cg german model project draft

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Stakeholders Approach to Corporate Governance of Banks- The German Model

LETTER OF TRANSMITTAL

Mr.Banking Policy & Regulation DepartmentState Bank of PakistanKarachi.

Dear Sir,

Please accept our internship report on Stakeholders Approach to Corporate Governance ofBanks- The German Model

During the process of preparing this report, we have learnt valuable amount of practicalKnowledge regarding the corporate governance practices and prevailing laws and regulation inPakistan.

We hope the work comes up to your expectations.

Yours Sincerely,

Mr. Mehtab Hussain Shah

Project Supervisor,Assistant Director,BPRD

Dated: August 03, 2012

Internship Report | State Bank of Pakistan 1


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ACKNOWLEDGEMENTS

In the Name of ALLAH, the Most BENEFICIENT, the Most

Merciful:

All praise is for due to ALLAH, to who belongs, the dominion of the Heaven and the Earth.

Peace and mercy be upon His Prophet who gave us the way of peace and real success in our

lives. We thank our ALMIGHTY ALLAH who furnished us with the essential knowledge and

patience to carry out such a challenging,, we must acknowledge the continuous motivation and

prayers of our parents which are always there for helping us reaching at major milestones of

our life.

We would like to offer our indebtedness and sincere appreciation to our projects supervisorMr.

Mehtab Hussain Shah, Assistant Director, BPRD and our training coordinatorMrs. Gulzar

Amin Merchant, Deputy Director.During the course of the report, they were always available

andready to help even at the very busy hours of their work.

We would also like to thank Mr. Muhammad Ali, Assistant Director, Training and

Development Department for arranging orientation of different departments and divisions of

SBP to increase our understanding of the functions of SBP.

In the last but not the least, we would like to thank our teachers without whom we would not be

able to get such a big opportunity.



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Table of ContentsTable of Contents................................................................3

Corporate Governance- An Overview: ...................................................................................4

Some Definitions of Corporate Governance:.......................................................................5

Role of Banks and Good Corporate Governance:...................................................................5

Background:.......................................................................................................................7

Stakeholders:.........................................................................................................................8

Banks and the stake holders:.............................................................................................9

Employees:.................................................................................................................... 10

Shareholders:................................................................................................................10

Board of Directors:........................................................................................................11

Management:................................................................................................................11

Clients:.......................................................................................................................... 12

Customers:.................................................................................................................... 12

Three Models of Corporate Governance from Developed Capital Markets...........................15

Introduction ..................................................................................................................... 15

The Anglo-US Model.............................................................................................................16

Key Players in the Anglo-US Model ..................................................................................16Share Ownership Pattern in the Anglo-US Model..............................................................17

Composition of the Board of Directors in the Anglo-US Model..........................................17

Disclosure Requirements in the Anglo-US Model..............................................................18

Corporate Actions Requiring Shareholder Approval in the Anglo-US ................................18

Interaction among Players in the Anglo-US Model............................................................19

The Japanese Model.............................................................................................................20

Key Players in the Japanese Model...................................................................................20

Share Ownership Pattern in the Japanese Model..............................................................21

Composition of the Board of Directors in the Japanese Model..........................................21

Regulatory Framework in the Japanese Model..................................................................22

Disclosure Requirements in the Japanese Model..............................................................22

Corporate Actions Requiring Shareholder Approval in the Japanese Model......................23

Interaction Among Players in the Japanese Model............................................................24

Regulatory Framework in the German Model:..................................................................27

Disclosure Requirements in the German Model:...............................................................27

Corporate Actions Requiring Shareholder Approval in the German Model:.......................28

German Panel on Corporate Governance: ...........................................................................30

Institutional Ownership........................................................................................................40



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Issues involved in Institutional Shareholding ...................................................................41

Institutional Investors in Pakistan........................................................................................42

Legal Conditions in Pakistan................................................................................................44

Institutional Activism in Pakistan......................................................................................46

Corporate Governance in Pakistan; a review.......................................................................47

Anglo-American Model Adopted by Pakistan:.......................................................................49

Recommendations:..............................................................................................................50

Current Challenges and Suggested Measures:....................................................................57

Additional Measures:........................................................................................................59

Work Cited........................................................................................................................... 62

Corporate Governance- An Overview:

In discussing the corporate governance, first we need to have a full understanding of

what governance is. To govern means to run and rule over an institution with the authority in

policies and procedure of that institution. Similarly governance is the central point of efforts in

order to ensure the best value of money. Governance in an organization is important to ensure

the quality of their products and their efficiency. .

In this global world every business or institution need to be governed by some set of rules made

by the board of directors of that institution or business. The rules must reflect the interest of all

the related stakeholders irrespective of any discrimination. Countries that pay no attention to the

corporate governance reforms will quickly find themselves in difficulty as compared to others

in pulling the long term resources (Capital) for the purpose of growth.

Corporate Governance on one hand deals with a system of assigning managers and

directors with responsibilities in order to run the business dealings and, on the other hand, it is

anxious with the accountability of those managers and directors on their responsibilities.

A corporation is needed to be run by using several golden principles that lies in the

concept of accountability, transparency, fairness, honesty, and responsibility. the responsibilities

are mapped both vertically and horizontally among the directors and managers so that theyshould make the decisions without any bias towards a certain class of society i.e. once a

decision is made it should be known to all the people who are related with the corporation or



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business. All the decisions taken should be transparent so that no question should be posed

against any of them. This could be done easily by both internal and external audit systems.

Some Definitions of Corporate Governance:

There are a lot of definitions to the corporate governance and we will discuss some of thepopular definitions here in this section.

"It is a system by which companies are directed and

controlled." (Cadbury Committee)

"A set of relationship between a company's management, its

board, its shareholders, and other stakeholders is CG.

Corporate Governance also provides the structure through

which the objectives of a company are set, and the means of

attaining those objectives and monitoring performances are

determined. Good corporate governance should provide proper

incentives for the board and management to pursue objectives

which are in the interest of the company and shareholders and

should facilitate effective monitoring, thereby encouraging

firms to use resources more efficiently." (OCED)

We can define it as follow;

''Corporate Governance is the system in which businesses and

corporations are controlled by some personals such as Board of

directors, shareholders, managers, regulators and stakeholders.

