these things where you may deviate and do not need to explain it—and then perhaps because it's easier to not do it, right? To not comply, we see that many more companies are not doing it. Interestingly, if you take a look, for instance, at the SDAX companies listed here now as part of one of the indices, they comply with these optional suggestions to a lower degree than the average of all companies who are listed in Germany, which comply to 65% of these optional suggestions.
So now we talked a little bit about how external institutions are setting standards. We talked about the international standards and then dived a little bit more deeply into German standards. In the last step, we also looked at different companies and organizations and how they fulfill requirements and the standards that have been set.
Let's now have a deeper look at how to then control these standards. So standard setting is the one hand, but to really control whether these standards are met is something different. Now we're looking at how to encourage and enforce compliance and, of course, also how to detect, sanction, and deter noncompliance. For example, having a look at the role of capital markets in standard control.
So why are different stakeholders from the capital market interested in having a say in standard control? We can, for example, have a look at the shareholders of an organization, banks, and financial analysts.
The shareholders, for example, have the opportunity to interact or to have a say when controlling the standards because they have information rights. There are annual reports and the questioning of the management. These are the information that the shareholders get. Also, they have participation rights. There's the supervisory board, the representatives, their elections, auditors' elections. These are all mechanisms through which shareholders have the opportunity to look at a standard control setting.
Of course, they also have disciplinary power because they can discharge management and supervisory board members, have voting rights, and threaten to shift capital. These are all possibilities or opportunities for shareholders to have a say and argue when thinking about standard control.
So what are the incentives of the shareholders to do so? There are, of course, contributing factors and countervailing forces that might have influence on that. When looking at the contributing factors, there are potentially higher returns from control. There's the opportunity to appropriate these returns and substantial influence on the strategic agenda. That is also an incentive for the shareholders to take part in standard controlling.
However, control costs are likely to exceed expected returns for small shareholders, so there might also be an incentive of free riding. Of course, there could also be information asymmetries that could then be seen as a countervailing force when thinking about the incentives of shareholders to have a say in standard control.
Now let's take a look at banks and what are their opportunities to control standards and incentives to do so. First of all, they also have some information rights. If you want to have some money from a bank and they want to assess your solvency as a company, then they have the right to also get a deeper insight into your company and the financial situation, also the strategy and the governance and the way you govern your organization as part of the analysis for credit decisions.
By doing so, they also have some disciplinary power. By threatening not to grant or extend credits, they can really have an influence on corporate management. They have some participation rights and thereby can use the disciplinary power, and they might have voting rights because they might also be shareholders by being active as a bank.
Why should they do so? They might have a strong interest to protect their own investments. If they have invested into a company, they might have an interest because then—they become a shareholder. Due to the own regulation of the banking industry, there is a strong need to follow the laws for banks, and one law is also to have an adequate assessment of the risks that you have because you as a bank also have shareholders and have to show that you complied with the norms and the law in assessing risks and pricing the risks when giving out credits.
Which are potential countervailing forces in the banking industries? There might be some differences compared to shareholder interests. There might be shareholders that have a different interest in the organization—the focal organization—than the bank, and thereby there might be discussions going on. There might be potential collusion between bankers and managers of organizations because they might have a shared interest in a certain corporate action to fulfill in order to be both more profitable, for instance.
After having a look at the capital markets and their role in standard control, let's now have a deeper look at the role of information and talent markets in standard control. Information markets—for example, public media and newspapers, journalism—and talent markets—for example, managers, potential managers of an organization—and how these two different markets play a role in standard control.
When thinking about information markets, their opportunity to control the standards is via information access because, again, there are annual reports, public sources, and key informants that might help to have an influence there. Advanced analytics can also be used to detect irregularities.
Of course, there's also disciplinary power because of high visibility and impact of media reports and strong effects of ratings on cost of capital. These are two opportunities of information markets—for example, journalists or public media might influence and play a role in standard control.
Why do they do so, or why could they do so? Because they can have a reputational effect on investigative journalism. There's relevant research and accurate ratings. There's the opportunity to appropriate these returns and substantial influence on the corporate governance landscape.
