Naming and shaming
Does good governance pay off? The stock market valuation has traditionally been the "proof of the pudding." According to corporate governance experts, scholars, and institutional investors, companies with good governance are rewarded with higher valuations in the capital market, while those with poor governance are penalized. Numerous empirical studies seem to support this narrative. As does a quick fact check, such as examining the price-earnings ratios of the DAX-40 companies. Porsche AG, with a ratio of 2.72, and Volkswagen, with a ratio of 3.54, are at the bottom. Notably, both companies also receive poor scores in various corporate governance ratings, including the one from Union Investment, which assesses governance based on 124 weighted criteria (source: BZ, March 29).
What doesn't fit is made to fit
What are the consequences? None. Volkswagen appears to be fine with being labeled the "black sheep" of governance every year, both in ratings and shareholders' speeches at the annual general meeting. VW dutifully reports the numerous deviations from the German Corporate Governance Codex every year, and that's it. What doesn't fit is made to fit. For example, Hans Dieter Pötsch, who has been the VW chairman of the supervisory board since 2015 and effectively acts as the steward of the Piëch and Porsche families within the company, is simply defined as independent to comply with code requirements. In the case of other code violations, such as Oliver Blume's dual role as CEO of both DAX companies, VW and Porsche, no attempts are made to sugarcoat the matter.
Does the dismal stock market valuation harm them? Not really. Neither VW nor Porsche are planning a capital increase via the stock exchange, where such a low price-earnings ratio would restrict their financial maneuverability or significantly increase equity costs. Additionally, both DAX companies don't need to fear activist shareholders or hostile takeovers due to their shareholder structure.
Governance codex for the birds?
Thus, in the spirit of Hermann Josef Abs and the question of the difference between a doghouse and a supervisory board or governance codex, must we conclude that the doghouse is for the dog, and the governance codex is for the birds? Unfortunately, from a purely legal standpoint, this is the case. Violations of the compliance declaration according to §161 AktG (German Stock Corporation Act) have no legal consequences, and even the Federal Court of Justice relies on the sanctioning power of the capital market. However, a thick skin is proverbially helpful against feeling the hot breath of the capital market in the neck. Whether it's family businesses like Volkswagen and Porsche or companies like Tesla, where, given a price-earnings ratio of 92, the theory of a valuation discount for poor governance in Elon Musk's led company should also be questioned.
Naming and shaming, a practice actively pursued by the German Federal Financial Supervisory Authority (BaFin) on the capital market stage to enhance financial market integrity, will only be effective in enforcing good governance if all stakeholders are reached. The Codex Commission should focus on this aspect and build public pressure to reform governance offenders. Setting up governance rules and getting lost in ever finer details is not enough. Where market sanctions fail, good corporate governance should be publicly demanded. This responsibility should also lie with the Codex Commission itself. But nevertheless, this year, the government commission has only managed to issue two statements about new members, falling short of more substantial actions.