Fenya Erzigkeit & Alina Petrescu
The Influence of Corruption on the Corporate Governance Development in
Germany
A Multiple Case Study
Service Marketing & Management Master Thesis
Semester: Spring 2013
Supervisor: Samuel Petros Sebhatu
Acknowledgements
We want to express our gratitude to our family and friends, who supported and encouraged us throughout the process of writing this paper, as well as throughout our academic career in general.
Without them, we would not be the persons we are now and most likely, we would not have come this far. You have been great motivators and supporters in times when we truly needed you.
In addition, we would like to thank our supervisor Samuel Petros Sebhatu for his support, valuable feedback and guidance from the beginning and the first drafts until the completion of the final paper. Likewise, we owe our gratitude to our teachers, professors and counselors that have crossed our paths and inspired us in so many ways.
Special thanks go to Markus Zeyen from Melitta Unternehmensgruppe KG, Stefan Otremba, Thomas Eckert and Bernd Wehinger from Daimler AG, Wolfgang Stubenrauch from Transparency International, Horst Sniehotta from Sparkasse Minden-Lübbecke and Katharina Buddenberg from the Chamber of Commerce and Industry Ostwestfalen zu Bielefeld. Without their participation and openness to our thesis project, this study would not have been possible.
As we wrote this study while living in Sweden and Germany, Skype and Facebook were our main communication tools. Thus, we see us obligated to thank the development of technology, as well.
Karlstad, May 2013
Fenya Erzigkeit Alina Petrescu
Abstract Purpose
This paper aims at investigating the relationship between corruption and corporate governance in Germany and how the development of corporate governance has been influenced by corruptive practices. The reason for choosing this topic is the fact that corporate governance is part of every business to encourage their managers to act according to rules and regulations, nevertheless unethical behavior still happens. Reoccurring events such as bribery scandals in several German companies made it a good case study, as well as the German unique corporate governance features such as the two-tier system and a partly voluntary corporate governance code.
Design/methodology
For the purpose of gaining a deeper knowledge on the topic, a qualitative research is undertaken by using multiple case studies as a research method, as it does not only gather information from documents and reports but also from interviews. The multiple case study is based on Melitta, as a representative of medium-sized and family-owned companies and Daimler, standing for global enterprises. To investigate the topic from different angles, the opinion of NGOs, represented by Transparency International, and the Chamber of Commerce and Industry as well as of investors from a local and a globally acting bank are taken into account.
Findings and Conclusion
Both, secondary and primary research has proven that corporate governance mechanisms can fight corruption. Yet, German companies wait and follow rather than to initiate changes, implying a rather reactive approach. Nevertheless, once mechanisms are implemented, they are very successful. Unfortunately, as the legal obligation is only valid for stock-listed companies, which amount to less than 20% of the German businesses, the implementation does often not occur.
Regardless of the company’s size, the respondents emphasize on the importance of creating a corporate culture of trust and integrity. Concludingly, although the awareness towards corruption has increased, it did not lead to an actual implementation of further corporate governance mechanisms that would reduce the risk of corruption within the companies.
Keywords
corporate governance, corruption, responsible business, new governance, Germany
I Table of Content
I. Figures ... III II. Tables ... III III. List of Abbreviations ... IV 1 Introduction ... 1 Problematization ... 2 1.1
Aim of Study ... 3 1.2
Research Questions ... 3 1.3
Structure ... 3 1.4
2 Methodology ... 4 Qualitative Research Approach... 4 2.1
Case Study Research ... 5 2.2
Research Material ... 8 2.3
2.3.1 Primary Data Collection ... 8 2.3.2 Secondary Data Collection ... 10 Data Analysis ... 11 2.4
Trustworthiness ... 13 2.5
Limitations ... 13 2.6
3 Theoretical Framework ... 14 Theoretical Aspects of Corruption and Corporate Governance ... 14 3.1
3.1.1 Agency Theory ... 15 3.1.2 Stewardship Theory ... 15 Stakeholder Theory ... 15 3.2
Definition and Development of Corruption ... 16 3.3
Corporate Governance in Germany ... 17 3.4
3.4.1 The German Corporate Governance Code ... 18 Legal framework ... 21 3.5
3.5.1 Corruption ... 21 3.5.2 Corporate Governance ... 22 New Governance Approach ... 22 3.6
Summary ... 23
3.7
II
4 Empirical Findings... 24
The Role of Businesses... 24
4.1 4.1.1 Melitta Unternehmensgruppe Bentz KG ... 24
4.1.2 Daimler AG ... 28
The Role of External Stakeholders ... 32
4.2 4.2.1 The Role of Investors ... 33
4.2.2 The Role of Non-Governmental Organizations ... 36
4.2.3 The Role of the Chamber of Commerce and Industry ... 39
Summary ... 42
4.3 5 Analysis ... 43
6 Conclusion ... 51
7 Managerial Implications ... 53
8 Bibliography ... 54
Interviews... 62 8.1
9 Appendix ... V
III I. Figures
Figure 1 Research evidence based on three pillars of investigation adapted from Gillham (2005). .. 6
Figure 2 Different viewpoints as part of the multiple case study. ... 7
Figure 3 Elements used for organizing interviews adapted from Gillham (2005). ... 8
Figure 4 Process of secondary data collection. ... 10
Figure 5 The hermeneutic spiral... 11
Figure 6 Coding phases in thematic analysis. ... 12
Figure 7 The interrelation between the subjects of study. ... 23
Figure 8 Main topics covered in the interviews. ... 42
Figure 9 Trigger for changes in the awareness on corruption and corporate governance. ... 46
Figure 10 Corporate culture as a way to mitigate corruption. ... 48
Figure 11 Opinions on the sufficiency of the German Corporate Governance Code. ... 49
II. Tables
Table 1 Management level of participants with reference to the company they work for. ... 9
IV III. List of Abbreviations
AG Corporation limited by shares AktG Stock Corporation Act BilReG Accounting Law Reform Act CCI Chamber of Commerce and Industry CSR Corporate social responsibility GmbHG Limited Liability Company Law HGB Commercial Code (HGB)
KG Limited partnership business entity
KonTraG Control and Transparency in Business Act NGO Non-governmental Organization
OwiG Regulatory Offences Act StGB German Criminal Code TI Transparency International TransPuG Transparency and Publicity Act
UMAG Law on Corporate Integrity and Modernization of the Right of Avoidance U.S. United States of America
VorstOG Management Compensation Disclosure Law
1 1 Introduction