There are a lot of examples where, based on the media—and we also had this in our introductory example—based on the media and public awareness, reforms are asked and demanded, and thereby these information markets have a clear role in standard control.
However, there are also countervailing forces like the cost of investigative journalism and the difficulty to access key informants. Not everything is publicly available, and, of course, it is higher cost to do the research. This could be something that then kind of diminishes these incentives.
Let's take a look at talent markets here, and here we're talking about managers and their prospects on the market for being a manager. Managers have access; they have insider information on corporate behavior and also misbehavior. By whistleblowing or by reporting on that behavior, they might gain some credibility as a key informant, as somebody who informs the public or information markets—journalists, media—about certain behavior happening inside a corporation.
They have thereby also the ability to affect corporate governance practices inside the organization, and they can also encourage the compliance with these standards, thereby also affecting their reputation as somebody complying with these standards and practices.
What are the incentives to do so? They might gain a reputation for such shareholder and stakeholder-oriented behavior and thereby improve their career prospects.
But certainly, there are also countervailing forces that might prohibit people to do so. For instance, talent markets are imperfect. As every market, the talent market has its imperfections. There are information asymmetries and things that the talent market doesn't see. Perhaps it's not that good to inspect whether people are really trying or whether managers are really trying to encourage the compliance with corporate governance practices. You can't perhaps see that from the outside—how managers really were talking with their subordinates and so on.
There might also be private incentives of covering things up. If there is misbehavior happening there, and if you are involved, it might be that there is an incentive to cover up things. There might be a downside risk of whistleblowing. We saw the case of Edward Snowden and others who had to leave their country because of whistleblowing. Perhaps that's not always so extreme, but this also shows us that there might be downside risks if you report something to the public that was a misbehavior inside an organization.
Even you might also get a bad reputation for being someone who gives out information. It might be good—you might have a good reputation from the public perception—but perhaps a bad reputation for being untrustworthy from the perspective of shareholders or owners of a company if they also are eager to perhaps not comply fully with such standards.
So we now talked about the capital market, the information market, and the talent market and its role in standard control. Let's now have a deeper look at the role of regulatory mechanisms in standard control, and let's start with law enforcement.
When thinking about law enforcement, of course, there are different key actors. There is the public prosecution—in Germany, we call it the "Staatsanwaltschaft"—police services, and the Federal Criminal Police Office. These are then the key actors that can enforce standard control in organizations when it comes to corporate governance.
Of course, there are different roles that these actors can have. They can investigate in case of suspected violations of binding corporate governance standards—really the standards that are binding and that the organization has to comply with. They can then, of course, sanction non-compliance. They can, for example, give fines to the organizations, and they can enforce compliance or remove the license to operate if the compliance is not given and also previous sanctions are not working.
Then we have supervisory agencies. For instance, in Germany, the Federal Financial Supervisory Authority, or in German, the "Bundesanstalt für Finanzdienstleistungsaufsicht" (BaFin)—an agency that really controls whether banks comply with law, and not only banks but also other service organizations in finance. In the US, we have the US Securities and Exchange Commission. We also have other organizations or agencies that control collusion, for instance.
They have the role to regulate the financial market, but not only do the regulation but also ensure that companies comply with the regulations and comply with the binding corporate governance standards. They do sanction misbehavior, and by doing so, they are perhaps more or less successful—there are scandals for sure—but they try to prevent corporate misuse.
And then, as a last step, there's also the role of auditing firms. In Germany, we have four consultancy companies that are acting as auditing firms: PricewaterhouseCoopers, KPMG, EY (Ernst & Young), and Deloitte. They have the role that they conduct statutory and annual audits; however, they are also advising on corporate governance and risk management practices. So they are really also in the role of interacting with the organizations and helping them to comply, and they could also conduct special audits in case of suspected irregularities.
These are the four companies that are doing so on an annual basis with all the organizations. These are then the ones that can, at the end, on the one hand, prove and audit the organizations but also advise them and consult them on the corporate governance and risk management practices.
