Stewardship and Shareholder Engagement in Germany

Wolf-Georg Ringe is Professor of Law & Economics at the University of Hamburg Faculty of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Corporate stewardship holds great promise for the improvement of shareholder engagement and the encouragement of more responsible and long-term oriented value creation. Many countries have now adopted a best practice code for the stewardship role of institutional investors and asset managers, following the UK example. Yet the EU’s largest economy remains surprisingly reluctant to join in the merry go-round. Lawmakers and regulators in Germany have been sitting on the fence on the issue during the past several years, hesitating on what to do. Most saliently, Germany has refused to adopt an official stewardship code, and the recent reform of the European Shareholder Rights Directive (SRD II) that is promoting similar long-term engagement policies at the EU level is eyed with some suspicion. Although shareholders of German firms have taken a more assertive role as active investors recently, it is surprising to see the comparative reluctance of the German government towards promoting a stewardship code that would define and promote engagement practices. Thereby, Germany is swimming upstream by refusing to follow the international trend towards such a code of best practices. In a new paper, I explore the role that stewardship and shareholder engagement play in the German context and investigate the reasons behind the reluctance of lawmakers to follow the international trend. I also discuss whether the adoption of a Stewardship Code would still make sense in the regulatory framework of Germany today.

Despite the increased presence of shareholder engagement (and even activism), several reasons may explain why lawmakers have refused to adopt a stewardship code so far. While many doctrinal or functional reasons are put forward to explain this, I argue that the main political reason for this reluctance lies in the limited geographical reach of such a code, which would primarily apply to the (limited) domestic fund industry and would be unable to prescribe any meaningful principles to foreign-based asset managers. Simply put, I argue that the comparatively small size of the German fund industry relative to the economy may explain why regulating it may not be the government’s top priority. Instead, the German position is following more traditional patterns of domestic corporate governance and law. Still, I argue that the adoption of a code in the German context may make sense as a complementary instrument, for example to define expectations and to clarify the obligations of investee companies. Most importantly, it would benefit domestic investors that are typically “home biased” and thereby frequently disproportionately invested in domestic funds.

The implementation of SRD II into German law should therefore not be seen as the end of the debate. Rather, we should strive to continue our efforts towards strengthening engagement and accountability in the German market.

The full paper is available for download here.

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