Corporate governance is nowadays an integral part of everyday business and offers abundant options for investigation and analysis when looking at it from a perspective that includes the aspect of corruption. Good corporate governance encourages corporate managers to act according to the explicit and implicit rules and regulations set between the investors and the company (Macey, 2008). Nevertheless, unethical behavior still occurs and Carr and Outhwaite (2011) state that corruption is not only a problem in developing countries. As long as there is corruption, no sustainable development can be created, which makes it one of the biggest challenges of companies and governments (Wu, 2005). Dishonesty is of increasing importance in the current economic environment, and companies are therefore faced with the responsibility of taking precautions to avoid and take actions against corruptive behavior within their enterprises. To do so, corporate governance is one possible mechanism leading to satisfactory solutions for the companies and their investors. As part of corporate governance, businesses are using anti-corruption mechanisms for preserving their reputation and satisfying stakeholders (Bostan et al., 2010). Hence, a strong correlation between the development of corruption and corporate governance can be noticed, with a high potential for analysis in Germany as it is one of the main models used to fight corruption. The awareness of corruption and has been triggered by global scandals such as Enron, but even more by the scandal involving Siemens AG (Bostan et al., 2010). Likewise, Wu (2005) underpins that corruption does not only have a demand side, but also a supply side to it, which has been neglected in literature so far. Consequently, there is not enough research regarding the contributors and payers of corruption, this is seen as a part of the identified research gap. Wu (2005) supports the relevance of this thesis topic by stating that the creation of a greater understanding of the relationship between corruption and corporate governance is of importance. She further highlights that there is a lack of literature when looking at corruption from the supply side, which is the focus of this thesis. Moreover, she mentions the importance of internationally organized companies when looking at corruption, which is also covered by the research area of this paper.
Germany presents itself with the custom of having big corporations controlled by mighty families,
large banks or other corporations by cross-holding of shares (Mallin, 2010) the recent scandals
prior to the new reputation which makes this country an interesting case. This is why this research
project will be conducted as a multiple case study with the enterprises Melitta
Unternehmensgruppe Bentz KG, a German manufacturer of branded products and the Daimler AG,
2 a German car manufacturer. Moreover, a representative of Sparkasse Minden-Lübbecke, a German Bank, and a representative of a globally acting bank give insight on investors’ perception and interviews with a representative of Transparency International and the German Chamber of Commerce and Industry add a rather independent viewpoint. Further it is attempted to find out what the relationship between the corruption and the corporate governance in Germany is and how corporate governance mechanisms have changed and influenced the development of corporate governance in Germany.
Problematization 1.1
The financial crisis, several corporate scandals and abuse of entrusted power have made many countries aware of illegal corruption practices. The problem with corruption is that in its presence, a sustainable development cannot occur, underlining its importance for companies and governments (Wu, 2005). Contrary to people’s belief, unethical behavior also exists in developing countries (Carr & Outhwaite, 2011). Moreover, Wu (2005) argues that there is a negligance of the supply side of corruption in literature and states the need for more investigation regarding the understanding of the relationship between corruption and corporate governance. Taking all those factors into account, doing research on the relationship between corruption and corporate governance in a industrialised country from the aspect of the supply-side, seemed justifiable. In addition, several countries such as the United Kingdom have published very strict anti-corruption codes and unlike them, Germany decided to create a code which includes recommendations for stock listed companies in Germany which are not legally binding (Deutscher Gewerkschaftsbund, 2009a), thus aiming at taking a path towards New Governance and stewardship rather than control.
Likewise Germany was the starting point for several corruption scandals in the last two decades,
making it a suitable country for a multiple case study. In conclusion, it can be said that
investigating the role of corporate governance in avoiding corruption as well as the impact of
corruption on the development of corporate governance mechanisms in the case of Germany,
seems to be a research that would lead to new insights in corporate governance theory and
implementation.
3 Aim of Study
1.2
This study aims to assess and understand the influence and affect of cases of corruption in Germany on the corporate governance thinking in the country. It will analyse data from a variety of document sources such as mass media, academic reports, NGO and company material as well as information from interviews with people representing an array of institutions which are involved in the corporate governance implementation in Germany.
Research Questions 1.3
The main purpose of this study is to analyse the effects of emerging corruptive behaviour in the German business world on the development of corporate governance in Germany. Based on the aim of the study, the following research questions were elaborated:
Research question 1: What is the role of corporate governance and the stakeholders‟ influence in avoiding corruption?
Research question 2: What is the role of corruption and how does it influence and provoke the development of corporate governance in Germany?
Structure 1.4
Firstly an introduction to the methodology used in this paper will be given, including an insight on
chosen research approach and research method as well as the data collection process. Additionally,
the trustworthiness and the faced limitations will be indicated. Then the theoretical framework will
be discussed along with theoretical aspects of corruption and corporate governance as well as a
further understanding of corporate governance in Germany and the German Corporate Governance
Code. The empirical findings will be covered in the third section made up of the different
perspectives of the participants, including businesses and external stakeholders. This chapter will
be followed by the analysis of the findings in connection with the theoretical framework and a
concluding section and subsequent managerial implications.