So what did we learn in this video? Overall, we learned that institutions develop, monitor, and enforce corporate governance standards to ensure global and local compliance. We also learned that regulatory bodies and market forces maintain transparency, discipline companies, and safeguard shareholder interest. We also talked about scandals and political-business overlaps and showed the need for stricter ethics, better controls, and long-term trust in governance systems.
So we overall looked at external institutions that are building regulations on how organizations might act in an ethical way and, of course, how to monitor then if these standards are met or not. Thank you very much for watching this video.
Edited Transcript:
How can we implement ethical standards in organizations? In this video, we take a deeper look at this question through the role of external institutions. To do so, we will first reflect upon the role of external institutions that set and control corporate governance standards. Second, we will examine the link between international and national standard-setting, using Germany as an example. Finally, we will explore the role of regulators and auditors in corporate governance standard control.
Example: The Revolving Door Phenomenon
To illustrate these concepts, we examine a case from Germany called the "revolving door phenomenon." This refers to the movement of politicians or policymakers into private sector roles after leaving public office.
For example, Ronald Pofalla, a German politician, was a member of the German Parliament for about 15 years (1990–2014) and part of the government from 2009 to 2013 as head of the German Chancellery under Angela Merkel. After leaving government, Pofalla joined the board of Deutsche Bahn in 2015, a partly state-owned company operating Germany’s national railroad.
His transition raised ethical questions because he was initially set to join Deutsche Bahn immediately after leaving office, but public outcry delayed his move by one year. Once there, Pofalla took on a lobbying role for Deutsche Bahn, earning over €1 million annually.
Timo Lange, a spokesperson for the Lobby Control organization, stated: “For us, this is a clear signal that we urgently need a cooling-off period. Those leaving the top ranks of government should wait three years before lobbying.” The logic is that former politicians may have special connections and networks that could unfairly benefit corporations and compromise policymaking independence.
This example highlights the ethical questions raised by such transitions and the influence external institutions can have in regulating these practices.
Definition of Corporate Governance
Corporate governance is defined as a system, function, and purpose. As a system, it involves moral values, external institutions, internal structures, and incentive mechanisms. In this video, we focus on the role of external institutions in corporate governance.
The role of external institutions can be divided into two functions:
Together, these functions form a key pillar of corporate governance.
Standard-Setting
Standard-setting occurs at multiple levels:
German Corporate Governance Code
The German Corporate Governance Code, established in 2001 and revised regularly (most recently in 2022), provides a framework for:
The code aims to enhance trust in German companies by promoting good governance. It includes:
Compliance Analysis
For listed companies in Germany:
Standard Control
Standard control involves monitoring and enforcing compliance with corporate governance standards. Key mechanisms include:
Key Learnings
Thank you for watching this video.
how can we Implement ethical standards in organizations in this video we're having a deeper look at this questionvia the use of external institutions and to do so we are firstreflecting upon the role of external institutions that set and control corporate governance standards and thenin the second step we are reflecting upon on the link between International and National standard setting usingGermany as an example and in the last step we are examining the role of regulators and Auditors for corporategovernance standard control to do so we will look at an example from Germany that happened a fewyears ago and it's called the revolving door phenomenon and this phenomenon issomething uh one can observe or at least in the past observed quite frequently inuh in the role of politicians and governments after leaving uh thegovernment uh or policymaking and here we have the example of uh Rona paala whowas a polit politician and that for quite a long time so he was a member of the German Parliament for uh aroundabout 15 years from 1990 to 2014 and he was also part of thegovernment from in the Years 2009 till uh 2013 he was the head of the German uhchancellory under um Angela Amel and then something happened and this iscalled the revolving door phenomenon um yeah serving here as a politician ingovernment opened uh certain doors for ronal paala and he became a businessmanhe was about to join the board of do Jaan directly after after leaving theGerman chancell um and the do jaban is a partly state-owned uh company operatingthe German national railroad um he joined it then uh in 2015 um and thiswas due only to a public outcry when he announced that he was leaving Polpolicymaking and was about to join Doan there was a big um debate in Germany anduh therefore his initial plan to join directly after leaving government was delayed by one year so he just