The Influence of Corruption on the Corporate Governance Development in Germany

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1 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

2 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

3 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

4 Table of Content I. Figures... III II. Tables... III III. List of Abbreviations... IV 1 Introduction Problematization Aim of Study Research Questions Structure Methodology Qualitative Research Approach Case Study Research Research Material Primary Data Collection Secondary Data Collection Data Analysis Trustworthiness Limitations Theoretical Framework Theoretical Aspects of Corruption and Corporate Governance Agency Theory Stewardship Theory Stakeholder Theory Definition and Development of Corruption Corporate Governance in Germany The German Corporate Governance Code Legal framework Corruption Corporate Governance New Governance Approach Summary I

5 4 Empirical Findings The Role of Businesses Melitta Unternehmensgruppe Bentz KG Daimler AG The Role of External Stakeholders The Role of Investors The Role of Non-Governmental Organizations The Role of the Chamber of Commerce and Industry Summary Analysis Conclusion Managerial Implications Bibliography Interviews Appendix... V II

6 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 Figure 3 Elements used for organizing interviews adapted from Gillham (2005)... 8 Figure 4 Process of secondary data collection Figure 5 The hermeneutic spiral Figure 6 Coding phases in thematic analysis Figure 7 The interrelation between the subjects of study Figure 8 Main topics covered in the interviews Figure 9 Trigger for changes in the awareness on corruption and corporate governance Figure 10 Corporate culture as a way to mitigate corruption Figure 11 Opinions on the sufficiency of the German Corporate Governance Code II. Tables Table 1 Management level of participants with reference to the company they work for III

7 III. List of Abbreviations AG AktG BilReG CCI CSR GmbHG HGB KG KonTraG NGO OwiG StGB TI TransPuG UMAG U.S. VorstOG Corporation limited by shares Stock Corporation Act Accounting Law Reform Act Chamber of Commerce and Industry Corporate social responsibility Limited Liability Company Law Commercial Code (HGB) Limited partnership business entity Control and Transparency in Business Act Non-governmental Organization Regulatory Offences Act German Criminal Code Transparency International Transparency and Publicity Act Law on Corporate Integrity and Modernization of the Right of Avoidance United States of America Management Compensation Disclosure Law IV

8 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, 1

9 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. 1.1 Problematization 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. 2

10 1.2 Aim of Study 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. 1.3 Research Questions 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? 1.4 Structure 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. 3

11 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. 2.1 Qualitative Research Approach 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 4

12 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. 2.2 Case Study Research 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. 5

13 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): 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 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). 6

14 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. Local investment bank with a focus on local enterprises Global investment bank with a focus on global enterprises Local, privately owned company not listed on stock market The development of corruption and corporate governance in Germany Global company, listed on stock exchange Chamber of Commerce as counselor for local companies Transparency International an NGO as a watchdog Figure 2 Different viewpoints as part of the multiple case study. 7

15 2.3 Research Material 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 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). Identifying Identifying key key topics topics Framing the questions Checking that questions are open Piloting interviews Redesigning interviews Conducting and recording Transcribing interviews Analyzing, bundling data Conclusion 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 semistructured 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). 8

16 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/ Department Head Employee Senior Manager Melitta X Daimler X X X Chamber of Commerce and X Industry 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. 9

17 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). General Information from Google and Google scholar Library, EBSCOhost, academic journals Company reports, NGO reports, stakeholder websites Surveys to support findings and analysis Final Conclusion 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 10

18 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. 2.4 Data Analysis 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 Understanding3 Pre-understanding 3 Understanding 2 Pre-understanding 2 Understanding 1 Pre-understanding 1 Figure 5 The hermeneutic spiral. 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 11

19 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: Familiarisation with the data Generating initial codes Searching for themes among codes Reviewing themes Defining and naming themes Producing the report Figure 6 Coding phases in thematic analysis. 12

20 2.5 Trustworthiness 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. 2.6 Limitations 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. 13

21 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 doublebenefit 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. 3.1 Theoretical Aspects of Corruption and Corporate Governance 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. 14

22 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) 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, nonmonetary 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. 3.2 Stakeholder Theory 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 15

23 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. 3.3 Definition and Development of Corruption 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, 16

24 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. 3.4 Corporate Governance in Germany 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). 17

25 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 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 18

26 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 19

27 numerous changes based on legislative adaptations in 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). 20

28 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. 3.5 Legal framework 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 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). 21

29 3.5.2 Corporate Governance The legal basis for the German Corporate Governance Code is the Stock Corporation Act (Aktiengesetz, AktG) 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). 3.6 New Governance Approach 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-andcontrol 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 1 Katharina Buddenberg IHK WESTFALEN ZU BIELEFELD, interview on the 7 th of May

30 with stakeholders and development, with reference to enterprises. Additionally, Hess (2008) points out that in order to achieve social reporting, all pillars must be implemented. Also, New Governance has the philosophy of lessons learned, as it is believed that enterprises have better abilities to transfer their experiences into practical knowledge. However, critically speaking, it is believed that enterprises only disclose information when they are threatened, i.e. with loss of reputation (Gill, 2008). From a contradictory perspective, some authors point out that selfregulation can have a negative effect, as enterprises are given the possibility to avoid restrictions when given the freedom to what extent they want to report (Hess, 2008). This way, they can tailor corporate governance to their own situation and needs (Hart, 1995). After all, this study aims at finding out if self-regulation has a positive effect on governance of enterprises as well as on mitigation of corruption. 3.7 Summary Corruption Agency Theory vs. Stewardship Theory Corporate Governance Stakeholder Approach German Corporate Governance Code Legal Regulations New Governance Disclosure Dialogue Development Figure 7 The interrelation between the subjects of study. As the figure above indicates, corruption is mainly influenced by the agency theory and the stewardship thinking. It is evident, that the presence of this illegal practice led to a rethinking in the business world and thus to the integration of stakeholder needs and the corporate governance idea. Consequently, the concept of corporate governance has been revised and a new governance approach arose in recent years, which includes the idea of voluntary self-regulation. 23