These personals are provided with some powers and rights and

at the same times some responsibilities too, so that they could

exercise their powers effectively and use the available resources

efficiently to produce quality output."

Role of Banks and Good Corporate Governance:

Banks play an important role in boosting the economy of a country. Their role varies

from one model to another. This is due to the banks function as credit issuers, as banks still

remain main donor of credit to almost all of the markets (economies) in the world, to their

borrower monitoring task, as well as to their ownership functions done within corporations or

banks. Banks are also business units and as such they rank among some of the largest

corporations on a global, regional and local scale. The interest in corporate governance in



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banking has been growing in recent years, primarily because of the sustained high share of debt

financing of the economy, systemic transformations taking place in many countries, and the role

of banks in ensuring financial stability.

In Pakistan, we have been witnessing significant changes in the banking sector over thelast decade or so, following start of the liberalization of the financial system and privatization of

the nationalized banks (except NBP) and emergence of a few new private banks. As a result, the

ownership structure of some banks and the entire banking system has changed which emitted

significant improvements in the banking industry of Pakistan and enabling it to be ranked on

scale of global admiration.

The purpose of the study is to make an assessment of the corporate governance of

banking industry considering different approaches adopted by the stakeholders worldwide with

a view to improve the governance structure of Pakistani banking industry .

Banks are a critical component of any economy. Corporate governance is important in banks

because:

a.) They provide financing for commercial enterprises, basic financial services to a broad

segment of the population and access to payment systems.

b.) In addition, some banks are expected to make credit and liquidity available in difficult

market conditions.

c.) The importance of banks to national economies is underscored by the fact that banking

is, almost universally, a regulated industry and that banks have access to government

safety nets. It is of crucial importance therefore that banks have strong corporate

governance.

Although, banks are similar to other firms in terms of the composition of shareholders, debt

holders, board of directors, competitors, etc, there in one important distinction between banks

and other firms. The nature of transaction banks are involved in suggests that banks are

expected utility maximize, (sometimes, it takes more than 20 years to complete a transaction).

As a result, the risk factor increases substantially and hence risk management becomes

important. In an emerging economy where banks are the main source of generating savings and

investment, these concerns are even more important.

Corporate Governance in Pakistans Banks:



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State Bank of Pakistan, during 1990s and the decade that follows it, has implemented policies to

improve and reform the banking sector in Pakistan. These reforms were initiated in 1990s and

were slow in nature at the start. Although slow, these reforms have been consistent and

continuous recently. As a result of these reforms, the commercial banking industry in Pakistan

has taken a new shape and is working on a new vision. Part of these reforms is also related to

the issue of corporate governance of banks in Pakistan. This is the main focus of the remainder

of this study. It is, however, imperative to have a brief discussion of the banking sector

restructuring before we embark on the issue of corporate governance.

Background:

At the time of independence, out of 99 commercial banks only one, Habib Bank, had its head

office located in the area that was to become the new country named Pakistan. From 1947 to

1974 the banking sector grew rapidly. The private sector started investing in the commercial

banks with branching network. In 1974 the ruling political party decided to nationalize the

banks which were working at that time. These banks were collectively called as nationalized

commercial banks (NCBs).

In 1980s the military regime decided to denationalize the banks with a purpose of to enhance

competition among the banks. Following policies were introduced:

a). The partial deregulation of interest rates.

b). The expansion rates of NCBs were reduced deliberately.

c.) Foreign banks were allowed entry in order to improve the competition by providing those

licenses.

Developments in Governance Structure of Pakistani Banks :

Across the globe particularly in the aftermath of the 1997 Asian financial crisis, the basic

objective of good corporate governance is to avoid the events of banks failures and run-on-

banks. The issue of corporate governance of banks in Pakistan received special attention

because Pakistani regulatory authorities took necessary measures of including restructuring and

privatization of the financial institutions at the same time when deliberations were underway to

devise some code of ethics for corporate governance of the financial and corporate sector

including banks. A major step towards good corporate governance was a joint project by the

Securities and Exchange Commission of Pakistan and the UNDP (SECP-UNDP) in



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collaboration with the Economic Affairs Division (EAD) of the Ministry of Finance. The

project was launched in August 2002 with the objective to design, develop and implement a

Code of Corporate Governance. Though this project had some discussion on corporate

governance for banks but its main focus was the corporate sector in Pakistan and issued

measures to create stakeholder awareness, capacity building and networking with other

emerging economies. To address the problems of banking sector, the State Bank of Pakistan

(SBP) issued a Handbook of Corporate Governance in 2003. The objective of this handbook

is to provide guidelines for Board of Directors, managers and shareholders. Most of the

recommendations and guidelines stated in the handbook are directly drawn from the

recommendations made by Basel Committee on corporate governance and OECD. These

guidelines cover four important areas, namely, Board of Directors, Management, Financial

Disclosure, and Auditors.

Stakeholders:

A corporation enjoys the status of a separate legal entity; however, the formation of a

public listed company is such that its success is dependent upon the performance of a

contribution of factors encompassing a number of stakeholders. A stakeholder is a

person (including an entity or group) that has an interest or concern in a business or

enterprise though not necessarily as an owner. The ownership of listed companies is

comprised of a large number of shareholders drawn from institutional investors to

members of public and thus it is impossible for it to be managed and controlled by

such a large number of diversified minds. Hence, management and control is delegated

by the shareholders to agents called the Board of directors. In order to achieve

maximum success, the Board of directors is further assisted by managers, employees,

contractors, creditors, etc. Therefore it is imperative to recognize the importance of

stakeholders and their rights. Communication with stakeholders is considered to be an

important feature of corporate governance as cooperation between stakeholders and

corporations allows for the creation of wealth, jobs and sustain ability of financially

sound enterprises. It is the Board's duty to present a balanced assessment of the

company's position when reporting to stakeholders. Both positive and negative aspects

of the activities of the company should be presented to give an open and transparent

account thereof. The annual report is a vital link and, in most instances, the only link

between the company and its stakeholders. The Companies Ordinance requires



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directors to attach in the annual report a directors' report on certain specific matters.