4 2 Methodology
The following sections briefly lay out the methodology chosen for this master thesis. Additionally, it introduces the approaches that were considered suitable for this work and points out the limitations of this project.
Qualitative Research Approach 2.1
For this paper, an exploratory approach has been chosen which has been proven to be a good method to clearly identify the problem and elaborate new approaches. Instead of testing hypotheses, reoccurring phenomena are investigated (Gray, et al., 2003). In order to gain a deeper insight of this topic, this research will include a triangulation, which refers to the usage of several mechanisms at once (Gillham, 2005), thus literature research as well as interviews will be conducted as suggested by Saunders et al. (2009). Furthermore, an inductive approach was selected in which observations are made by analyzing data through primary as well as secondary research to be able to develop a hypothesis as the result of the research undertaken (Saunder et al., 2009). In this case it is expected to find greater knowledge of the role of corporate governance in avoiding corruption and a pattern on how corruption influenced the development of corporate governance in Germany.
When looking at research methods, literature usually differentiates between quantitative and qualitative analysis (Gray, et al., 2003). While quantitative data has its strength in a high number of results, thus increasing reliability, qualitative research is dependent on descriptions and the statement of participants as well as on the researcher’s interpretation. The author also states that the decision on research methods used depends on the researcher and what he tries to prove in combination with the amount of communication he desires (Gray et al., 2003).
A qualitative research approach has been adopted to conduct the proposed research project, as this
gives the possibility to investigate and understand the behavior of the participating individuals
(Bryman, 2008). As it is of high interest to acquire an insight on the peoples’ perception and
feelings on the topic of corruption, corporate governance and its development as well as the
interrelations between the areas, it is important to choose a research concept which is concerned
with the spoken word and leaves the possibility of interpretation (Bryman, 2008). According to
Gillham (2005), qualitative research can undertake investigation in areas that quantitative cannot
5 and gives information on topics that there has been little research conducted. Furthermore, the author states that qualitative research methods target information gathering from the inside, within a company, an organization or inside a person. Although qualitative research does not give informaton in high numbers as only a few participants take part in it, it is still a very interesting way of conducting research due to the fact that behaviour is not always rational, but partly caused by the context (Gillham, 2005). This means that the circumstances can influence behaviour which can be of interest for investigating the development of corruption and corporate governance in Germany. Moreover, Gillham (2005) mentions that objective research, thus referring to quantitative methods, usually lead to artefacts of methods implying that they might not be valid for the real life and just be of theoretical nature. Finally, he states that by using qualitative methods, one can become aware of the world and way of thinking of the interviewee hich can lead to a deeper insight than quantitave data would give.
Case Study Research 2.2
Qualitative methodology, including case studies, is a powerful instrument in research related to management or corporate strategy (Gummesson, 2000). According to Gillham (2005), a case can be defined as an individual, a group or a community, each of them being single cases. The reason for using case studies are many: Case studies have increased in popularity as a method for qualitative data collection (Lee et al., 2007) as it has been noticed that this type of data collection generates richer data. Furthermore, they are suitable for interpretivist approaches such as the one used for this research paper. According to Gillham (2005) and Cassell and Symon (2004), case studies usually support inductive approaches in the sense that rather than testing a hypothesis, a meaning is generated once the findings have been analyzed. It has a less objective approach than quantitative data collection, but this does not make it less significant. The focus of a case studies, and of this paper, are not the scientific facts and numbers, but the deeper reason and meaning behind the objectives aspects and participants behaviours (Gillham, 2005; Woodside, 2010).
Generally it can be said, that case studies provide a detailed analysis of a single case (Bryman,
2008) and by the combination of different data collection methods, such as interviews, document
research and observations, it is possible to gain a comprehensive understanding of the reviewed
issue (Eisenhardt, 1989). According to Gillham (2005), a case study is used to investigate an
institution or a group on several research questions, which is what is intended for this paper.
6 Eisenhardt (1989) argues that a case study is especially adequate as a research strategy if the study of organizational characteristics and dynamics are of importance for the outcome of the project. As the aim is a description of the current situation as well as a historical review on the happenings in the areas of corporate governance and corruption in Germany, the topics are investigated upon by using several sources of evidence (Gillham, 2005). This paper provides information from interviews and documents, such as guidelines and regulations (i.e. the German Code of Corporate Governance, German Jurification System) and unpublished internal documents as well as records (i.e. statistics from Transparency International, Annual Reports from Daimler AG):
Figure 1 Research evidence based on three pillars of investigation adapted from Gillham (2005).
According to Gillham (2005) the analysis of several single cases is referred to as a multiple case study, which will be used for this research. This multiple case study approach gives the possibility to find differences and similarities between the cases (Yin, 2003) and to gain greater understanding of the processes in the companies. The goal is to replicate the findings across patterns and to enhance the data credibility (Patton, 1990) as well as transferabiltiy of the studies findings into other contexts (Eisenhardt, 1989).
Documents
Media articles Press releases Surveys Scientific articles Books Legal texts Codes of Governance Working papers
Records
Annual Reports Sustainability Reports Compliance Reports
Interviews
Businesses Non-governmental Organisation Investors
Chamber of Commerce and
Industry
7 In this thesis, the two main cases for the analysis are two German companies, supported by information gathered from four other German institutions. The cases of this study consist of Melitta Unternehmensgruppe Bentz KG, a family-owned company, and Daimler AG, an international company listed on the German stock exchange, thus having different obligations of disclosing information related to corporate governance and corruption. Furthermore, empirical data regarding Transparency International is also collected, representing the view of NGOs. Likewise, the Chamber of Commerce and Industry has been interviewed as well as a local investor represented by the Sparkasse Minden-Lübbecke which invests mainly in local medium-sized enterprises.