31 4 Empirical Findings The following section highlights the main findings of the conducted interviews and the roles and perspectives of the different actors as well as information from secondary data such as surveys, company records and media documents. 4.1 The Role of Businesses In today s globalized and highly competitive business environment, an asset of increasing importance is the company s reputation. This reputation is being challenged by the influence of corruption, which has constituted itself as a global problem and hampers economic development worldwide (DiPiazza, 2008). The mechanisms provided by corporate governance are good tools to eliminate the possibilities of engagement in corrupt behavior (Shkolnikov, 2002). Additionally, a survey with senior executives conducted gives clear evidence that regulating corruption is connected to good governance and adds value to the corporate brand (PricewaterhouseCoopers, 2008) which supports the assumption that corporate governance is a useful instrument to deliver the best value to the stakeholders Melitta Unternehmensgruppe Bentz KG The German manufacturer of branded products Melitta Group was founded 1908 in Dresden/Germany by Melitta Bentz who invented the basis for the company, the worldwide first coffee filter with filter paper. In 1929, the company moved its headquarter and production facilities to Minden/Germany, where it is still found today and the conical filter which is still used all over the world and made the company famous, was introduces in Until the 1980s, the company was managed only by family members, but after years of expansion, the third generation took over and it was agreed to split the operations into legally independent companies with non-family managing directors, pooled under the roof of the Melitta Group (Melitta, 2005). The Melitta Unternehmensgruppe Bentz KG is organized as a limited partnership business entity (Kommanditgesellschaft, KG) with four limited partners and three family members as the general partners: Dr. Thomas Bentz and Dr. Stephan Bentz are the founder s grandsons. Jero Bentz entered the Group s management in January 2013, heralding the coming alternation of generations and is the fourth generation leading this family-owned company (Melitta, 2013). 24

32 Today, Melitta is one of the German leading brands on the coffee market and well-known for its high-quality branded products. The family company is peripherally organized to enable the alignment of operations with the need of the local markets and has one central corporate steering division in Minden (Melitta, 2011) was a positive year for the Melitta Group. Furthermore, it has subsidiaries in the USA, Canada and Brazil and additionally, owns administrative representations in most European countries as well as in Russia, Japan and China (Melitta, 2011). Generally one can observe that Zeyen 2, the responsible for corporate legal affairs and human resources at Melitta, does not see the company in the focus of the corporate governance discussion: Corporate Governance is a different matter, on the one hand because we are a medium-sized business and on the other hand because we are family-owned. and adds Corporate Governance is used for the protection of the general public and the investors, and that is in our case the family. And they are also the top-management, which means that this is not really interesting for us 3. Nevertheless, Melitta has implemented certain tools, which are beneficial for good governance and used to secure sustainable business practices such as the separation of powers on the topmanagement level (Mallin, 2010). The corporate management is engaged in the daily operational business, whereas the advisory council is an independent supervisory body that controls it (Schilling, 2001). Zeyen argues that the independence of the advisory board is important for the accomplishment of control, but it is also necessary to provide the members with a certain role and authority 4. While Zeyen brings forward the argument, that external advisory board members are to possess a certain expertise, are searched for by independent consultants and are not connected to family members 5, the independence of the advisory council members may be arguable. In 2011 two members of the corporate management were also members of the advisory council (Melitta, 2011) and even though the council needs to take certain decisions, such as the appointment of the corporate management, unanimously 6, the influence of the corporate management members on the council cannot be neglected. Contrary to this position, shareholders meeting elects the advisory council for three years and they in turn appoint the corporate management for three years (family 2 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Ibid. 4 Ibid. 5 Ibid. 6 Ibid. 25

33 members for five years) 7. Thus, the shareholders have the right and the possibility to articulate or withdraw their confidence in the advisory council s ability to control the corporate management. Concerning the avoidance of corruption through corporate governance, Zeyen 8 is unsure if it is enough to have governance regulations at the top, such as a cap for management board remuneration. According to him, analysis of the market risks and nature of business transactions are essential. Additionally, rules and regulations for business conduct are also of importance, as well as the control of the processes. Nevertheless he is certain, that it is still possible to conduct profitable business in Germany without illegal practices. Zeyen also adds the importance of loyalty and integrity in family-owned businesses. It is easier to be loyal and of integrity towards a person than towards an anonymous shareholder. It is psychologically easier, but also more important, as our managers and the family trust our employees on every level and at the same time assign them many responsibilities 9. Yet, he is not convinced that corruption can be mitigated by the connection of a company to an owner-family. According to Zeyen 10, corruption is a matter of the market and businesses one is working in, regardless of ownership structure. Supporting this view, a survey by the auditing company KPMG found that medium-sized companies are often victims of business crime. Many medium-sized and family-owned companies believe in the principle of trust and that too much control results in bureaucracy which provokes a perceived loss in flexibility, often the companies competitive advantage (KPMG, 2010). Generally the survey shows that medium-sized companies have the same risks as big corporations, but less media presence. The challenge is to find a compromise between effective and efficient mitigation of business crime and flexibility in the organizational structures and the mission should be: control where needed, trust where possible (KPMG, 2010). In 2008, the Federal Cartel Authority pressed charges against Melitta and three other major German coffee roasters because of price-fixing agreements (Schlautmann, 2009). This circumstance led to an increase in perception of compliance. We have talked about it [compliance, author s note], and compliance regulations were existent before, but this was the 7 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Ibid 9 Ibid. 10 Ibid 26