The Code expands the content of the directors' report and requires greater disclosure on

a number of matters that traditionally were not reported on. The aim is for the directors

to discuss and interpret the financial statements to give a meaningful overview of the

enterprise's activities to stakeholders and to give users a better foundation on which to

base decisions. Specific emphasis has been placed upon the fiduciary obligations

of directors and hence the need to understand the implications of such obligations also

arises.

Banks and the stake holders:

When a bank is established some of the core values are set, some mission statements are shaped.

Some of the objectives are given as under.

Creating a distinctive brand identity by providing the highest standards of services.

Adopting the best international vu solutions copy right data management practices

Maximizing stakeholder's value.

Discharging their responsibility as a good corporate citizen of Pakistan and in countries

Where they operate

And some of the core values are also considered like:

Highest standards of Integrity.

Institutionalizing team work and performance culture.

Excellence in service.

Advancement of skills for tomorrows challenges.

Awareness of social and community responsibility.

Value creation for all the stakeholders.

There are some entities which are related to banks, directly or indirectly, known as stakeholders

of the banks. Aperson, group, or organization that has direct or indirect stake in an organization

because it can affect or be affected by the organization'sactions, objectives, andpolicies.

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Key stakeholders in abusiness organization includecreditors, customers,directors, employees,

government (and its agencies), owners (shareholders), suppliers, unions, and the community

from which the business draws its resources.

Shareholders

Board of Directors

Management

o CEO

o Key Executives

Clients/Customers

Pier Groups

Government

Regulators

Employees

Creditors

Employees:

There is widespread agreement that they are a prime stakeholder. They work in the corporations

(company) or in the banks. The primary interest of the employees should be the profit

maximization of their firm which is indirectly related with their benefit i.e. if a corporation or

bank functions well then it will provide bonuses to their employees.

Shareholders:

A shareholder is a one who holds stocks of a company/ bank. A share holder has the right to

vote in certain matters of the company. For each share a shareholder owns he earns some

dividend, which is some amount of money given to shareholder yearly/monthly/quarterly/semi

annually depending on the nature of the share.

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The objective of share holders is to maximize their profit i.e. get the shares of the company

whose dividends are high.

Board of Directors:

The Board of Directors has most of the powers to take decisions in respect of loans, guarantees

and borrowings as well as seeing that the Bank is properly run, it ensures that the Bank is

managed in keeping with the provisions of the Treaty and the Statute.

The board of directors is selected by share holders in general elections/ meetings. Once they are

selected there are some responsibilities which they need to fulfill:

The board of directors will be responsible for the review and update of the existingpolicies. The board will ensure effective Management information system to cater

the needs of changing markets conditions.

The board of directors should clearly define the authorities and key responsibilities

of both directors and senior management.

The board of directors should meet frequently i.e. in monthly or weekly basis in

order to discuss the matters of the corporation or bank.

Management:

The management includes CEO and other key executives who act as custodians of their

respective departments. They are answerable to the BODs on the matters and decision of the

departments in the banks. However, the banks are required to adhere to the SBPs guidelines

including the Fit and Proper Test Criteria for the appointment of CEOs and key executives,

non compliance to which may result into punitive actions against the banking company. The

key criterions of the Fit and Proper test include:

The incumbent should have a track record of Honesty, integrity and reputation, not

convicted of any criminal offence including fraud or financial crime.

Should be competent and capable of fulfilling his/her duties, having adequate

qualification and experience.

Should not have been removed/ dismissed from service in the capacity of anemployee, director or chairman on account of financial crime or moral conduct.

Should not be defaulter of payment(s) due to any financial institutions or tax office.



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Should not supervise more than one functional areas that give rise to conflict of

interest within the banking company and should not hold directorship of a company

that is a client to the bank.

Clients:

There are some of the discussions about the differences between clients and the stake holders.

One of the differences told by Dr. Ichak Adizes was Stakeholders are all those who have a

stake in the organization, i.e., who have a certain interest in the existence of the organization,

but the organization does not EXIST for the stakeholder. It tries to satisfy the needs of

stakeholders by satisfying the needs of its clients. Stakeholders are the driven force. Not the

driving force. Clients are the purpose for which the organization exists and stakeholders are allthose interests, internal and external, that came together for the purpose of satisfying client

needs and in doing so expect some return for their effort.

Creditors:

Creditors rights are often protected under contract and backed by collateral so they are seldomtreated as owners as the shareholders are treated.

Future generations:

Sustainable development is at the center of the stakeholder debate and this suggests a

responsibility to future generations --those who will one day be reliant upon the physical

environment-- as a stakeholder group. Sometimes they are included as stake holders and

sometimes not.

Customers:

A customer can be external or internal to banks. Our understanding of our

customers/stakeholders should be at a depth appropriate to our role. When you demonstrate this

level of understanding, it enables you and banks to deliver a comprehensive service with impact

for customers/stakeholders. You are responsive to customer and stakeholder needs andunderstand the business environment in which they operate. You also appreciate the diverse

challenges they face and maintain an impartial and independent view, as necessary.



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Types of Stakeholders:

Stakeholders are people/communities who may - directly or indirectly, positively or

negatively affect or be affected by the outcomes of projects or programs.

2.2.1 Primary stakeholders are the beneficiaries of a development intervention or those

directly affected (positively or negatively) by it. They include local populations (individuals and

communitybased organizations) in the project/program area, in particular, poor and

marginalized groups who have traditionally been excluded from participating in development

efforts.

2.2.2 Secondary stakeholders are those who influence a development intervention or

areindirectly affected by it. They include the borrowing government, line ministry and project

staff, implementing agencies, local governments, civil society organizations, private sector

firms, the Bank and its shareholders and other development agencies.

2.2.3 A key element in participatory development is the ability to identify stakeholders, their

needs, interests, relative power and potential impact on project outcomes. Stakeholder analysis,

as described

Groups / individuals that are affected by and/or have an interest in the operations and

objectives of the business

Stakeholder groups vary both in terms of their interest in the business activities and also

their power to influence business decisions. Here is a useful summary:



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Stakeholder Main Interests Power and influence

Shareholders Profit growth, Share price growth,

dividends

Election of directors

Banks & other

Lenders

Interest and principal to be repaid,

maintain credit rating

Can enforce loan covenants

Can withdraw banking facilities

Directors and

managers

Salary ,share options, job

satisfaction, status

Make decisions, have detailed

information

Employees Salaries & wages, job security, job

satisfaction & motivation

Staff turnover, industrial action,

service quality

Suppliers Long term contracts, prompt

payment, growth of purchasing

Pricing, quality, product availability

Customers Reliable quality, value for money,

product availability, customer service

Revenue / repeat business

Word of mouth recommendation

Community Environment, local jobs, local impact Indirect via local planning and

opinion leaders

Government Operate legally, tax receipts, jobs Regulation, subsidies, taxation,

planning

Stakeholder power is an important factor to consider whenever you are asked to write about

the relationship between a business and its stakeholders. In the context of strategy, what is

important is the power and influence that a stakeholder has over the business objectives .