Moreover, a bank with a focus on making investments in larger enterprises has been selected for interviews. By interviewing Transparency International as an example of an NGO and the Chamber of Commerce and Industry, the chance of biased results is lessened and an independent perspective is included. In addition, a local as well as a global bank was chosen to investigate the issue of corruption and corporate governance in Germany from an investor’s perspective, which is hoped to reduce biases and create more reliable and trustworthy results.
The development of
corruption and corporate governance in
Germany Local, privately
owned company not listed on stock
market
Chamber of Commerce as counselor for
local companies
Transparency International –
an NGO as a watchdog Global
company, listed on stock
exchange Global
investment bank with a focus on global
enterprises Local investment bank with a focus on local
enterprises
Figure 2 Different viewpoints as part of the multiple case study.
8 Research Material
2.3
Eisenhardt (1989) states, that data collection from multiple sources is important for the reliability of the data. Thus, the data for the present report will be collected from two sources: interviews and document review. This triangulation enables the cross-checking of the findings through the usage of several data.
2.3.1 Primary Data Collection
Primary research is useful for collecting qualitative information (Finn et al., 2006) as the researcher himself collects data (McDaniel & Gates, 2006) and is the first person to use it for a study (Veal, 2006). This makes it possible to tailor the questions to the aim and objectives of the research.
Interviews
According to Cassell and Symon (2004), interviews as part of qualitative research can vary in length and style as well as in the number of participants and while interviews are very time consuming, they give a deeper insight than questionnaires (Gillham, 2005). Interviews are suitable when there is a small sampling size and, when delicate and sensitive topics are discussed as doing an interview can create a more welcoming and personal atmosphere than surveys (Gillham, 2005).
Moreover, interviews are capable of revealing data that other methods cannot (Wellington &
Szczerbinski, 2007).
Figure 3 Elements used for organizing interviews adapted from Gillham (2005).
Gray et al. (2003) argue that an interview guide is necessary so that a variety questions that can be asked, depending on the subject’s input. Therefore, the interviews were outlined in a semi- structured way, as this gives the chance of flexibility for the interviewer and possibility of the spontaneous addition of questions to the given topics in the interview guide (Bryman, 2008;
Wellington & Szczerbinski, 2007). This type of interview has its characteristics in asking all participants the same structured questions, as well as unstructured ones (Gray, et al., 2003) with the result of having comparable results as well as more tailored ones. This type of interview is the most important type of conducting interviews with a high amount of data (Gillham, 2005).
Identifying key topics
Framing the questions
Checking that questions
are open
Piloting interviews
Redesigning interviews
Conducting and recording
Transcribing interviews
Analyzing, bundling
data Conclusion Identifying
key topics
9 As recommended by (Wellington, 2007) the questions were initially designed and clustered, starting with the easy questions and finishing with the more difficult ones. Also, a pilot interview was conducted in order to eliminate any errors and to make final ammendments. Likewise, leading questions as well as Yes and No answers as well as doubled-questions were avoided. In the next step, the interviews were conducted with representatives from different organizations, as it is important for the study to gain insight into the topic from a variety of angles. The participants have an abundant knowledge about corruption and corporate governance in Germany and are in leading positions. The key informants for the interviews were managers from Daimler, Melitta, Transparency International, the German Chamber of Commerce and Industry, the Sparkasse Minden-Lübbecke and a globally acting bank.
Management Board/
Senior Manager Department Head Employee
Melitta X
Daimler X X X
Chamber of Commerce and
Industry X
Transparency International X
Sparkasse Minden X
Globally acting bank X
Table 1 Management level of participants with reference to the company they work for.
As can be seen from the table above mainly at people with high authority and knowledge were interviewed, but in the case of Daimler also at the medium management and ordinary employees were questioned due to the fact that information regarding corporate social responsibility (CSR) and the mitigation of corruption are discussed extensively in their annual reports. By interviewing employees of different management levels, the aim was to investigate to what extent the preached ideology of compliance and corporate governance mechanism for fighting corruption is truly implemented. When looking at global investors, the search for volunteers turned out to be very difficult which led to an interview with an ordinary employee due to restrictions set by the management. This is also why this interview had to be conducted anonymously and without recording. The other interviews were recorded via a recording application on the computer and a recorder as this changes the nature and velocity of responses (Gray, et al., 2003) in a positive way.
Additionally, when conducting a face-to-face interview was impossible due to the location of the
participant, telephone interviews were conducted.
10
Final Conclusion Surveys to
support findings and
analysis Company
reports, NGO reports, stakeholder
websites Library,
EBSCOhost, academic
journals General
Information from Google and Google
scholar
2.3.2 Secondary Data Collection
The secondary research was conducted first, and existing research on the topic was thus analysed (Finn et al., 2000). The analysis of secondary data through the literature review is essential for identifying the gap of the study (Finn et al., 2000) and is less cost and time effective than primary research (McDaniel & Gates, 2006).
The document research includes reports from a variety of sources and the content can, as Eisenhardt (1989) argues, be of similar or contradictory nature. Thus, the sources being used include annual, sustainability and compliance reports of the surveyed companies, releases by NGOs, general media coverage and books as well as academic research papers. Company documents such as mission statements or annual reports are likely to be authentic and meaningful but they often try to let the company stay in a positive light. Mass media on the other hand, might be of less reliable nature, but it covers another perspective of the issue (Bryman, 2008).
Figure 4 Process of secondary data collection.
The document research process for secondary data started with a scan of internet sources for
general information on the topics of corruption and corporate governance. Firstly, the internet
search engines Google and Google scholar have been used to find media articles and scientific
reports on the subjects. Moreover, the university library was explored for books and eBooks and
the online data base for journals has also been scanned. Especially the academic journals on
EBSCOhost data base were found useful for this study in order to obtain information on the
theoretical framework and the methodological approaches used. The key words that have been used
during this process were: corporate governance, corruption, responsible business, new governance
and Germany. After having gained a first insight on the research topic and the business cases were
selected, the focus of obtaining information got more detailed. Company websites were examined
11
Understanding 1 Pre-understanding 1
Pre-understanding 2
Understanding 2 Pre-understanding 3
Understanding3
and a variety of reports such as annual, sustainability and compliance reports were inspected.