34 crucial point 11 says Zeyen. But as the company is active in the retail industry, Zeyen is convinced that corruption is only of minor importance 12, which undermines the results of a survey by the auditing company PricewaterhouseCoopers (2008), stating that awareness of corruption in German retail and consumer goods industry is relatively low. But German companies do not protect themselves sufficiently against corruptive behavior, as only 6% of the surveyed companies feature an anti-corruption program (the international industry average is 26%). Zeyen also states, that cartels and the compliance with legal regulations are important for the company, and the implementation of mechanisms and initiatives concerning these matters are ongoing. There has been no problem to change and implement these, as the company has been convicted. states Zeyen, and continues there were high possible penalties, everybody knew that and it was openly communicated within the company. Everyone understood that this is not supposed to happen again 13. Nowadays, employees are being trained on an ongoing basis, especially concerning the legally correct execution of their assignments to avoid incidents such as the coffee cartel. 11 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Ibid. 13 Ibid. 27

35 4.1.2 Daimler AG The Daimler AG, the inventor of the automobile, is a German car manufacturer, a provider of financial services and operates worldwide (Daimler AG, 2013a). Daimler AG employs over 275,000 employees and had revenue of 114,297 million in 2012 (Daimler AG, 2012). It is an incorporated company, listed on the German stock market and thus required to disclose information, in the form of extensive annual reports (Federal Ministry of Justice, 2012b). Consequently, working in a compliant way and ensuring transparency, as well as integrity should be of utmost importance. As it is a characteristic of the German management structure, Daimler has a Board of Management with eight representatives (Daimler AG, 2013b) and a Supervisory Board of twenty representatives, ten elected by shareholders and ten by employees (Daimler AG, 2013c). The company was originally established by the inventor of the car, Carl Benz and Gottlieb Daimler in 1886 under the name of Daimler Motorengesellschaft before it became the Daimler-Benz AG in 1926 after a fusion with Benz & Cie. Although Mercedes Benz can be seen as the strongest brand of the company, it has also produces trucks, buses and vans and offers financial services. Furthermore, it owns a great amount of shares in energy companies, in technology companies as well as aviation enterprises (Daimler AG, 2013a). In times of high competition, Daimler wanted to become even more competitive and merged with Chrysler Group LCC to the DaimlerChrysler AG (Badrtalei & Bates, 2007). This has been done to increase growth, encourage diversification, to take advantage of economies of scale and to strengthen its international brand awareness (Badrtalei & Bates, 2007). Unfortunately, this merger did not even last a decade and Daimler separated from Chrysler in 2007 by selling its shares and changing its name to Daimler AG (Daimler AG, 2013a). Corruption at Daimler AG After investigations by the government of the United States in 2010, a corruption scandal was revealed at Daimler (Dwoskin & Voreacos, 2012) and the enterprise announced that some of its subsidiaries were rightly accused of bribery. As not only employees in middle management, but rather high level management and executives were involved, as well as Daimler s internal audit offices themselves (Steinberg, 2011), this scandal was damaging to the brand. As a consequence, Daimler made an agreement with the government to drop the charges in return for an internal investigation and a fine of $ 185 million (Dwoskin & Voreacos, 2012). The agreement included to, 28

36 internally agree on working together with regulators as well as to increase performance of internal control mechanisms and, externally, to allow an independent compliance monitor to investigate and watch the ethics and compliance of Daimler (Steinberg, 2011). Nevertheless, it was criticized that the culture of Daimler was supporting corruption and had no ethical moral values (Steinberg, 2011). From that point onwards, Daimler s awareness of corruption and compliance has increased tremendously which is underlined by the fact that several executives accused of bribery were fired, that a special compliance office as well as a new management board position for integrity and compliance was created and filled with a former judge of the Federal Constitutional Court of Germany, Dr. Christine Hohmann-Dennhardt (Daimler AG, 2013d; Steinberg 2011). According to the former external compliance monitor Mr. Freeh, the enterprise managed to improve tremendously and serves as a role model for other companies in actions towards compliance (Deininger & Hägler, 2013). Stefan Otremba, a senior manager in Group Compliance of Daimler AG, has been an employee at Daimler since 2011 and is responsible for the compliance risk management as well as for representing Daimler at the UN Global Compact and the German Forum for Business Ethics. His department of Group Compliance was set up in 2006 as a consequence of several corruption scandals and the need to greater emphasis on compliance 14. According to Otremba 15, there has been a great change in the awareness of corruption, triggered by corporate scandals such as Holzmann AG in the early 2000s as well as corruption at Siemens AG in But, most importantly, issues and the bribery revealed within the company of Daimler in 2010, led to an actual implementation of several corporate governance mechanism that aimed at reducing corruption. In addition, he mentions the Corporate Governance Code in Germany as well as new UK and U.S. regulations as factors for increased awareness, but stated that only shortly after his arrival at Daimler in 2011, compliance started to be lived and implemented. Compliance awareness has increased tremendously since I started working here in 2011, I would say mainly due to the scandal that was revealed within the company and due to the fact that the issue was not kept silent, but actions were taken instead. We can truly say now that every employee is aware of compliance, integrity and ethical business practices 16. Furthermore, Daimler s willingness to improve was represented 14 Stefan Otremba DAIMLER AG, interview on the 24 th of April Ibid. 16 Ibid. 29

37 through the participation in the UN Global Compact, which led to a greater awareness of corruption and ethical business practices in society, as well as a better reputation of Daimler by proving that it is actively engaging in compliance issues 17. But not only the organization was changed, the amount of workshops and seminars addressing the issue of compliance, corruption and consequences increased drastically as the company wanted to make sure that the awareness passes through to every employee. There is a focus on seminars and audits in order to ensure compliance, backed up by regulations and guidelines that are valid for the entire company worldwide 18. Yet, instead of putting people under pressure, Otremba 19 states that Daimler aims at teaching people to act and make decisions as they would in private life. He admits though that Daimler is facing a problem that almost every global player faces, which are the issues of gray zones triggered of by cultural differences. It will never be possible to eliminate corruption completely due to the nature of the people, but it can at least be attempted to minimize the risk and to create awareness of the negative consequences of corruption, corporate governance mechanism can absolutely deal as a facilitator for that. 20 Thomas Eckert, Junior Manager in the Corporate Audit Office has been working at Daimler since 2007, was an employee of the Mercedes Benz Bank AG, a subsidiary of Daimler, beforehand and has been working at Daimler or Mercedes Benz Bank AG, respectively, since Unlike Otremba, he states that there were no noticeable changes in corruption awareness and compliance triggered off by external factors such as the Siemens scandal, but solely by internal events. 22 But once the scandal happened within Daimler everything changed and everybody became very sensitive towards this topic of corruption and compliance. It was attempted to improve the situation and actions were taken immediately. and Eckert points out that several new regulations and standards were introduced. Acting compliant was taken very seriously. Furthermore, there has been a huge increase in hired staff for the compliance and audit offices Stefan Otremba DAIMLER AG, interview on the 24 th of April Thomas Eckert DAIMLER AG, interview on the 24 th of April Ibid. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 30