entereduh Doge Jaan in 2015 um and he got there in a very special position uhresponsible for lobbying lobbying for deuts Jaan in policy um and was about toearn a compensation of uh more than a million euros per year and there was avery quite famous saying here from teimo langa he's the spes a spokesman for aLobby control organization um and he said for us this is a clear signal thatwe quite urgently need a cooling off period those leaving the top rank of government should wait 3 years beforebeing able to lobby and the reason behind that is and the logic that due to the context due to the networks dueperhaps also to friendships that you made during um your uh yeah yourresponsibility in government you might have uh very special contexts veryspecial ways of doing uh lobbyism for uh corporate organizations which is on theone hand side the incentive for these organizations to hire people but on the other hand um yeah then policymaking isnot uh or perhaps not independent or too easily influenced by uh yeah publicorganizations by organizations like de Jaan and uh therefore the idea here byte moang is to have a cooling off period so that people will not um directlyenter public organizations um after being a member ofgovernment so what does this example tell us first of all this is Highly Questionable whether this was an ethicaldecision from policy then to um uh an organization in industry but it alsoshows how perhaps external institutions or external actors can have an influenceon um on these uh examples and then of course also on these uh how we call itlike opening some doors because you had a prior position and now you have the opportunity there's others perhaps donot have in an um organization so when looking at the definition of corporategovernance um corporate governance is um defined as a system a function and apurpose and when deep diving into the idea of corporate governance as a system uh it can be said that it's a consistentsystem of moral values external institutions internal structures and incentive mechanisms and in this videowe're looking especially at the role of external institutions in in um the fieldof corporate governance and the role of external institutions can be um defined as twofold on the one hand it's aboutstandard setting so to develop binding or non-binding guidelines and of courseat the other hand also about standard control like encouraging enforcing compliance and also detecting sanctionand uh deter noncompliance so um we are talking aboutboth forms of or both roles of external in institutions and this then as one ofthe pillar of corporate governance overall so in a first step we're talkingabout standard setting and uh standard setting happensat various levels so there's an international level and at that International level we have uh standardsthat have been developed by uh organizations like the oecd uh whodeveloped uh a a set of yeah standards which are called the principles ofcorporate governance and develop then as a more or less Universal standard that should be uh valid around the globe forall kinds of organizations this uh International uh yeah framework so to say for corporategovernance is then translated onto the national level is it is adapted to uhyeah to the National level using also National particularities which might differ across the globe due to specialsituations uh culture and so on and uh therefore uh yeah single countriessingle States develop uh uh National regulations for instance the Germancorporate governance code which we will also talk about in this video here a little bit and then these yeah codes arethen translated into yeah what a firm uses at the organizational level and howthis firm then implements this uh specifically in the setup of theorganization um and this means that it operationalizes to some degree mandatoryand non-mandatory National standards and codes into then uh a code of conduct forthe organization like here uh the example of Volkswagen UN code which istranslated our code um and means uh yeah the guidelines that Volkswagen developedbased on the uh German corporate governance code how people and especially decision makers in theorganization should behave um and which is yeah legit legitimate to do andwhatnot so let's take a look now first of all at the oecd uh uh governance codeand uh it was uh started uh in 1990 in the 1990s to develop such a frameworkand it was initially published in 1999 and uh the purpose When developing it uhand uh yeah offering it to uh Nations worldwide um is the idea that uh theremight be a a selection of recommended practices and guidelines um that uh yeahuh yeah focus on ethical behaviors of organization and it has a special focuson listed companies so public companies which are listed um at some uh StockExchange um but the recommendations also hold true for non-listed firmsimportantly because the oecd is not developing any uh law or something theseare non-binding recommendations and uh over the years there were several revisions uh and andguidelines how to implement these uh yeah uh these guidance uh and thesepractices in organizations and in in uh in in yeah national law there have beenseveral revisions uh yeah outlined and ongoing the structure of uh the oecdframework is that they basically first of all say uh why this uh frameworkexists what are the rights of shareholders so of the owners of a company um what is the role ofinstitutional investors and intermediaries intermediaries such as Banks um and which role stakeholdersplay and who are