For stakeholders to have power and influence, their desire to exert influence must be

combined with theirability to exert influence on the business. The power a stakeholder canexert will reflect the extent to which:

The stakeholder can disrupt the business plans

The stakeholder causes uncertainty in the plans

The business needs and relies on the stakeholder

The reality is that stakeholders do not have equality in terms of their power and influence. For

example:

Senior managers have more influence than environmental activists



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A venture capitalist with 40% of the companys share capital will have a greater

influence that a small shareholder

Banks have a considerable impact on firms facing cash flow problems but can be

ignored by a cash rich firm

A customer that provides 50% of a business revenues exerts significantly more

influence than several smaller customer accounts

Businesses that operate from many locations across the country will be less relevant to

the local community than a business which is the dominant employer in a town or

village

Governments exercise relatively little influence on many well-established and

competitive business-to-business markets. However their power is much stronger over

businesses in markets which are regulated (e.g. water, gas & electricity) or where the

public sector has a direct stake (e.g. retail banking)

Employees have traditionally sought to increase their power as stakeholders by grouping

together in trade unions and exercising that power through industrial action. However,

in the last two decades the level of union membership has declined significantly as has

the total time lost to industrial act.

Three Models of Corporate Governance from Developed Capital Markets

Introduction

The corporate governance structure of joint stock corporations in a given country is

determined by several factors: the legal and regulatory framework outlining the rights

and responsibilities of all parties involved in corporate governance; the de facto realities

of the corporate environment in the country; and each corporations articles of

association. While corporate governance provisions may differ from corporation to

corporation, many de facto and de jure factors affect corporations in a similar way.

In each country, the corporate governance structure has certain characteristics or

constituent elements, which distinguish it from structures in other countries. To date,

researchers have identified three models of corporate governance in developed capitalmarkets. These are the Anglo-US model, the Japanese model, and the German model.



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The Anglo-US Model

The Anglo-US model is characterized by share ownership of individual, and

increasingly institutional, investors not affiliated with the corporation (known as outside

shareholders or outsiders); a well-developed legal framework defining the rights and

responsibilities of three key players, namely management, directors and shareholders;

and a comparatively uncomplicated procedure for interaction between shareholder and

corporation as well as among shareholders during or outside the AGM.

Key Players in the Anglo-US Model

Players in the Anglo-US model include management, directors, shareholders (especially

institutional investors), government agencies, stock exchanges, self-regulatory

organizations and consulting firms which advise corporations and/or shareholders on

corporate governance and proxy voting. Of these, the three major players are

management, directors and shareholders:

The Anglo-US model, developed within the context of the free market economy,

assumes the separation of ownership and control in most publicly-held corporations.

This important legal distinction serves a valuable business and social purpose: investors

contribute capital and maintain ownership in the enterprise, while generally avoiding

legal liability for the acts of the corporation. Investors avoid legal liability by ceding to

management control of the corporation, and paying management for acting as their agent

by undertaking the affairs of the corporation. The cost of this separation of ownership

and control is defined as agency costs. The interests of shareholders and management

may not always coincide. Laws governing corporations in countries using the Anglo-US

model attempt to reconcile this conflict in several ways. Most importantly, they

prescribe the election of a board of directors by shareholders and require that boards act

as fiduciaries for shareholders interests by overseeing management on behalf of

shareholders.



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Share Ownership Pattern in the Anglo-US Model

In both the UK and the US, there has been a marked shift of stock ownership during the

postwar period from individual shareholders to institutional shareholders. In 1990,

institutional investors held approximately 61 percent of the shares of UK corporations,

and individuals held approximately 21 percent. (In1981, individuals held 38 percent.) In

1990, institutions held 53.3 percent of the shares of US corporations.

The increase in ownership by institutions has resulted in their increasing influence. In

turn, this has triggered regulatory changes designed to facilitate their interests and

interaction in the corporate governance process.

Composition of the Board of Directors in the Anglo-US Model

The board of directors of most corporations that follow the Anglo-US model includes

both insiders and outsiders. An insider is as a person who is either employed by

the corporation (an executive, manager or employee) or who has significant personal or

business relationships with corporate management. An outsider is a person or

institution which has no direct relationship with the corporation or corporate

management.

A synonym for insider is executive director; a synonym for outsider is non-executive

director or independent director.

In response, individual and institutional investors began to inform themselves about

trends, conduct research and organize themselves in order to represent their interests as

shareholders. Their findings were interesting. For example, research conducted by

diverse organizations indicated that in many cases a relationship exists between lack of

effective oversight by the board of directors and poor corporate financial performance.

In addition, corporate governance analysts noted that outside directors often suffered

an informational disadvantage vis--vis inside directors and were therefore limited in

their ability to provide effective oversight.

Several factors influenced the trend towards an increasing percentage of outsiders on

boards of directors of UK and US corporations. These include: the pattern of stock

ownership, specifically the above-mentioned increase in institutional investment the

growing importance of institutional investors and their voting behavior at AGMs; and

recommendations of self-regulatory organizations such as the Committee on the



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Financial Aspects of Corporate Governance in the UK and shareholder organizations in

the US.

Disclosure Requirements in the Anglo-US Model

As noted above, the US has the most comprehensive disclosure requirements of any

jurisdiction. While disclosure requirements are high in other jurisdictions where the

Anglo-US model is followed, none are as stringent as those in the US.