38 Bernd Wehinger, the third interviewee, has been at the Mercedes Benz Bank AG since 1990 and is working in the IT department as a team leader, responsible for banking systems, which includes credit card systems, money laundering prevention and more 24. Similar to Eckert, he states that external factors had no influence on awareness of corruption and increase of compliance. Corruption has not been a big issue in the IT department, it all started when the U.S. government accused Daimler of bribery 25. When judging the comply or explain principle of the Corporate Governance Code, Otremba 26 has a very critical viewpoint as he argues that it is a rather reactive approach and that no changes or improvements have occurred within the markets despite the existence of the Code. Furthermore, in his opinion and supported by Wehinger and Eckert, the two-tier system in Germany is a very good approach and a strength of the German system as long as the Supervisory Board takes action and does not only block decisions. Also, when looking at the Corporate Governance Code and its sufficiency, Otremba and Eckert do not agree. Eckert 27 argues the Corporate Governance Code is sufficient, if it was a regulation or a law, many companies could not comply with it and there would be too much inflexibility when having to react to changing market situations. According to Otremba 28, there is no need to change the nature of the Corporate Governance Code as it is working and includes enough reference to the issue of compliance. Although compliance is only one category of the code, this is not an issue as several laws and regulations exist, such as the money laundering act and the bribe act. 29 The fact that bribes and corruption are not tax deductible anymore as it used to be in the 1990s is a big improvement and facilitates doing business in a compliant way. Another interesting observation highlighted by him is that corruption can have different facets, depending on the department, as the sales are facing other challenges than dispatch, for example. And when looking at the aspect of having family members on the management board or supervisory board, he believes that this does 24 Bernd Wehinger DAIMLER AG, interview on the 25 th of April Ibid. 26 Ibid. 27 Bernd Wehinger DAIMLER AG, interview on the 25 th of April Stefan Otremba DAIMLER AG, interview on the 24 th of April Ibid. 31

39 not influence the amount of corruption that could occur. What matters is their attitude towards corruption and ethical behavior, regardless of the fact that they are family members or not. Otremba and Eckert agree, however, on the fact that corruption cannot be eliminated, it can only be minimized. Eckert 30 also mentions that the strength of Daimler are corporate mechanisms such as workshops and seminar as they create awareness of compliance, give support to employees on how to act appropriately, but also show them what the consequences and punishments are, if misbehavior occurs. In addition, they agree on the two-tier system in Germany to being an advance approach of controlling the management and protecting business assets. Just as Otremba, Eckert is happy about the fact that Daimler is part of the UN Global Compact, but he disproves Otremba by stating that, in reality, it is not adding to the company s reputation as people do not know that Daimler is a member 31. Summarized it can be said that opinions vary depending on management level and the department as can be seen by the fact that Otremba and Eckert were more familiar of the development of corporate governance, compliance and corruption than Wehinger. It is also interesting how opinions vary between Otremba, who just recently joined the company and is convinced that the bribery at Daimler was a big factor for improvement and change, but the scandals beforehand had also an impact on the business. This however, is being disproved by Eckert and Wehinger who have been part of the enterprise for about two decades, stating that the internal scandal was the trigger for changes. 4.2 The Role of External Stakeholders According to the stakeholder approach, companies operations have an effect on the company itself by profits and reputation, but also on its surroundings (Freeman, 2010). Mallin (2010) describes stakeholders as anyone that is altered by a company s actions and these can be divided into directly and indirectly affiliated groups. The directly to the company related stakeholders are mainly employees, suppliers, customers and investors, the indirectly connected stakeholders are amongst others NGOs and governments. In agreement with this approach, stakeholder-oriented businesses are aware of these groups and address their needs and concerns in their daily business practices 30 Thomas Eckert DAIMLER AG, interview on the 24 th of April Thomas Eckert DAIMLER AG, interview on the 24 th of April

40 (Freeman, 2010). The following section will give an insight on the perspective of three main stakeholders concerning corruption and good governance of businesses in Germany The Role of Investors Traditionally, the main investors for German corporations are banks, which thus tend to dominate the shareholder structure and are sometimes even represented on the supervisory board (Mallin, 2010). According to a study of Deloitte, 32 of 51 responding medium-size companies used more than one bank for their financing and 29 of 51 respondents relied primarily on their house bank as the main investor (Reinemann & Böschen, 2008). The supervisory regulations governing the capital adequacy of internationally active banks Basel II, which were published in 2004 (Basel Committee on Banking Supervision, 2006), and resulted in the Minimum requirements for the credit business of credit institutions 32 demanded all banks to undertake an internal rating process with possible credit users, before the contract is closed (Basel Committee on Banking Supervision, 2006). The result of this rating influences the required equity capital quota and thus the banks credit risk. Main parts of the rating are hard accounting facts as well as country risks and industry features (Füser & Heidusch, 2003). According to Sniehotta 33, head of the loan department and a representative of the management board of the Sparkasse Minden-Lübbecke, the capacity of the debtor to service the loan is one of the most important factors to consider. The additional soft facts such as management quality, corporate governance, corporate control and corporate leadership as well as the existence of risk management systems (Füser & Heidusch, 2003) lead to further improvements in the rating process. The final credit rating consists of the sum of all economical and qualitative factors, including corporate governance and compliance mechanisms 34. And Graupeter adds A risk conscious assessment of the ability to pay as well as a year-long grown and trusting customer relationship are the things that guide us in our credit decisions (Bürger, 2011). The Sparkasse Minden-Lübbecke is a German savings bank located in North Rhine-Westphalia, Germany and is the biggest financial institution in the area. It supports the local population with financial supplies and credit services and medium-sized companies as well as domestic households are their primary customers. Especially in the loan department, corporate clients are important for 32 Horst Sniehotta SPARKASSE MINDEN-LÜBBECKE, interview on the 3 rd of May Ibid. 34 Ibid. 33