Additionally, websites and materials of NGOs and other important stakeholders such as worker unions, banks and the Ministry of Justice were looked into to gain further information and different perspectives on the study topic. Moreover, the German Corporate Governance Code was examined and during the inspection of the empirical findings, surveys from different auditing companies were added, in order to support or oppose the opinions of the respondents.
Data Analysis 2.4
An inductive approach to the analysis of the qualitative data was chosen to identify the relationship between theory and research. This approach gives the possibility to create theory out of the research as principal characteristic is the repetitive interplay between the data collection and the analysis of data (Bryman, 2008). Additionally, Eisenhardt (1989) states that the data analysis can be seen as the most challenging part of the research process, as the chosen hermeneutical approach includes the understanding from the authors perspective, “reading between the lines (Bryman, 2008)” and deals with the general challenge of analysing and interpreting data. The aim of this approach is to get as good knowledge as possible about the data and finding unique patterns which in turn, build a good basis for a further cross case analysis. After the individual analysis of every interview and document, a cross case analysis will be conducted in order to see evidence from different angles and to detect patterns across the cases (Eisenhardt, 1989).
The hermeneutical analysis is concerned with the written text and the interpretative process in order to explain the theories that are concerned with the meaning of the written text. Hirsch (1976) argues that the meaning of a text derives from the author’s intent whereas Ricoeur (1976) opposes that a text’s meaning is decided by the reader. The
hermeneutic spiral involves the circular relationship (Gadamer, 1994) between pre-understanding and understanding a text (Alvesson & Sköldberg, 2000) or as Gummesson (2008) argues between understanding a text and interpreting it. In this thesis, the hermeneutic approach has been applied to
Figure 5 The hermeneutic spiral.
12 the analysis of primary and secondary data in order to understand and analyze organizational issues and the relationship between the companies and their stakeholders and thus their perception of corruption and corporate governance.
Additionally to the hermeneutic approach of interpreting the obtained data, a thematic analysis was conducted to identify, analyze and report patterns or themes within the data set (Braun & Clarke, 2006). Even though there is no clear consensus on what theoretical analysis is and how it should be conducted, several principals have been identified to help the initial process (Bryman, 2008). As the aim is to identify themes and subthemes in the data by reading and categorizing the data (Bryman, 2008), Ryan and Bernhard (2003) advice that looking for repetitions, metaphors, similarities and differences, missing data and theory-related material while examining the data will help organize and identify it. According to Braun and Clarke (2006), the thematic analysis can either be used as a realist method that looks into reports, experiences and realities of the participants or it can be seen as a constructionist method. Here, the analysis is focused on the effects that events happening within society have on the experiences of the participant. As the process of thematic analysis is not described specifically, Braun and Clarke developed six phases to create meaningful patterns from the collected data:
Figure 6 Coding phases in thematic analysis.
Familiarisation with the data
Generating initial codes
Searching for themes among
codes
Reviewing themes
Defining and naming themes
Producing the
report
13 Trustworthiness
2.5
To assess the quality of the research, the trustworthiness of the project needs to be evaluated. Guba and Lincoln (1994) proposed four criteria for the assessment of trustworthiness: credibility, transferability, dependability and conformability. As for this study, credibility of the results is high, due to the triangulation of data sources (Bryman, 2008) and the variety of persons that have been interviewed. Additionally, the partly critical standpoint of the participants adds to the credibility, as they show their interest in the topic. Nevertheless, the transferability of the results is limited due to the unique cultural, legal and social environment of the target country Germany, which makes it difficult to transfer the results to other setting. Moreover, all respondent were of the same age group which implies that they might not have different perceptions of corruption and corporate governance. Additionally, dependability was not achieved, as the records such as interview transcripts and data analysis decisions were not reviewed by an external party. Also, the conformability is not achieved thoroughly due to the nature of qualitative data analysis, as it includes the immersion of oneself into the cases. The interpretation of the data is rather subjective and the objectivity of the study can therefore not be ensured.
Limitations 2.6
Special situations can lead to limitations, such as pressure from management or the community
when offering to participate in the interviews (Gray, et al., 2003). Especially the access to
information from large German banks emerged as a problem during the research process, as the
employees were not allowed to show their perspective on the topics. In the same manner, gaining
access to all the areas this research is attempting to cover can be very difficult as the researchers
were not aware how cooperative companies, NGOs and investors were regarding giving out
information on the research topic. Likewise, the short amount of time available for data collection,
as well as distance between the researchers can create problems and needs to be seen as a
limitation. During the research process, language emerged as a disadvantage. As the topic targeted
Germany, the participants were more comfortable answering questions in German and numerous
sources of information targeted the German market, therefore by translating them into English a
loss of content and information could be possible. Additionally, the word count of this master
thesis can be seen as another limitation of this paper, as the authors felt that more information
could have been added.
14 3 Theoretical Framework
Over the last two decades, there has been a development in the perception of corporate governance (Carr & Outhwaite, 2011). It is defined by Cromme (2005, p. 5) as “a term describing good, efficient management and supervision of companies on the basis of internationally recognized standards in the interests of the company‟s owners and its social environment.” Moreover, it strives to create a framework and processes that can increase efficiency of companies and thus, of the country. According to Macey (2008, p. 1), corporate governance has the purpose to “persuade, induce, compel, and otherwise motivate corporate managers to keep the promises they make to investors.” Furthermore, it can mitigate corruption as it offers mechanisms to control excessive use of power by directors as well as audit controls (Carr & Outhwaite, 2011). The concept of corporate governance has a tremendous impact on business performance and acts as a double- benefit as it can lead to a greater performance, as well as to mitigation of corruption (Wu, 2005).