US corporations are required to disclose a wide range of information. The following

information is included either in the annual report or in the agenda of the annual general

meeting (formally known as the proxy statement): corporate financial data ( this is

reported on a quarterly basis in the US); a breakdown of the corporations capital

structure; substantial background information on each nominee to the board of directors

(including name, occupation, relationship with the company, and ownership of stock in

the corporation); the aggregate compensation paid to all executive officers (upper

management) as well as individual compensation data for each of the five highest paid

executive officers, who are to be named; all shareholders holding more than five percent

of the corporations total share capital; information on proposed mergers and

restructurings; proposed amendments to the articles of association; and names of

individuals and/or companies proposed as auditors.

Disclosure requirements in the UK and other countries that follow the Anglo-US model

are similar. However, they generally require semi-annual reporting and less data in most

categories, including financial statistics and the information provided on nominees.

Corporate Actions Requiring Shareholder Approval in the Anglo-US

The two routine corporate actions requiring shareholder approval under the Anglo-US

model are elections of directors and appointment of auditors.

Non-routine corporate actions which also require shareholder approval include: the

establishment or amendment of stock option plans (because these plans affect executive

and board compensation); mergers and takeovers; restructurings; and amendment of the

articles of incorporation.



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There is one important distinction between the US and the UK: in the US, shareholders

do not have the right to vote on the dividend proposed by the board of directors. In the

UK, shareholders do vote on the dividend proposal.

Anglo-US model also permits shareholders to submit proposals to be included on the

agenda of the AGM. The proposals - known as shareholder proposals - must relate to

a corporations business activity. Shareholders owning at least ten percent of a

corporations total share capital may also convene an extraordinary general meeting

(EGM) of shareholders.

In the US, the SEC has issued a wide range of regulations concerning the format,

substance, timing and publication of shareholder proposals. The SEC also regulates

communication among shareholders.

Interaction among Players in the Anglo-US Model

As noted above, the Anglo-US model establishes a complex, well-regulated system for

communication and interaction between shareholders and corporations. A wide range of

regulatory and independent organizations play an important role in corporate

governance.

Shareholders may exercise their voting rights without attending the annual general

meeting in person. All registered shareholders receive the following by mail: the agenda

for the meeting including background information an all proposals ("proxy statement"),

the corporations annual report and a voting card.

In the Anglo-US model, a wide range of institutional investors and financial specialists

monitor a corporation's performance and corporate governance. These include: avariety of specialized investment funds (for example, index funds or funds that target

specific industries); venture-capital funds, or funds that invest in new or "start-up"

corporations; rating agencies; auditors; and funds that target investment in bankrupt or

problem corporations. See the diagram "Diversified monitoring in Anglo-US Corporate

Governance" for a pectoral explanation of this phenomenon. In contrast, one bank

serves many of these (and other) functions in the Japanese and German models. As a

result, one important element of both of these models is the strong relationship between

a corporation and its main bank.



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The Japanese Model

The Japanese model is characterized by a high level of stock ownership by affiliated

banks and companies; a banking system characterized by strong, long-term links

between bank and corporation; a legal, public policy and industrial policy framework

designed to support and promote keiretsu (industrial groups linked by trading

relationships as well as cross-shareholdings of debt and equity); boards of directors

composed almost solely of insiders; and a comparatively low (in some corporations,

non-existent) level of input of outside shareholders, caused and exacerbated by

complicated procedures for exercising shareholders votes.

Equity financing is important for Japanese corporations. However, insiders and their

affiliates are the major shareholders in most Japanese corporations. Consequently, they

play a major role in individual corporations and in the system as a whole. Conversely,

the interests of outside shareholders are marginal. The percentage of foreign ownership

of Japanese stocks is small, but it may become an important factor in making the model

more responsive to outside shareholders.

Key Players in the Japanese Model

The Japanese system of corporate governance is many-sided, centering around a main

bank and a financial/industrial network or keiretsu.

The main bank system and the keiretsu are two different, yet overlapping and

complementary, elements of the Japanese model. Almost all Japanese corporations have

a close relationship with a main bank. The bank provides its corporate client with loans

as well as services related to bond issues, equity issues, settlement accounts, and related

consulting services. The main bank is generally a major shareholder in the corporation.

Many Japanese corporations also have strong financial relationships with a network of

affiliated companies. These networks, characterized by crossholdings of debt and

equity, trading of goods and services, and informal business contacts, are known as

keiretsu.

In the Japanese model, the four key players are: main bank (a major inside shareholder),

affiliated company or keiretsu (a major inside shareholder), management and the

government. Note that the interaction among these players serves to link relationships

rather than balance powers, as in the case in the Anglo-US model.



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In contrast with the Anglo-US model, non-affiliated shareholders have little or no voice

in Japanese governance. As a result, there are few truly independent directors, that is,

directors representing outside shareholders.

Share Ownership Pattern in the Japanese Model

In Japan, financial institutions and corporations firmly hold ownership of the equity

market. Similar to the trend in the UK and US, the shift during the post-war period has

been away from individual ownership to institutional and corporate ownership. In 1990,

financial institutions (insurance companies and banks) held approximately 43 percent of

the Japanese equity market, and corporations (excluding financial institutions) held 25

percent. Foreigners currently own approximately three percent.

In both the Japanese and the German model, banks are key shareholders and develop

strong relationships with corporations, due to overlapping roles and multiple services

provided. This distinguishes both models from the Anglo-US model, where such

relationships are prohibited by antitrust legislation. Instead of relying on a single bank,

US and UK corporations obtain financing and other services from a wide range of

sources, including the well-developed securities market.

Composition of the Board of Directors in the Japanese Model

The board of directors of Japanese corporations is composed almost completely of

insiders, that is, executive managers, usually the heads of major divisions of the

company and its central administrative body. If a companys profits fall over an

extended period, the main bank and members of the keiretsu may remove directors and

appoint their own candidates to the companys board. Another practice common in

Japan is the appointment of retiring government bureaucrats to corporate boards; for

example, the Ministry of Finance may appoint a retiring official to a banks board.

In the Japanese model the composition of the board of directors is conditional upon the

corporations financial performance. A diagram of the Japanese model at the end of this

article provides a pictorial explanation.

Note the relationship between the share ownership structure and the composition of

Japanese boards. In contrast with the Anglo-US model, representatives of unaffiliated

shareholders (that is, outsiders) seldom sit on Japanese boards.