41 the Sparkasse, as they stand for 40.4% of the credit transactions (Sparkasse Minden-Lübbecke, 2011). The balance sheet total in 2011 was 2.37 billion and middle- and long term loans for companies and self-employed made a total amount of 570 million (Traue, 2013). In 2011, the Sparkasse Minden-Lübbecke joined the Corporate Governance Kodex für Sparkassen in Nordrhein-Westfalen 35, a corporate governance code for savings banks in the region. The code is a standard for good and responsible governance and is built on the principles of ensuring transparency and accountability of the management- and the supervisory board. The members of both boards commit themselves to comply with legal requirements while working together towards the development of the Sparkasse and fulfillment of the assigned public duties (Sparkassenverband Westfalen-Lippe, 2011). Sniehotta believes that the inclusion of the German Corporate Governance Code in 161 AktG has positive effects on stock-listed companies, especially concerning the prevention of corruption. He nevertheless reckons that a substantial corruption potential is lying within the non-stock-listed companies, as the rules of the Code are not applicable for them 36. Additionally, Reinemann and Böschen (2008) state that transparency towards banks as a part of corporate governance has increase over the last years and that medium-sized companies are more open to disclose information to their main investors. The emergence of corruptive behavior has mainly led to the standardization of our code of conduct to prevent the appearance of corruption 37 states Sniehotta and adds that corruption does not have a major impact on the credit approval process, as there is no evidence that it happened within the Sparkasse Minden-Lübbecke clientele. This statement goes in line with the findings of a survey by KPMG (2010), which affirms that medium-sized companies, which are the main business customer group of the Sparkasse, still need to find a way to combine strategies against corruption. Moreover, as the Sparkasse sees local medium-sized and family-owned companies as their main customer group (Sparkasse Minden-Lübbecke, 2011), it is important for the executives to align their business strategy with the focus of the company values of tradition, trust and the strong connection of the company with one person or a family (KPMG, 2010). Besides, the two- 35 Ibid. 36 Horst Sniehotta SPARKASSE MINDEN-LÜBBECKE, interview on the 3 rd of May Ibid. 34

42 tier board structure can be seen as an indication for transparency and trust 38, which is an important factor for the bank when it comes to granting loans. As there have been struggles with the supervisory bodies of large enterprises such as Thyssen-Krupp (Reinhard-Mohn-Institut, 2013), it is seen as a positively influencing factor is, if the supervisory board performs its duties and responsibilities thoroughly 39. To cover the role of investors more extensively, an employee of a German investor bank that operates on an international level with big enterprises volunteered for an interview. Due to the delicacy of the topic, and to the fact that several large investors have been involved in corruption lately, receiving information and finding someone who would participate in this interview was very difficult. Whereas several employees of one of the largest banks in Germany refused to offer support regarding the interviews due to pressure from their management and fear of consequences, participant X finally agreed but only under the condition that he and the bank he is working for remain anonymous. Furthermore, he refused to let the researcher do audio recording so that only note taking was allowed. However, the participant agreed on publishing information about the areas he is working in within the banks as well as his date of entry. Participant X has been working at an internationally operating global bank since 2007 and is in charge of strategic risk controlling, monitoring and estimation of risks for the bank. Participant X states that the credit approval process is done under strict management-risk guidelines that he could not get into further detail for this interview. He did not mention corruption or immoral behavior of potential investment companies as a great influence on the loan decision making. An important factor for decision making when looking at giving out loans are not only quantitative aspects such as the amount of profit they are planning to make or the company size, but also qualitative characteristics of potential customers under which you could see a lack of integrity or recent corruption scandals as influencing factors. However, it is not an exclusionary one. Furthermore, he states that the selection process is clearly structured similar to a check list dependent on the type of industry and region the company is located at. Although corporate governance and compliance as well as cases of corruptions does not seem to be such a crucial factor for granting a loan, Participant X argues that Transparency, however, particularly when looking at the communication of the enterprise s business activities 38 Ibid. 39 Ibid. 35

43 towards the investor bank is of utmost importance and has a great influence on our strategy and decision as a potential investor of a particular company. When looking at the awareness of corruption and corporate governance due to corruption scandals such as Daimler and other investment banks as well as one s own, participant X mentions that since 2007 he could not see any noticeable change or shift when looking at compliance or corporate governance. Apparently, this topic is not drawn much attention to at least from a global investor s perspective. He mentioned though, that from a perspective regarding external investments, the corruption cases have slightly influenced the quality factor when deciding about granting a loan. Concluding, one can say, that good corporate governance may influence only slightly the loan granting and lending conditions of banks The Role of Non-Governmental Organizations In today s competitive business life it is important for companies to consider the social dimension of their business activities (Laszlo, 2008), which can be achieved by integrating stakeholders such as non-governmental organizations (NGOs) as business partners (Waddock, 2008), accept their important role in the society and their influence on the day-to-day business practices (Teegen et al., 2004). The most visible role that NGOs adopt adverse corporations is the position as a watchdog organization (Slim, 2002) that claims to work for universal values and a general public interest (Waddock, 2008). They define themselves by their duty of raising awareness of corporate behavior issues, unite people to work for a common idea or cause and aim to make corporations more accountable, responsible and transparent (Waddock, 2008). Our Vision is a world in which government, politics, business, civil society and the daily lives of people are free of corruption (Transparency International, 2011, p. 78). The independent, non-governmental and non-profit organization Transparency International (TI) was founded in 1993 by the former World Bank official Peter Eigen. During the 1980s he observed, that corruption directly undermines the fight against poverty and the development of poor countries and he therefore decided to establish an organization which promotes transparency and accountability in international development (Transparency International, 2012a). Today, TI is present in over 100 countries and is best known for its Corruption Perception Index, which 36