stakeholders um what do we need to disclose as a company and where do weneed to be transparent and what are the responsibilities of the board uh yeah incontrolling uh the organization so when talking about the international standards for um corporategovernance there are of course also National Standard standards from different countries and let's take alook at the German um example here there are VAR there are various umlegislations that have direct um influence on um on the corporategovernance standards in a country we have for example the commercial uh Commercial Code but we also have forexample the stock exchange act so there are various laws or various legislationsthat are referencing or that giving that are giving recommendations to uh how toact and how to establish corporate governance guidelines and taking these together or the summary of corregulations in Germany is the German corporate governance code um that then summarizes recommendations on how toestablish corporate governance in organizations so deep diving a littlebit more on the corporate governance code um the purpose is clearly that there are it's a collection of generalprinciples of good and responsible corporate governance and it is um itsgoal is to enhance trust and corporate governance of German listed companies so that can at the end be translated inthat organizations in Germany that are acting according to um the German corporate governance code can be trustedbecause they have different standards or they have um various standards umimplemented and when looking at the Timeline it can be seen that um the umInternational corporate governance code from the oecd was kind of like initiated in the 1990s here um for the Germancorporate governance code it is started or it started in 2001 and then againafter different revision rounds the last revision round for example was in 2022 um yeah the corporate governance isincorporating different new formats and formalities like for example um the ESGscore um for example deep diving a little bit more into sustainabilitytransparency or in 2015 also implementing the genderquota so the structure is um that there are different informations about shareholders and general meetingscooperation between management board and super supervisory board um of courserecommendations for the management board itself about transparency and Reporting and audit so these are the umformalities that find place in the German corporate governancecode so we brought here an uh a brief snippet from the introductory part ofthe German corporate governance code and here it reads that this German corporate governance code the code presentsessential statutary regulations for the management and supervision the governance of German listed companiesand contains internationally and nationally recognized standards for good and responsible management so we havesome regulations here um which are seen as a standard and uh not only yeah whatthey call here good and responsible management so it's not in the interest of an organization to do it just due outdue to profit interest to do something but this year is more the morallycorrect behavior of organizations which is imposed here from external institutions on listed firms so the codeaims at making the German corporate governance system transparent and understandable so it's it's abouttransparency here and uh yeah so that um governance corporate governance systemsystem in Germany is uh yeah to be understood by external uh by by byeverybody right so it's not about only the firms and that they understand howuh it yeah governance in Germany is understood but also for the greater public it's purpose is to promote thetrust of international national investors customers employees and the general public in the management andsupervision of listed German stuck corpor corporations so it's a said notonly about uh yeah shareholders the owners of companies but potentialinvestors and especially those people who might be yeah uh less informed aboutyeah ways of behaving in business and that they can trust in the behavior oforganizations in Germany it's about customers employees and the general public so everybody should be able toyeah understand what companies are doing and why they are doing it due to this uhgovernance code here uh because it Fosters transparency andunderstandability of uh corporates in Germany so there are uh there's ahierarchy of these standards there are a few things that are mandatory so thingsyou must do right so it's a using the laws that we saw earlier the variouslaws and different things that are regulated in these various laws are reproduced here as part of the corporategovernance code in Germany uh to show what must be done in order to followgood practice and there are things that are called recommendations so these arethe things that you uh shall do right so it's uh it's good practice to do certainthings um you might deviate from this but you need to report this and explainit uh why uh you are not following that that um thatrecommendation for instance here based on uh the so-called uh acting is that'swhere you uh should or you need to explain whether you comply or um uh dothat principle or way you why you uh yeah try to explain why you did notcomply with the uh yeah recommendation and then there are uh optionalsuggestions things you should do these are optional practices uh deviations are permitted and you do notneed to report and explain what you're doing so let's look at some numbers anduh we want to look