The Influence of Corruption on the Corporate Governance Development in Germany

106 Pages·2013·1.36 MB·English

Fenya Erzigkeit & Alina Petrescu

The Influence of Corruption on the
Corporate Governance Development in
Germany

A Multiple Case Study

Service Marketing & Management
Master Thesis

Semester: Spring 2013
Supervisor: Samuel Petros Sebhatu
Acknowledgements

We want to express our gratitude to our family and friends, who supported and encouraged us
throughout the process of writing this paper, as well as throughout our academic career in general.
Without them, we would not be the persons we are now and most likely, we would not have come
this far. You have been great motivators and supporters in times when we truly needed you.

In addition, we would like to thank our supervisor Samuel Petros Sebhatu for his support, valuable
feedback and guidance from the beginning and the first drafts until the completion of the final
paper. Likewise, we owe our gratitude to our teachers, professors and counselors that have crossed
our paths and inspired us in so many ways.

Special thanks go to Markus Zeyen from Melitta Unternehmensgruppe KG, Stefan Otremba,
Thomas Eckert and Bernd Wehinger from Daimler AG, Wolfgang Stubenrauch from Transparency
International, Horst Sniehotta from Sparkasse Minden-Lübbecke and Katharina Buddenberg from
the Chamber of Commerce and Industry Ostwestfalen zu Bielefeld. Without their participation and
openness to our thesis project, this study would not have been possible.

As we wrote this study while living in Sweden and Germany, Skype and Facebook were our main
communication tools. Thus, we see us obligated to thank the development of technology, as well.

Karlstad, May 2013

Fenya Erzigkeit Alina Petrescu
Abstract
Purpose
This paper aims at investigating the relationship between corruption and corporate governance in
Germany and how the development of corporate governance has been influenced by corruptive
practices. The reason for choosing this topic is the fact that corporate governance is part of every
business to encourage their managers to act according to rules and regulations, nevertheless
unethical behavior still happens. Reoccurring events such as bribery scandals in several German
companies made it a good case study, as well as the German unique corporate governance features
such as the two-tier system and a partly voluntary corporate governance code.

Design/methodology
For the purpose of gaining a deeper knowledge on the topic, a qualitative research is undertaken by
using multiple case studies as a research method, as it does not only gather information from
documents and reports but also from interviews. The multiple case study is based on Melitta, as a
representative of medium-sized and family-owned companies and Daimler, standing for global
enterprises. To investigate the topic from different angles, the opinion of NGOs, represented by
Transparency International, and the Chamber of Commerce and Industry as well as of investors
from a local and a globally acting bank are taken into account.

Findings and Conclusion
Both, secondary and primary research has proven that corporate governance mechanisms can fight
corruption. Yet, German companies wait and follow rather than to initiate changes, implying a
rather reactive approach. Nevertheless, once mechanisms are implemented, they are very
successful. Unfortunately, as the legal obligation is only valid for stock-listed companies, which
amount to less than 20% of the German businesses, the implementation does often not occur.
Regardless of the company’s size, the respondents emphasize on the importance of creating a
corporate culture of trust and integrity. Concludingly, although the awareness towards corruption
has increased, it did not lead to an actual implementation of further corporate governance
mechanisms that would reduce the risk of corruption within the companies.

Keywords
corporate governance, corruption, responsible business, new governance, Germany
Table of Content
I. Figures .................................................................................................................................. III
II. Tables ................................................................................................................................... III
III. List of Abbreviations ....................................................................................................... IV
1 Introduction ............................................................................................................................ 1
1.1 Problematization .............................................................................................................. 2
1.2 Aim of Study .................................................................................................................... 3
1.3 Research Questions .......................................................................................................... 3
1.4 Structure ........................................................................................................................... 3
2 Methodology .......................................................................................................................... 4
2.1 Qualitative Research Approach......................................................................................... 4
2.2 Case Study Research ........................................................................................................ 5
2.3 Research Material ............................................................................................................. 8
2.3.1 Primary Data Collection ............................................................................................ 8
2.3.2 Secondary Data Collection ...................................................................................... 10
2.4 Data Analysis ................................................................................................................. 11
2.5 Trustworthiness .............................................................................................................. 13
2.6 Limitations ..................................................................................................................... 13
3 Theoretical Framework ......................................................................................................... 14
3.1 Theoretical Aspects of Corruption and Corporate Governance ........................................ 14
3.1.1 Agency Theory ........................................................................................................ 15
3.1.2 Stewardship Theory ................................................................................................. 15
3.2 Stakeholder Theory ........................................................................................................ 15
3.3 Definition and Development of Corruption ..................................................................... 16
3.4 Corporate Governance in Germany ................................................................................. 17
3.4.1 The German Corporate Governance Code ............................................................... 18
3.5 Legal framework ............................................................................................................ 21
3.5.1 Corruption ............................................................................................................... 21
3.5.2 Corporate Governance ............................................................................................. 22
3.6 New Governance Approach ............................................................................................ 22
3.7 Summary ........................................................................................................................ 23

I
4 Empirical Findings................................................................................................................ 24
4.1 The Role of Businesses................................................................................................... 24
4.1.1 Melitta Unternehmensgruppe Bentz KG .................................................................. 24
4.1.2 Daimler AG ............................................................................................................. 28
4.2 The Role of External Stakeholders .................................................................................. 32
4.2.1 The Role of Investors .............................................................................................. 33
4.2.2 The Role of Non-Governmental Organizations ........................................................ 36
4.2.3 The Role of the Chamber of Commerce and Industry .............................................. 39
4.3 Summary ........................................................................................................................ 42
5 Analysis ................................................................................................................................ 43
6 Conclusion ............................................................................................................................ 51
7 Managerial Implications ....................................................................................................... 53
8 Bibliography ......................................................................................................................... 54
8.1 Interviews....................................................................................................................... 62
9 Appendix ............................................................................................................................... V

II
I. Figures
Figure 1 Research evidence based on three pillars of investigation adapted from Gillham (2005). .. 6
Figure 2 Different viewpoints as part of the multiple case study. .................................................... 7
Figure 3 Elements used for organizing interviews adapted from Gillham (2005). ............................ 8
Figure 4 Process of secondary data collection. .............................................................................. 10
Figure 5 The hermeneutic spiral.................................................................................................... 11
Figure 6 Coding phases in thematic analysis. ................................................................................ 12
Figure 7 The interrelation between the subjects of study. .............................................................. 23
Figure 8 Main topics covered in the interviews. ............................................................................ 42
Figure 9 Trigger for changes in the awareness on corruption and corporate governance. ............... 46
Figure 10 Corporate culture as a way to mitigate corruption. ........................................................ 48
Figure 11 Opinions on the sufficiency of the German Corporate Governance Code. ..................... 49

II. Tables
Table 1 Management level of participants with reference to the company they work for. ................ 9

III
III. List of Abbreviations

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