44 measures the level of perceived corruption around the world (Transparency International, 2011). The organization sees itself as a coalition against corruption 40, is dedicated to raising awareness for the effects of corruption and works together with governments, businesses and international organizations in order to develop effective programs to encounter this phenomenon (Transparency International, 2012b). The TI s goal is to budge and change the world s collective conscience. Over the last years, the NGO has followed its mission to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society (Transparency International, 2012c) and has thereby played a major role in the introduction of the United Nations Convention against Corruption and the OECD Anti-Bribery convention (Transparency International, 2012d). The importance of corporate governance and compliance in avoiding corruption is eminent, yet it is important to note that good governance cannot be achieved just by creating a code of conduct and publishing it on the web. The structures need to be managed firmly and need to be lived topdown. [ ] It needs to be exercised with employee trainings and tight controls just like in the financial sector 41. According to Stubenrauch 42, a member of the Working Group Economy at TI in Germany, it is important that a company employs experts in the area of compliance and corporate governance, as guaranteeing compliance with national rules and internal regulations is nothing that can be done casually along the way. If you live it [corporate governance and compliance, author s note], then you can achieve positive results and thus avoid corruption. If you do not live it, then it is a cover up and corruption will always be existent 43. Therefore, it is of high importance to have a firm compliance structure, including control systems, whistle blower system and audits in the company. Particular attention should be given to international subsidiaries, which are more difficult to govern, due to the geographical distance and cultural differences. Additionally, Stubenrauch points out the role of the supervisory board, as an independent control authority with expertise for their assignments. Yet, one can note, that companies tend not to work proactively against negative causes, such as corruptive behavior in their industry. They rather wait until scandals become public in order to react. The Siemens affair for instance, was the trigger for 40 Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Ibid. 43 Ibid. 37

45 many other German corporations, to launch a compliance department, the organization of which was often based on Siemens structure 44. After the public exposure of the Siemens corruption scandal in 2006, the perception of corruption and the importance of tackling it have changed drastically in Germany. The Siemens scandal was a wake-up call for stock-listed companies and international corporations says Wolfgang Stubenrauch. According to him, a lot has been done in big corporations, as Chief Compliance Officers were appointed, codes of conduct were released and the term compliance was introduced to the German Corporate Governance Code in However, it cannot be attested, that these changes are affecting the entire German business landscape 45, as 80% of the German companies are family-owned and small or medium sized enterprises (Reinemann & Böschen, 2008) and do hence not need to follow the strict disclosure regulations of stock-listed companies. Regardless, due to the globalization and influence of other countries legislations, it becomes more evident that German companies and the German state need to work on self-commitment policies and anti-corruption legislation. Especially the influence of the American and British authorities on German companies that are listed on their stock exchanges makes the presence of their strict anticorruption policies evident 46. While Germany lacks anti-corruption guidelines until today and bribery money was even tax deductible until 1999 (Bundeszentrale für politische Bildung, 2009), the American Foreign Corrupt Practices Act was released in 1977 (Department of Justice, 2013) and a tradition of hard and strictly enforced regulations concerning business crime began. As Germany does not have a corporate law, opinions regarding the Corporate Governance Code are split within TI, with one part saying that it is enough to have a voluntary and legally unbinding Code and another part stating that legal regulations are important as the voluntary basis is not enough. Their major concern is that the Code is mainly directed towards stock-listed companies and that the majority of the German enterprises are therefore not affected by the regulations 47. Nevertheless, Stubenrauch 48 believes that corruption and the size and ownership structure of a company are not necessarily connected, as it is based on ethical attitudes and the cultural 44 Ibid. 45 Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Ibid. 47 Ibid. 48 Ibid. 38

46 background. He reckons that the principle of the respectable merchant which was based on accountability and trust between tradesmen (IHK Nürnberg für Mittelfranken, 2010) is still present in the culture of many family-owned companies and ethical values are of high importance. However, he sees a change in attitude, as the Code demands more transparency from stock-listed corporations towards their stakeholders. Still, he sees the need for change in medium-sized enterprises, as there is a lack of transparency and disclosure towards other parties. Generally, Stubenrauch believes that greediness for money is a phenomenon of employed managers and is confident that family businesses do not stimulate corruption The Role of the Chamber of Commerce and Industry The German Chamber of Commerce and Industry (CCI) is a statutory body and its mission is to look after the overall interests of the commercially engaged persons and organizations in their region, promoting commerce whilst taking into consideration the commercial interests of individual industry branches or single firms. All companies and self-employed are legally obliged to be members of the CCI in their district (Deutscher Industrie- und Handelskammertag, 2013). The main task is to give independent advice to its members about starting new businesses, tax issues, marketing, and environmental questions. Additionally, it gives arranges contacts with banks and is involved in training and skill enhancement of employees and employers (Industrie- und Handelskammer Ostwestfalen zu Bielefeld, 2013) and is involved in consulting focusing on new business challenges 50. Generally, the CCI is a public body that ensures fair competition and works towards integrity and morality in local businesses and sees it as an important task to preserve the values of the respectable merchant in Germany (Industrie- und Handelskammer Ostwestfalen zu Bielefeld, 2013). Buddenberg, the head of the legal department for the Chamber of Commerce and Industry Ostwestfalen zu Bielefeld, states that especially the two-tier management structure in German companies with the resulting control mechanisms foster transparency in the organizations and may hence also help to expose corruptive behavior 51. She says if you abide strictly by the rules, they can also help to prevent corruption 52. Buddenberg also reports that the awareness of corruption, 49 Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Ibid. 52 Ibid. 39