at the compliance with these yeah more optional things right with the recommendations that youshall do but you are not uh yeah fostered to do um and the optionalsuggestions so let's differentiate between uh the different stock indices that we have so we have the overviewhere on the right hand side later for all listed companies then we have uh theuh for instance the Dux stock index and some other index indices we have the uhPrime standard and the general standard so what's the prime standard it's a special Market segment at the FrankfurtStock Exchange uh where German companies who are part of the Prime standard uhneed to fulfill higher transparency standards so they uh are higher than in the general standard which is uh yeahregulated by law and these higher standards for the prime standards include that they do quarterly reportingin German as well as English follow International Accounting Standards uh like their IFRS or the USGap and uh yeah they uh follow these more um yeah International standards andall companies listed in these indices here on the left in the duck or the MD or so they belong also to the primestandard the general standard is also a market segment at the Frankfurt Stock Exchange and uh those companiesbelonging to the general standard they uh have at the minimum fulfill therequirements regulated by German law um uh so it's focused on the on thenational German market and to be listed in the German Stock Exchange um yeah as setuh to be listed in one of the the inds here on the left you need to evenfulfill higher standards than required by German law so let's take a look andwhat we see here now for the recommendations so these things you shall do but if you do not do it youneed to explain it we see uh that across all companies84% um of uh the companies comply with these recommendations and we see that inthe Prime segment uh the uh the uh the share is slightly higher than for thegeneral um uh segment especially uh inthe um in the indices here on the left which are always just the top companiesright so in the duck we have the biggest 30 German companies all companies in there they comply to 96% to all theserecommendations thereby uh exceeding the prime standard exceeding the general standard and exceedingalso uh the the number for all listed companiesinterestingly um those companies listed in these uh yeah incc on the left all ofthem which because perhaps because of they are the biggest and most successful in these areas all of them exceed um theaverage uh number of the Prime segment right so there are many more companies than just those listed in theseindices um but those who are listed they exceed what uh even to a greater extentthan than other companies in the prim standard uh yeah or they exceed the the other companies in the prim standard byfollowing these recommendations but as you can see here uh round about aquarter of companies do not F comply with allrecommendations uh from the prime standard right a quarter doesn't fulfill all the recommendations but explain whythey don't do it there might be good reasons to do so uh but here we uh seethat at least the quarter doesn't do it okay and looking at the optionalsuggestions so these things where you may deviate and do not need to explain it and then uh perhaps because it'seasier to not do it right to not comply uh we see that many more companies arenot doing it and interestingly uh if you take a look for for instance as the sducompanies listed here now as part of Wonders with the indices uh comply withthese optional suggestions to a lower degree than uh the average of all companies who are listed in Germany uhwhich uh comply to 65% of these optional suggestions okay so now we talked alittle bit about high external institutions are setting standards we talked about the international standardsand then deep down dived a little bit more on German standards and um in the last step also looked at differentcompanies and organizations how they fulfill um requirements and um yeah thestandards that I've have set let's now have a deeper look at how to then control these standards so standardsetting is the one hand but to really control whether these standards are met this is something different so now we'relooking at how to encourage and enforce compliance and of course also how to detect sanction and deter noncompliance well for example having a look at um the role of capital marketsin standard control so why are like different stakeholders from the Capital Market are interested in um yeah havinga saying in standard control we can for example have a look at the shareholders of an organization and bank andfinancial analysts of an organization so the shareholders forexample they have the opportunity to interact or to to have a saying when umyeah when controlling the standards because they have information rights so there are annual reports and uh thequestioning of the management so these are the informations that the shareholders get and also they haveparticipation rights so there's the supervisory board the representatives there their elections Auditors electionsso these are all mechanisms how shareholders have the opportunity to have a look at a standard controlsetting of course they also have disciplinary power because they can discharge of management and supervisoryboard voting rights and threats to shift Capital so these are all possibilitieshow shareholders or opportunities how shareholders can have a saying and arguewhen thinking about um standard control so what are