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Japanese boards are generally larger than boards in the UK, the US and Germany. The

average Japanese board contains 50 members.

Regulatory Framework in the Japanese Model

In Japan, government ministries have traditionally been extremely influential in

developing industrial policy. The ministries also wield enormous regulatory control.

However, in recent years, several factors have weakened the development and

implementation of a comprehensive industrial policy. First, due to the growing role of

Japanese corporations at home and abroad, policy formation became fragmented due to

the involvement of numerous ministries, most importantly, the Ministry of Finance and

the Ministry of International Trade and Industry. Second, the increasing

internationalization of Japanese corporations made them less dependent on their

domestic market and therefore somewhat less dependent on industrial policy. Third, the

growth of Japanese capital markets led to their partial liberalization and an opening,

albeit small, to global standards. While these and other factors have limited the

cohesion of Japanese industrial policy in recent years, it is still an important regulatory

factor, especially in comparison with the Anglo-US model.

In contrast, government agencies provide little effective, independent regulation of the

Japanese securities industry. This is somewhat ironic, because the regulatory framework

in Japan was modeled on the US system by US occupation forces after the Second

World War. Despite numerous revisions, the core of Japans securities laws remains

very similar to US laws. In 1971, in response to the first wave of foreign investment in

Japan, new laws were enacted to improve corporate disclosure. The primary regulatory

bodies are the Securities Bureau of the Ministry of Finance, and the Securities Exchange

Surveillance Committee, established under the auspices of the Securities Bureau in1992. The latter is responsible for monitoring corporate compliance and investigating

violations. Despite their legal powers, these agencies have yet to exert de facto

independent regulatory influence

Disclosure Requirements in the Japanese Model

Disclosure requirements in Japan are relatively stringent, but not as stringent as in the

US. Corporations are required to disclose a wide range of information in the annualreport and or agenda for the AGM, including: financial data on the corporation (required

on a semi-annual basis); data on the corporations capital structure; background



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information on each nominee to the board of directors (including name, occupation,

relationship with the corporation, and ownership of stock in the corporation); aggregate

date on compensation, namely the maximum amount of compensation payable to all

executive officers and the board of directors; information on proposed mergers and


individuals and/or companies proposed as auditors.

Japans disclosure regime differs from the US regime (generally considered the worlds

strictest) in several notable ways. These include: semi-annual disclosure of financial

data, compared with quarterly disclosure in the US; aggregate disclosure of executive

and board compensation, compared with individual data on the executive compensation

in the US; disclosure of the corporations ten largest shareholders, compared with theUS requirement to disclose all shareholders holding more than five percent of the

corporations total share capital; and significant differences between Japanese

accounting standards and US Generally Accepted Accounting Practices (US GAAP).

Corporate Actions Requiring Shareholder Approval in the Japanese Model

In Japan, the routine corporate actions requiring shareholder approval are: payment of

dividends and allocation of reserves; election of directors; and appointment of auditors.

Other common corporate actions which also require shareholder approval include

capital authorizations; amendments to the articles of association and/or charter (for

example, a change in the size and/or composition of the board of directors, or a change

in approved business activities); payment of retirement bonuses to directors and

auditors; and increase of the aggregate compensation ceilings for directors and auditors.

Non-routine corporate actions which also require shareholder approval include mergers,

takeovers and restructurings.

Shareholder proposals are a relatively new phenomenon in Japan. Prior to 1981,

Japanese law did not permit shareholders to put resolutions on the agenda for the annual

meeting. A 1981 amendment to the Commercial Code states that a registered

shareholder holding at least 10 percent of a companys shares may propose an issue to

be included on the agenda for the AGM or EGM.



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Interaction Among Players in the Japanese Model

Interaction among the key players in the Japanese model generally links and strengthens

relationships. This is a fundamental characteristic of the Japanese model. Japanese

corporations prefer that a majority of its shareholders be long-term, preferably affiliated,

parties. In contrast, outside shareholders represent a small constituency and are largely

excluded from the process.

Annual reports and materials related to the AGM are available to all shareholders.

Shareholders may attend the annual general meeting, vote by proxy or vote by mail. In

theory, the system is simple; however, the mechanical system of voting is more

complicated for non-Japanese shareholders.

Annual general meetings are almost always pro forma, and corporations actively

discourage shareholder dissent. Shareholder activism is restricted by an informal yet

important aspect of the Japanese system: the vast majority of Japanese corporations

hold their annual meetings on the same day each year, making it difficult for

institutional investors to coordinate voting and impossible to attend more than one

meeting in person.

The German Model:

The German model governs German and Austrian corporations. Some elements of the model

also apply in the Netherlands and Scandinavia. Furthermore, some corporations in France and

Belgium have recently introduced some elements of the German model. The German

corporate governance model differs significantly from both the Anglo-US and the

Japanese model, although some of its elements resemble the Japanese model.

Banks hold long-term stakes in German corporations6, and, as in Japan, bank

representatives are elected to German boards. However, this representation is

constant, unlike the situation in Japan where bank representatives were elected to

a corporate board only in times of financial distress. Germanys three largest

universal banks (banks that provide a multiplicity of services) play a major role; in

some parts of the country, public-sector banks are also key shareholders. There are

three unique elements of the German model that distinguish it from the other

models outlined in this article. Two of these elements pertain toboard composition

and one concern shareholders rights:

First, the German model prescribes two boards with separate members. German

corporations have a two-tiered board structure consisting of a management board



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(composed entirely of insiders, that is, executives of the corporation) and a

supervisory board (composed of labor/employee representatives and shareholder

representatives). The two boards are completely distinct; no one may serve

simultaneously on a corporations management board and supervisory board.

Second, the size of the supervisory board is set by law and cannot be changed by

shareholders. Third, in Germany and other countries following this model, voting

right restrictions are legal; these limit a shareholder to voting a certain percentage of

the corporations total share capital, regardless of share ownership position. Most

German corporations have traditionally preferred bank financing over equity

financing. As a result, German stock market capitalization is small in relation to the

size of the German economy. Furthermore, the level of individual stock ownership

in Germany is low, reflecting Germans conservative investment strategy. It is not

surprising therefore, that the corporate governance structure is geared towards

preserving relationships between the key players, notably banks and corporations.