47 business crime and compliance augmented over the last three to four years which might be related to the rising presence of incorrect business practices in the media and that corporations therefore are more understanding and aware of the situation 53. To meet the demand, the CCI has arranged a variety of seminars and presentations as well as leaflets and other information material in order to raise further awareness of the topic (Herre, 2013; IHK Ostwestfalen zu Bielefeld, 2012). Moreover, the International Chamber of Commerce has developed a code of conduct for small- and mediumsized enterprises to strengthen their self-regulation, as they do not have to comply with provisions concerning compliance and anti-corruption of the large corporations (ICC Deutschland e.v. & Deutscher Industrie- und Handelskammertag e.v., 2008). Additionally, Buddenberg believes that the voluntary basis of the Code is sufficient, as the comply or explain-approach is fixed in the Stock Corporation Act 54, and even though, this act is only valid for stock-listed companies, the rules have partly been translated into the Limited Liability Company Law (GmbH-Gesetz), which includes rules for due diligence of executives of limited liability corporations (Bayer et al., 2012), a common legal form for German small- and medium-sizes enterprises. Depending on the size and the legal form, the recommendations and suggestions given by the CCI differ 55. It is notable that many small- and medium-sized enterprises are not fully aware of the risks linked to corruption and business crime. Yet, internationally operating medium-size companies have started to engage in compliance activities, as they realized that corruption and price-fixing agreements are not less common for them than for large corporations (Maga, 2013). Still, they are afraid of the high cost and the decreasing flexibility (KPMG, 2010). Grüninger argues, that not all companies need a compliance management system, sometimes it is enough to have the head of business as a moral authority, as a living compliance management system (Maga, 2013). He states further, that it cannot be enough to copy a code of conduct from the internet and distribute it between the employees. It is more important to have an authentic management and a speak-up culture in which the employees dare to talk about problems (Maga, 2013). 53 Ibid. 54 Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Ibid. 40

48 Relating to family-owned businesses, it is evident that they often look back on a long history of traditions and values which are present in the company s everyday business. Yet, this does not mean, that large corporations do not have values, such as trust and loyalty, but it is sometimes easier to connect values to a person one has met before than to an anonymous shareholder or manager 56. Generally it is evident, that the CCI is an independent body that gives advice, is strongly concerned with ethical and good governance and tries to impart this to its member companies. This does not only result from legal obligations (IHK Nürnberg für Mittelfranken, 2010), but was also evident throughout the interview with Katharina Buddenberg. 56 Ibid. 41

49 4.3 Summary Reputation Corporate Culture Ownership Financial Rating Corporate Culture Codetermination External Scandals Subsidiaries Business form Empowerment vs. Control Figure 8 Main topics covered in the interviews. Summarized it can be said that by collecting empirical data and conducting the interviews as part of primary research, the information gathered could be clustered and categorized into several key topics which are depicted in the figure above. Every topic that is included in the figure has a certain relationship to the mitigation of corruption and the development of corporate governance in Germany and will help to elaborate an in-depth analysis and to answer the research questions of this paper. 42

50 5 Analysis Cromme (2005, p. 5) defines corporate governance as a term describing good, efficient management and supervision of companies on the basis of internationally recognized standards in the interest of the company s owners and its social environment and thus points out the stakeholder recognition of the subject. In the studied cases it is evident, that the companies pay strong attention to the needs of their stakeholders and are concerned with their enterprises reputations. This concern of reputation and the damaging of the brand can be noticed in the case of Daimler, reflected by the fact that they have set up a special management board position and that the company confronts the topic rather than to avoid it. There is no doubt that the fear of losing reputation was one major factor, simply because they could have come up with such mechanisms for fighting corruption before the emergent bribery scandals. This is supported by three representative of Daimler who stated that the crucial driving force were exactly those events within the company that where not ethically sound. Likewise, PricewaterhouseCoopers (2008) supports this need of reputation, as it is necessary for the companies survival in the business world. As a manager for a family-owned company and producer of branded products, Zeyen 57 states, that one source of reputation is the trust of their customers in the products and the company. He adds that this confidence can only be sustained through the implementation of a strong culture of loyalty, honesty and accountability within the company, which is exemplified by the owner family on a daily basis. The stewardship theory argues that employees and humans in general are not only driven by extrinsic factors, but also by intrinsic ones such as a the sense of achievement (Muth & Donaldson, 1998). The Bentz family, owners of Melitta, follows the stewardship theory by empowering the employees and managers (Mintz, 2005) and believes in the strong bond between the company and its workers. Additionally, as the family still is part of the advisory council and the corporate management, the agency problem (Gill, 2008) on the top management level is being minimized. Nevertheless, this does not mean, that this problem does not exist, as the family is not present in every operational division of the company (Melitta, Annual Report 2011, 2011). Through the division of control in the corporate management by a two-tier management structure (Melitta, Annual Report 2011, 2011) the stakeholders demand for control and accountability is being met 57 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April