This is why corporate governance plays such an important role when looking at business practices.
Yet, the importance of corporate governance had been underestimated until the end of last century.
Scandals such as the bankruptcy of Enron Corp. as a consequence of fraud and money laundering, led to changes in the focus of corporate governance. As a consequence, transparency and disclosure was put into spotlight and ethical issues and ethical performance got into focus (Gill, 2008). The mechanism used for doing so are board committees, codes of conduct, and social reporting (Gill, 2008) and their distinct feature is that all those mechanisms are voluntary, triggered by guidelines that were set by NGOs (Gill, 2008). The effectiveness of these guidelines has been underpinned by several studies which have shown that the lack of such mechanisms lowers operating performance and increases costs (Wu, 2005). Additionally, the lack of good corporate governance bears the potential for corruption. Thus, it can be said that corporate governance has an influence on corruption and can be used as a mechanism for its mitigation.
Theoretical Aspects of Corruption and Corporate Governance 3.1
Both, the agency theory and the stewardship theory are focusing on the structure of effective
boards and motivators of employees. Although both of them deal with the relationship between
principals, which are the shareholders, and agents, which represent the executives, they have
completely different approaches.
15 3.1.1 Agency Theory
The agency theory aims at solving problems that arise in relationships between principals and agents. It mainly focuses on addressing the “agency problem” which evolves when there is a conflict of interest between the two parties and information is withheld by the agent, hindering the principal from achieving his goals (Gill, 2008). Likewise, this theory sees the agent and humans in general, as rational and with a focus only on extrinsic motivators (Hart, 1995). Additionally, Mintz (2005) underlines this by stating that the general perception is that managers put their personal goals on a higher priority than the goals of the company, thus neglecting the shareholders (Muth &
Donaldson, 1998). Generally, it is stated that the agency problem can never be solved completely (Mintz, 2005), which is why it is often suggested to make the management compensation flexible based on performance. Although this approach has been a very popular one in literature, it has been opposed by the stewardship theory (Muth & Donaldson, 1998).
3.1.2 Stewardship Theory
While the agency theory elaborates upon motivators from a financial and economic perspective, the stewardship theory has its roots in psychology and interprets motivators of human beings differently (Muth & Donaldson, 1998). Whereas the agency theory is in favor of the independence of the board, the stewardship theory is not. The latter argues that agents also have intrinsic, non- monetary motivators such as the need for achievement. The authors also state that they are indeed capable of acting in the principal’s interest, as the agent is seen as a steward of corporate assets who acts on behalf of the company by protecting the assets and this sense of power which in the end can lead to an increase in returns. Furthermore, it is argued that an empowered manager will control assets responsibly and in the end generate better results for the shareholders (Mintz, 2005).
Although the agency theory has not been rejected completely, it seems as if the stewardship theory has a more modern approach towards needs and motivators.
Stakeholder Theory 3.2
The stakeholder theory refers to how businesses should be managed and assumes that values are an
essential part of business practice and organization (Freeman et al., 2004). Thus, if there is no
separation between ethics and economics, the conclusion can be made that morally responsible
behavior influences business performance. Consequently, Freeman et al. (2004) underpin that
shareholders are only one part of several stakeholder groups that influence business performance
and are affected by business practices (Mintz, 2005). Freeman et al. (2004) further mark that the
16 management needs to take the interests of all groups that could be affected into account. This, however, is an idealistic and theoretical approach due to the fact that in practice, interest can be contradictory and a company is usually not capable of pleasing all stakeholders, which include a wide range from employees to lenders, banks and shareholders (Gill, 2008). As a consequence, relationships towards stakeholders might vary depending on interests. Nevertheless, one can argue that favouring one stakeholder group excessively will cause tension and therefore the ideal way is to have a balanced relationship with all stakeholders. This, however, will be difficult as the tension between stakeholder in general seems to be increasing (Gill, 2008).
One example of how this balancing is being approached by German stock listed enterprises is the implementation of a two-tier board, consisting of a supervisory board elected by shareholders and an executive board with members from within the company as well as representatives of unions.
This proves that the German corporate governance structures are based on principles from the stakeholder theory as more than one shareholder group’s interests are represented. Also, the involvement of employees can reduce resistance and increase opportunism which eventually would lead to better corporate governance.
Definition and Development of Corruption 3.3
“Corruption is the abuse of entrusted power for private gain (Transparency International, 2013).”
Despite common belief, corruption exists in both, developing and developed countries (Carr &
Outhwaite, 2011). Corruption, defined by Wu (2005, p.5) as “the abuse of public office”, has been
around for centuries and has been considered as a part of human condition, until 1977 when the
Foreign Corrupt Practices Act introduced in the United States (Alford, 2012). Although corruption
can lead to a gain in wealth from a short term perspective, it has an abundant amount of negative
effects. First of all, it creates an uneven distribution of wealth in which the poor are neglected and
the richest of society take an unfairly large part. Additionally, corruption is an unsustainable
practice that increases running costs of enterprise, destroys fair competition and can lead to
distortion of economic growth. A great incentive for companies to avoid corruption is not
necessarily their attitude towards creating sustainable business models, but their fear of losing their
brand image and reputation (Alford, 2012). Additionally, sustainable development is hampered by
corruption, which makes it one of the biggest challenges for companies and governments (Wu,
2005) and thus an interesting topic to analyze. However, as part of corporate governance,
17 businesses are using anti-corruption mechanisms for preserving their reputation and meeting stakeholder needs (Bostan et al., 2010). Furthermore, Bostan et al. (2010) state that Germany is one of the role models when looking at fighting corruption, especially triggered by global scandals such as Enron and the scandal involving Siemens AG. Additionally, Wu (2005) underpins that corruption does not only have the demand side, but also the supply side to it, and she states that attention usually goes to the demand side, but the responsibility of suppliers is not to be neglected.