the incentives of the shareholders to do so there are ofcourse contributing factors and countervailing forces that might have um influence on that when looking at thecontributing factors um there are potentially higher returns from control there's the opportunity to appropriatethese returns and substantial influence on strategic agenda that is also anincentive for the shareholders to take part in uh standard controlling howevercontrol costs likely to exceed expected returns from small shareholders so there might also be an incentive of freewriting and of course there could also be information asymmetries that couldthen be seen as a counterveiling force when thinking about the incentives of shareholders to um have a saying instandard control so now let's uh take a look at Banks and what are theiropportunities to control standards uh and incentives to do so so first of allthey also have some information rights right if you want to have uh some moneyfrom a bank uh and they uh want to uh assess their your solvency as a companyum then they have the right to also get uh a deeper Insight in your company andin the uh financial situation also the strategy and the governance and the wayhow you govern your organization as part of the analysis for credit decision right they also by doing so have somedisciplinary power power right so by threatening not to Grant uh or extendcredits they can really have an influence on corporate management umthey have some participation rights and thereby can uh yeah use the disciplinarypower and uh they might have voting rights because there might also be shareholders um by uh yeah by being active as a bank so why should they do so uh theymight have a strong interest to protect their own Investments right if they have invested into a company they might behaving an interest because then I mean that's obviously the same as on the left hand side here for shareholders uh theybecome uh a shareholder right um and due to the own regulation of the bankingindustry there is a strong need to follow the laws for banks and uh onelaws also to have an adequate assessment uh of the risks that you have and um umbecause you as a bank also have shareholders and have to show that you complied um with uh the norms and uh thelaw in uh yeah uh assessing risks and pricing the risks uh when giving outcredits so which are uh potential counterveiling forces uh uh in the inthe in the banking Industries so there might be uh some differences compared touh shareholder interests right so there might be shareholders that have a differentinterest in the organization the focal organization then the bank and uhthereby there might be uh discussions going on um and uh there might be uh uhyeah potential collusion between bankers and managers of organization becausethey might have a shared interest in a yeah in a certain uh corporate action uhto fulfill in in order to be both more profitable for instance so after havinga look at the capital markets and their role in uh standard control let's nowhave a deeper look at the role of information and talent markets in standard control so information marketsas for example public media and newspapers journalism and talent marketsas for example like the talents for example managers potential managers of an organ organization and how these twodifferent markets um yeah their role in standard control so when thinking aboutinformation markets of course their opportunity of how to control the standards is via information accessbecause again there are annual reports public sources and key informants that might help to have an influence thereand advanced analytics um can also be used to detect IR legalities of coursethere's also disciplinary power because High VIs visib and impact of media reports and strongeffects of ratings on cost of capital these are two opportunities of information markets like for examplejournalists or um yeah public media might um influence and play a role instandard control and why do they do so or why could they do so so because umthey can of course um yeah have reputation effect on investigative journalism there's relevant research andaccurate ratings there's of course the opportunity to appropriate these returnsand substantial influence on uh the corporate governance landscape so there are a lot of examples where based on themedia and we also had this in our introductory example based on the mediaand um public awareness um yeah reforms are um are asked and demanded andthereby these information markets have a clear role in then in standard controlbut however there are also counterveiling forces like the cost of investigative journalism and thedifficulty to access key informance um it is not everything is not publiclyavailable and of course it is higher cost to um to do the research so um thiscould be something that then kind of di diminishes these incentives let's take a look at Talentmarkets here and here we're talking about managers and their uh prospects onthe market for being a manager right so um managers have access they have insertinformation on corporate behavior and also misbehavior and by uh yeahwhistleblowing or by reporting on that behavior they might gain some credibility uh as a key informant assomebody who informs the public uh or information markets journalists media uhabout uh certain Behavior happening inside a corporationso they have uh thereby also the ability to affect uh corporate governancepractices inside the organization and they can also encourage encourage thecom