51 by Melitta. Daimler on the other hand supports this at least on the lower management levels as many actions were taken regarding compliance and measurements for minimizing corruptions that were on a voluntary basis, which indicates that the company does not believe that people act only on their own behalf, otherwise they would have included more control mechanisms. However, despite the fact that control mechanisms exists, the company believed in raising awareness and teaching people to act how they would in private life, as it was pointed out by Otremba 58 as well as Eckert 59. Yet, all three respondents of the Daimler stated that the two-tier system is a very advanced approach and a positive example of successful corporate governance. They all consider it a useful mechanism for controlling actions of the management, as long as the supervisory board acts in a reasonable way, which indicates that they consider the agency theory to be more appropriate as the management apparently needs to be controlled. This sense of having to control the management has probably been strengthened due to the bribery scandals within the company. Then again, exactly those scandals can question the stewardship theory and underline the fact that co-determination is a strength and a very well-functioning feature of the German corporate governance system. Zeyen 60 states that Melitta focuses on integrity and trust in the workers and that this leads to the belief that corruption and other criminal acts can be mitigated through corporate governance systems and corporate culture. Buddenberg 61 agrees with this opinion and continues that the tradition of a family-owned company is often easier to communicate. Yet, she denotes that it cannot be neglected that large corporations also promote loyalty and integrity, which is confirmed by Wehinger 62 who states that Daimler AG attaches great importance to ethical behavior. According to Buddenberg 63, the presence of corruption is a matter of values and that those might be communicated differently in family-owned enterprises. Nevertheless, Zeyen 64 cannot affirm that the presence of corrupt practices is related to the ownership structures of the company and 58 Stefan Otremba DAIMLER AG, interview on the 24 th of April Thomas Eckert DAIMLER AG, interview on the 24 th of April Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Bernd Wehinger DAIMLER AG, interview on the 25 th of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April

52 Wehinger 65 as well as Stubenrauch 66 agree with this position. The latter believes that it is a matter of culture and attitude to follow the principles of a respectable merchant. However, he sees it as evident that greed is more present between employed managers. Stubenrauch 67 also argues that the perception of corruption has changed dramatically since the Siemens scandal became public in 2006 and Buddenberg 68 supports his opinion by observing that the demand for information concerning corruption and business crime in general has increased over the last years. Additionally, KPMG (2010) found that the awareness and public discussion on corruption was fostered by the lively discussions in the media. Stubenrauch 69 especially points out the discrepancies in consequences of the corporate scandals of the last years for the different business entities. Especially stock-listed companies were subject to major changes in their corporate governance and compliance guidelines, whereas other business entities were barely affected. Yet, Buddenberg 70 disagrees by stating that the limited liability companies also need to follow regulations which control the due diligence and accountability of the management. This can also be affirmed by Zeyen 71, who mentions the large amount of external and internal rules and regulations that the company commits to. In addition, Eckert 72 states that even if the Code is not mandatory, there are several laws that are valid for all companies regardless of their legal form or size. 65 Bernd Wehinger DAIMLER AG, interview on the 25 th of April Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Thomas Eckert DAIMLER AG, interview on the 24 th of April

53 Figure 9 Trigger for changes in the awareness on corruption and corporate governance. It is evident that a company s awareness on corruption and corporate governance needs to change in order to minimize corruption and this only happens after a scandal occurred, as the findings from the interviews, summarized in the figure above, show. Both, Melitta s 73 and Daimler s 74 representatives stated that internal events where the trigger for change and implementation of corporate governance mechanisms. Only consequences that affected the companies directly, the coffee cartel in 2008 and the Daimler bribery scandal in 2010 respectively, led to a restructuring of the organization and the understanding of the gravity and the impact of corruption on business practices. In addition, Stubenrauch 75 from Transparency International also states that, for general awareness, the Siemens scandal was probably the major trigger. This can be due to the influence and pressure from media resulting in the fear of losing their reputation as a consequence of misbehavior, as this seems to be one of the major influences on companies and the biggest incentive for compliance as backed up by statements from the Chamber of Commerce and Industry 76. Furthermore, participant X as well as Sniehotta 77 as representatives of investors agree on the fact that although corruption scandals have increased in amount, they cannot name a factor 73 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Thomas Eckert DAIMLER AG, interview on the 24 th of April Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April Katharina Buddenberg IHK OSTWESTFALEN ZU BIELEFELD, interview on the 7 th of May Horst Sniehotta SPARKASSE MINDEN-LÜBBECKE, interview on the 3 rd of May

54 as a specific trigger. Likewise, they state that corruption is not a crucial criterion for giving out loans. The involvement of a company in bribery and corruption does thus not make it less attractive for investors to give out loans. They also state that although the awareness of corruption has increased, the rating systems have not been amended noticeably, other than due to legal changes. The fear of companies to loose investors due to corrupt practices in the company or the nonexistence of anti-corruption policies can thus be neglected. The general appearance of the corporate governance practices and anti-corruption activities in German companies is of a reactive nature, as many enterprises decide to follow rather than to initiate actions concerning good corporate governance. According to Stubenrauch 78, many companies watched Siemens development corporate governance mechanisms and anti-corruption policies after the scandal in 2006 and copied them afterwards, rather than acting proactively, as companies seemed to have realized that reorganization was needed in order to counter illegal actions. This opinion is being supported by the fact that the German Corporate Governance Code is being amended in response to changes in national and international laws as well as alterations in the business environment (Cromme, 2005), meaning that it reacts rather than to be a proactive towards changes. 78 Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April

55 Figure 10 Corporate culture as a way to mitigate corruption. The general opinion of all respondents on the possibility of mitigating corruption through corporate governance systems was positive and usually related to the implementation of a culture of trust and integrity. When looking at this aspect, it can be seen as very essential for fighting corruption. It acts as a prerequisite, which is backed up by several statements from the interviewees, depicted in the figure above. Zeyen 79 from Melitta underpins this by stating that rules do not work, unless the values and beliefs are truly lived. In other words, regulations imposed on the company and its employees are ineffective, if the corporate culture does not promote the mitigation of corruption. Within the company, a proactive culture has to exist that approaches the fight against corruption. If the employees do not see why unethical business practices are harmful, they will continue breaking rules or guidelines. Thus, the development of an ethical corporate culture as a corporate governance mechanism is of utmost importance for reducing corruption which is backed by Stubenrauch 80 from Transparency International. This culture however, often needs more than external factors. In order for a company culture to change, internal events such as the bribery scandal at Daimler, are necessary. This will trigger the implementation of corporate governance mechanisms which over time will improve the corporate culture. It can be said that having a good 79 Markus Zeyen MELITTA BENTZ UNTERNEHMENSGRUPPE KG, interview on the 22 nd of April Wolfgang Stubenrauch TRANSPARENCY INTERNATIONAL, interview on the 25 th of April