Yet, there is not enough research regarding the contributors and providers of corruption, which is what is seen in this paper as part of the research gap.
Corporate Governance in Germany 3.4
Germany is a very interesting case for analyzing corporate governance mechanisms due to its unique feature of the clear separation of the management from the supervision of the enterprise (Mintz, 2005). This is implemented by a two-tier board structure, consisting of an executive management board called “Vorstand” and a supervisory board called “Aufsichtsrat” with half of the members elected by shareholders and the other half by employees (Schilling, 2001; Mintz, 2005). Here, co-determination, an important feature of the German governance system comes into play, which means that everybody has “the right to be kept informed about the company‟s activities and to participate in decisions that may affect the workers (Mallin, 2010).” This implies that employees have a compulsory representation in the companies’ supervisory boards which in turn creates trust and a cooperative environment between employees and employers (Mallin, 2010).
Unlike in other countries, the responsibility and privilege of managing the enterprise in Germany lies with the management board which acts according to the best interest of the company rather than the one of the shareholders (Schilling, 2001). This does not mean that the voices of shareholders are not being heard, as the chairman is always elected by them. Furthermore, the general idea of the German corporate governance model is a consensus approach (Schilling, 2001;
Mintz, 2005). The task of the supervisory board is the supervision of management activities
(Bordean & Pop, 2012). After all, unlike the United States and the United Kingdom, Germany has
an insider-oriented corporate governance system (Bordean & Pop, 2012).
18 Summarized it can be said that while the German approach on corporate governance was very consensus oriented in early times, in practice, it was not very transparent, there was little control from parties outside of the management and was unattractive for foreign investors (Strenger, 2004). In the mid-1990s, however, corporate governance started to change, triggered by several management failures, bankruptcy of various German companies, privatization of companies and a change in the composition of investors as a consequence of globalization as well as the liberalization of markets (Cromme, 2005; Schilling, 2001). As more foreign companies were planning on investing in German enterprises, there was the need for a more transparent corporate governance that would lead to an increase in trust towards German businesses. In 1996, the first legislation move towards greater transparency was put into practice by the Law on Control and Transparency in Business with a focus on risk management and empowerment of the supervisory board (Cromme, 2005), followed by the German Corporate Governance Code in 2002 as a collection of recommendations for german stock-listed companies.
3.4.1 The German Corporate Governance Code
Over the last decades, a variety of corporate governance codes have been issued and revised all over the world, in line with different legal, cultural and political contexts (Cromme, 2005). The common basis for the establishment of a corporate governance code was the desire for more transparency and accountability as well as the aim to increase the confidence of international investors in the local stock market as financial scandals were often the main triggers of these developments (Mallin, 2010).
In Germany, the Corporate Governance Code has been issued by the Government Commission on
the German Corporate Governance Code. This commission was chaired by Gerhard Cromme (thus
the often cited name “Cromme Code”) and comprises of experts from a variety of business and
industry areas (Commission of the German Corporate Governance Code, 2002), ten of which are
business men, two academic scholars and one union representative (ver.di, 2013). In its foreword,
the German Corporate Governance Code (the “Code”) is described as “essential statutory
regulations for the management and supervision (governance) of German listed companies and
contains internationally and nationally recognized standards for good and responsible governance
(German Corporate Governance Code, 2012a).” It is stated that the purpose of the Code is to
make the German corporate governance system more transparent and understandable and that it is
intended to increase the trust of international and national investors, customers, employees and the
19 general public in the management and supervision of listed German stock corporations (German Corporate Governance Code, 2012a). Especially the internationally uncommon two-tier governance system is being regulated by the Code to increase the international stakeholders’
confidence in the companies as it is easier to understand the task division between the management board and the supervisory board (Cromme, 2005).
The Code includes recommendations, suggestions and provisions which the stock listed companies in Germany should comply with but are not legally binding (Deutscher Gewerkschaftsbund, 2009a) and is established on a “comply or explain” basis, which means that the companies either comply fully with the Code or they need to explain why they deviate from it. It is being reviewed on an annual basis to adjust it to national and international developments (Government Commission German Corporate Governance Code, 2012). Eventually, the Code addresses listed companies in Germany but it is recommended that even un-listed companies follow and respect the code as it increases the transparency and accountability in the company (Government Commission German Corporate Governance Code, 2012).
Amendments of the German Corporate Governance Code
Since the Code has been issued in 2002, a vast variety of amendments (Odenius, 2008) have been
made in order to align it with the current legal requirements and to adapt it to developments in the
national and international business environment (Cromme, 2005). The modifications between 2003
and 2005 can especially be ascribed to the newness of the Code and the further need of
transparency as well as the aforementioned importance to make the German two-tier management
system understandable for international business managers. Besides, many changes can be related
to corporate scandals such as WorldCom and Enron, which led to the current aim of ensuring that
good corporate governance is put into practice. The basis for later amendments was a variety of
changes in the EU legislation as well as other legal requirements and changes in the framework
conditions (Cromme, 2005). The Code was subject to major amendments in 2007 as the
international developments raised corporate governance questions concerning the management
board that go beyond the compensation (Cromme, 2007). A further improvement of the Code in
2008 in the area of the involvement of the supervisory board and the audit committee in the review
of financial reports as well as the disclosure of management board compensation (Government
Commission German Corporate Governance Code, 2008) was followed by another year of
20 numerous changes based on legislative adaptations in 2009. The main focus in this year’s modifications was the emphasis on sustainable creation of value in the best interest of shareholders, employees and other stakeholders (Deutscher Gewerkschaftsbund, 2009b). According to the Klaus- Peter Müller, Chairman of the Government Commission, the Code has proven its worth during the financial crisis especially due to its enforcing nature for internal dialogue and the more professional approach to corporate control. (Government Commission German Corporate Governance Code, 2009a). In 2010, diversity, especially the involvement of women on the executive level, was of interest as the commission states that it should be in the companies’ economic interest to involve female leaders (Government Commission German Corporate Governance, 2010). As the Code is of very good quality and nationally and internationally accepted (Government Commission German Corporate Governance Code, 2011), mainly legal amendments were applied since 2011 (Government Commission German Corporate Governance Code, 2012c) and for 2013, it is the aim to improve the comparability of the Code as well as the transparency through recommendations on the remuneration for management board members (Government Commission German Corporate Governance Code, 2013).