compliance with uh these standards thereby also uh yeah affecting theirreputation as somebody complying with these uh yeah standards andpractices um what other the incentives to do so they might gain a reputation for the such shareholder and stakeholderoriented behavior and thereby improve their career prospects but certainly there are also uh counterveiling forcesuh that uh might prohibit uh people to do so so for instance Talent markets areimperfect right as every Market also the talent Market has its imperfection sothere are information as symmetries and things that the market the talent Market doesn't see perhaps uh it's not thatgood uh inspectable WEA people are really trying or weather managers arereally trying to um encourage the compliance with corporate governance practices you can't perhaps not see thatfrom the outside um how managers really were talking with their subordinates andso on um there might be also uh private rents of covering things up right ifthere are uh misbehavior happening there it might also if you are involved itmight be that there is an incentive to cover up things uh and there might be downside risk of wh whistleblowing uh wesaw the case of Edward Snowden and others uh who had to uh leave theircountry because of whistleblowing uh perhaps that's not always so extreme butthis also shows us that there might be downside risks if you um yeah reportsomething to the public that was a misbehavior inside an organization and even um you might also get get a amisrep putation a bad reputation for being someone who yeah who gives outinformation right so it might be good you might be have a good reputation from the public perceptive perception butperhaps a bad reputation um for uh yeah for being untrustworthy from theperspective of shareholders of owners of a company if they also are eager toperhaps not comply fully to such standards so we now talked about the Capital Market the information marketand the talent market and its role in standard control let's now have a deeper look at the role of regulatorymechanisms in standard control and let's start with law enforcement so um when thinking aboutlaw enforcement of course there are different key actors there is the public prosecution in Germany we call it theanshaft um Poli services and the Federal Criminal um Poli office so these arethen the key actors that can enforce um standard control in organization when itcomes to corporate governance um of course there are like different roles that these actors canhave so they can investigate in case of suspected violations of binding corporate governance standards so reallythe standards that are binding and that the organization has to comply with theycan then of course sanction non-compliance they can for example give fines to the organizations and they canenforce compliance or remove license to operate if then the compliance is notgiven and also um privious sanctions are not working so then we have supervisoryagencies right so we have for instance uh in Germany the federal financial supervis supervisory Authority or inGerman the bin the bundus for finance liting of so an agency that reallycontrols whether Banks um comply uh with uh law and not only banks to do so butalso other uh service organizations in finance in um in the US we have the USSecurities and Exchange Commission um and we also have other organizations orother uh agencies that control collusion for instance right so uh they have therole to regulate the financial Market but not only uh do the regulation butalso ensure that uh companies comply with the regulations and comply with thebinding corporate governance standards they do sanction misbehavior um and by doing so they uhperhaps more or less successful there are scandals of for sure but they try to prevent corporateruse and then as a last step there's also the role of auditing firms and inGermany uh we have like four consultancy companies that are acting as auditingfilms it's price Waterhouse Copus uh KPMG ey Ernest Yang and Deo and theyhave the role that they conduct statutary and annual audits however butthey are also advising on corporate governance and risk management practices so they are really also in the role ofinteracting with the organizations and helping them to comply and they could also contact special audit in case ofsuspected irregula and um yeah these are the the four companies that are doing so on anannual basis with all the organizations so these are then um the ones that canat the end um yeah on the one hand um like prove and audit the organizationsbut also advise them and consult them on the corporate governance and risk managementpractices so what did we learn in this videos overall we learned that institutions develop Monitor and enforcecorporate government standard to ensure Global and local compliance we also learned that regulatory bodies andMarket forces maintain transparency discipline companies and Safeguard shareholder interest and we also talkedabout scandals and political business overlaps and showed the need for stricter ethics better controls andlong-term trust in governance systems so we overall looked at externalinstitutions that are like building regulations on how organizations mightum act in an ethical way and of course of how to monitor then if thesestandards are met or not thank you very much for watching this video
Want to print your doc?
This is not the way.
This is not the way.
Try clicking the ⋯ next to your doc name or using a keyboard shortcut (
CtrlP
) instead.