The system is somewhat ambivalent towards minority shareholders, allowing them

scope for interaction by permitting shareholder proposals, but also permitting

companies to impose voting rights restrictions. The percentage of foreign

ownership of German equity is significant; in 1990, it was 19 percent. This factor is

slowly beginning to affect the German model, as foreign investors from inside and

outside the European Union begin to advocate for their interests. The globalization

of capital markets is also forcing German corporations to change their ways. When

Daimler-Benz AG decided to list its shares on the NYSE in 1993, it was forced to

adopt US GAAP. These accounting principles provide much greater financial

transparency than German accounting standards. Specifically, Daimler-Benz AG

was forced to account for huge losses that it could have hidden under German

accounting rules.

Key Players in the German Model:

German banks, and to a lesser extent, corporate shareholders, are the key players

in the German corporate governance. Similar to the Japanese system described

above, banks usually play a multi-faceted role as shareholder, lender, and issuer of

both equity and debt, depository (custodian bank) and voting agent at AGMs. In

1990, the three largest German banks (Deutsche Bank AG, Dresdner Bank AG and

Commerz bank AG) held seats on the supervisory boards of 85 of the 100 largest

German corporations.

In Germany, corporations are also shareholders, sometimes holding long-term

stakes in other corporations, even where there is no industrial or commercial



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affiliation between the two. This is somewhat similar, but not parallel, to the

Japanese model, yet very different from the Anglo-US model where neither banks

nor corporations are key institutional investors. The mandatory inclusion of labor/employee

representatives on larger Germansupervisory boards further distinguishes the German model from both

the Anglo-US andJapanese models.

Share Ownership Pattern in the German Model:

German banks and corporations are the dominant shareholders in Germany. In

1990, corporations held 41 percent of the German equity market, and institutional

owners (primarily banks) held 27 percent. Neither institutional agents, such as

pension funds (three percent) or individual owners (four percent) are significant inGermany. Foreign investors held 19 percent in 1990, and their impact on the

German corporate governance system is increasing.

Composition of the Management Board (Vorstand) and Supervisory

Board (Aufsichtsrat) in the German Model:

The two-tiered board structure is a unique construction of the German model.German corporations are governed by a supervisory board and a management

board. The supervisory board appoints and dismisses the management board,

approves major management decisions; and advises the management board. The

supervisory board usually meets once a month. A corporations articles of

association sets the financial threshold of corporate acts requiring supervisory

board approval. The management board is responsible for daily management of

the company. The management board is composed solely of insiders, or

executives. The supervisory board contains no insiders, it is composed of

labor/employee representatives and shareholder representatives.

The Industrial Democracy Act and the Law on Employee Co-determination regulate

the size and determine the composition of the supervisory board; they stipulate the

number of members elected by labor/employees and the number elected by

shareholders. The numbers of members of the supervisory board is set by law. In

small corporations (with less than 500 employees), shareholders elect the entire

supervisory board. In medium-size corporations (defined by assets and number of

employees) employees elect one-third of a nine member supervisory board. In

larger corporations, employees elect one-half of a 20-member supervisory board.



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Note these two key differences between the German model and the other two

models. First, the size of the supervisory board is set by law and cannot be changed. Second,

the supervisoryboard includes labor/employee representatives.

While the supervisory board includes no insiders, it does not necessarily include

only outsiders. The members of the supervisory board elected by shareholders

are usually representatives of banks and corporations which are substantial

shareholders. It would be more appropriate to define some of these as affiliated

outsiders. For a pictorial explanation of board composition in the German model, please refer to

the diagram of the German model at the end of this article.

Regulatory Framework in the German Model:

Germany has a strong federal tradition; both federal and state (Laender) law

influence corporate governance. Federal laws include: the Stock Corporation Law,

Stock Exchange Law and Commercial Law, as well as the above-mentioned laws

governing the composition of the supervisory board are all federal laws. Regulation

of Germanys stock exchanges is, however, the mandate of the states.

A federal regulatory agency for the securities industry was established in 1995. It

fills a former void in the German regulatory environment.

Disclosure Requirements in the German Model:

Disclosure requirements in Germany are relatively stringent, but not as stringent

as in the US.

Corporations are required to disclose a wide range of information in the annual

report and or agenda for the AGM, including: corporate financial data (required on

a semi-annual basis); data on the capital structure; limited information on each

supervisory board nominee (including name, hometown and

occupation/affiliation); aggregate data for compensation of the management board

and supervisory board; any substantial shareholder holding more than 5 percent of

the corporations total share capital; information on proposed mergers and


individuals and/or companies proposed as auditors. The disclosure regime in

Germany differs from the US regime, generally considered the worlds strictest, inseveral notable ways. These include: semi-annual disclosure of financial data,

compared with quarterly disclosure in the US; aggregate disclosure of executive



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compensation and supervisory board compensation, compared with individual data

on executive and board compensation in the US; no disclosure of share ownership

of members of the supervisory board, compared with disclosure of executive and

directors stock ownership in the US; and significant differences between German

accounting standards and US GAAP. One key accounting difference in Germany is

that corporations are permitted to amass considerable reserves. These reserves

enable German corporations to understate their value. This practice is not

permitted under US GAAP.

Until 1995, German corporations were required to disclose shareholders holding

more than 25 percent of the total share capital. In 1995, this threshold was lowered

to 5 percent, bringing Germany in line with international standards.

Corporate Actions Requiring Shareholder Approval in the German Model:

The routine corporate actions requiring shareholder approval under the German

model are: allocation of net income (payment of dividends and allocation to

reserves); ratification of the acts of the management board for the previous fiscal

year; ratification of the acts of the supervisory board for the previous fiscal year;

election of the supervisory board; and appointment of auditors. Approval of the

acts of the management board and supervisory board are basically a seal of

approval or vote of confidence. If shareholders wish to take legal action against

individual members of either board or against either board as a whole, they refrain

from ratifying the acts of the board for the previous year. In contrast with the

Anglo-US and the Japanese models, shareholders do not possess the authority to alter the

size or composition of the supervisory board. These are determined by law.

Other common corporate actions which also require shareholder approval include

capital authorizations (which automatically recognize preemptive rights, unless

revoked by shareholder approval); affiliation agreements with subsidiaries;

amendments to the articles of association and/or charter (for example, a change of

approved business activities); and increase of the aggregate compensation ceiling

for the supervisory board. Non-routine corporate actions which also require

shareholder approval include mergers, takeovers, and restructurings.