Critical View of the German Corporate Governance Code
It is evident that the Code is being complimented and favored by the German economy and politicians, the critics can nevertheless not be neglected. Especially the non-binding nature of the Code is being seen skeptically as non-compliance does not have any legal consequences for the refusing company. Several years ago, experts started demanding the integration of investor representatives in the Commission and that non-compliance should be published and have severe consequences for the corporation (Jahn, 2007). And even though the majority of the listed companies state that they comply with the Code, a major corruption case at Siemens AG and ruinous speculations of several banks were still possible (Müller-Dofel, 2010). The lawyer Hoffmann-Becking even claims the possible dissolving of the Government Commission (Jahn, 2011), as the commission detains itself with minor detail questions such as women’s quota in supervisory boards rather than to concentrate on important topics (Fockenbrock, 2011).
Additionally, it has been criticized that the process of amendments in the Code is being
intransparent which means that companies and other interested experts do not have the chance to
receive a holistic justification for the changes being made (Hoffmann-Becking, 2010).
21 In 2012, the commission has reacted to these criticisms and made it possible for interested citizens to discuss the suggested amendments before the final consultation (Heldt & Royé, 2013) and decision are being made (Mülbert, 2012). Subsequently, the Berlin Centre of Corporate Governance found that 95.1% of the management and supervisory board chairmen welcomed this consultation process (Bartz & von Werder, 2012). Moreover, the Code’s climate has been surveyed, which showed that the management and supervisory board chairmen of the companies listed at the German Stock Exchange in Frankfurt/Main have a generally positive attitude towards the institutional design and the substantial content of the Code (Bartz & von Werder, 2012).
Generally, it is noticeable that the Government Commission has taken in the criticism of the public and is trying to integrate these points into the future Code amendments in order to work for a further improvement of the German Corporate Governance Code and its acceptance.
Legal framework 3.5
To assess corporate governance and corruption in Germany, it is important to know the implications which can be drawn from the German legal system. Therefore, it is important to know that these topics are strongly connected with legal compliance and accountability and the following section gives an insight on the legal foundations of the topics in Germany.
3.5.1 Corruption
Corruptive behavior is regulated in the German Criminal Code (Strafgesetzbuch, StGB) and
includes taking bribes (§331 StGB), taking bribes meant as an incentive to violating one‟s official
duties (§332 StGB), giving bribes (§333 StGB) and giving bribes as an incentive to the recipient‟s
violating his official duties (§334 StGB). Additionally, it can be separated between the bribery in
commercial practice (§299 StGB) and bribery of public officials (§332 StGB) (Federal Ministry of
Justice, 2012a). Besides, as the German legal system does not impose of a corporate crime law
(Graf Lambsdorff & Nell, 2010), legal persons can only be prosecuted based on the Regulatory
Offences Act (Gesetz über Ordnungswidrigkeiten, OWiG) (Federal Ministry of Justice, 2013).
22 3.5.2 Corporate Governance
The legal basis for the German Corporate Governance Code is the Stock Corporation Act (Aktiengesetz, AktG) 1 . §161 AktG states that management board and supervisory board of listed companies need to state on an annual basis that the company complies with the recommendations of the Code, or give reasons why they are not being complied with (Federal Ministry of Justice, 2012b). The comply-or-explain approach och the Code is hence fixed legally. Moreover, several important legal initiatives related to corporate governance and increased corporate integrity have been released: The Control and Transparency in Business Act (KonTraG) to alleviate the corporate governance of companies by specifying and extending the regulations of the Commercial Code (HGB) and the Stock Corporation Act (AktG) (von Rosen, 2001), the Transparency and Publicity Act (TransPuG) to improve the transparency and control of the corporate management (Seibt, 2002) and the Accounting Law Reform Act (BilReG) to strengthen the role of the auditor (Deutscher Bundestag, 2004).
New Governance Approach 3.6
According to Hess (2008), a new type of governance has been created over the last few years called
„New Governance“. While conventional regulation systems have their emphasis on rules that are centralized and imposed on enterprises as a way of controlling their actions and punishing them if they do not comply, New Governance aims at creating a greater awareness and participation of businesses by using approaches of a decentralized and participatory nature (Hess, 2008). This new model of corporate governance appeared as a reaction to the failures of the oudated command-and- control system, as the old system proved itself to be inefficient and too slow when attempting to adapt to new environments and circumstances (Hess, 2008). Additionally, it encouraged enterprises to emphasize on fulfilling the minimal standards rather than motivating them to improve to more than the minimum requirements (Gill, 2008). Furthermore, Hess (2008) states that pressuring enterprises to integrate disclosure in business pratices leads into resistance to do so. This is because, if stakeholders insist on disclosing corporate responsibility it means that there is a high intolerance towards misbehaviour. This self-regulation is furthermore supported by meta-regulation mechanisms, indicating that an external actor needs to be involved, such as NGOs who engage through activism and other campaigns (Gill, 2008). Furthermore, he states that the new regulatory system is based on three pillars named disclosure, refering to information, dialogue, when dealing
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