Shareholder proposals are common in Germany. Following announcement of the

agenda for the meeting, shareholders may submit in writing two types of

proposals. A shareholder counterproposal opposes the proposal made by themanagement board and/or supervisory board in an existing agenda item and

presents an alternative. For example, a counterproposal would suggest a dividend



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higher or lower than that proposed by the management board, or an alternative

nominee to the supervisory board. A shareholder proposal requests the addition of an

issue not included on the original agenda. Examples of shareholder proposals

include: alternate nominees to the supervisory board; authorization of a special

investigation or audit; suggestions to abolish voting rights restrictions; and

recommendations for changes to the capital structure. Provided that such

proposals meet legal requirements, the corporation is required to publish these

shareholder proposals in an amended agenda and forward them to shareholders

prior to the meeting.

Interaction among Players in the German Model:

The German legal and public-policy framework is designed to include the interests

of labor, corporations, banks, and shareholders in the corporate governance

system. The multi-faceted role of banks has been described above. On the whole,

the system is geared towards the interests of the key players. There is,

nevertheless, some scope for participation by minority shareholders, such as the

above-mentioned provisions concerning shareholder proposals. There also exist several

obstacles to shareholder participation, especially in terms ofbanks powers as depositories and

voting agents.

The majority of German shares are issued in bearer (not registered) form.

Corporations with bearer shares are required to announce their annual general

meeting in an official government bulletin and forward the annual report and

agenda for meeting to custody banks. The banks forward these materials to the

beneficial owners of the shares. This often complicates the procedure for receipt of

materials, especially for foreign shareholders.

In Germany, most shareholders purchase shares through a bank, and banks are

permitted to vote the shares of German they hold on deposit. The procedure is as

follows: The beneficial shareholder grants a general power of attorney to the bank,

and the bank is permitted to vote the shares for a period up to 15 months. The

corporation sends the meeting agenda and annual report to its custody bank. The

bank forwards these materials and it's (the bank's) voting recommendations to the

German shareholder. If the beneficial shareholder does not provide the bank with

his/her specific voting instructions, the bank may vote the shares according to its

own interpretation. This leads to potential conflict of interest between the bank and

the beneficial shareholder. It also increases the potential voting power of the bank,

because some shareholders might not provide specific voting instructions and the

bank may exercise the votes according to its interpretation. Because the level of



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individual share ownership in Germany is very low, this is not a huge problem.

Nevertheless, it reflects a certain pro-bank and anti-shareholder tendency of the

system.

Other obstacles to shareholder participation include the above-mentioned legality

of voting right restrictions, and the fact that shareholders may not vote by mail. As

noted above, shareholders must either attend the meeting in person or to be

represented in person, i.e., by their custodian bank.

Despite these obstacles, minority German shareholders are not inactive. In fact,

they often oppose management proposals and present a wide range of

counterproposals and proposals at the AGMs and EGMs of many German

corporations each year.

German Panel on Corporate Governance:

I. General questions of Corporate Governance

The purpose of Corporate Governance is to achieve a responsible, value-oriented management

and control of companies. Corporate Governance Rules promote and reinforce the confidence of

current and future shareholders, lenders, employees, business partners and the general public in



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national and international markets. The Supervisory Board, Management Board and Executive

Staff of the Company identify themselves with these Rules and are contractually bound by

them. They are part of the general obligation to observe other interests related to the corporate

activity.

The Rules of the Code serve as general guidelines for Corporate Governance for quoted German

companies. Quoted companies are all enterprises whose shares are officially listed on a German

stock exchange or traded over-the counter. The Rules, their acceptance, implementation and

respective adjustments to the specifics of the individual Company shall be communicated in the

Annual Report.

Due to the various legal systems, institutional parameters, and traditions, there is presently no

internationally accepted universal model for Corporate Governance. The parameters for the

code are provided by codified law and leading cases, generally accepted national and

international codes of good conduct and market practice. They include the directly relevant

provisions of company and group law, in particular, the law governing stock corporations,

financial accounting, banking supervision and the capital market as well as the Company's

Memorandum and Articles of Association. From these derive the provisions, some of them

detailed, with regard to the responsibilities and duties of the governing bodies: Supervisory

Board (German Stock Corporation Act), Management Board (76-94 German Stock Corporation

Act) and General Meeting (118-147 German Stock Corporation Act) as well as the code of

conduct of the members of the governing bodies. The essential points of the OECD Principles

for Corporate Governance of May 1999 are covered as follows:

Protection of Shareholders' rights: Following the introduction of the German Act on Corporate

Control and Transparency (KonTraG) in 1998, there are adequate provisions safeguarding the

rights of shareholders through the comprehensive mandatory rules under the German Stock

Corporation Act. In particular, the following OECD points are covered by mandatory law (23

German Stock Corporation Act):

Full voting right for each ordinary share (12 German Stock Corporation Act)

No impediments with regard to ownership or registration (67 German Stock Corporation

Act)

Transferability of shares at any time (68 German Stock Corporation Act)

Participation, proxy and exercise of voting rights at General Meetings (134 German

Stock Corporation Act)

Election of members of the Supervisory Board (101 German Stock Corporation Act)



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Participation in company profits. (58 German Stock Corporation Act).

These points are mandatorily covered by German Law (23 German Stock Corporation Act).

An authorization to increase the share capital with exclusion of shareholder participation rights

in order to pursue either an acquisition or a share placement near the prevailing market price

will only be exercised by the Management Board if the share capital increase does not exceed

10 % of the then existing share capital. In this calculation the re-utilization of any repurchased

shares will be included.

Equal treatment of shareholders: The 'Equal treatment of shareholders' stipulated by the OECD

is also in place for German companies. The precautionary measures against insider trading, self-

dealing and disclosure of any personal interests in transactions or matters are extended beyond

the legal requirements by the subsequent points i.e. Two and three, Management board' and the

Supervisory Board'.

Until the enactment of the German Takeover Law, the voluntary Takeover Code of the Capital

Markets Expert Commission of the German Ministry of Finance applies. This Code is accepted

by the Company. In the case of repurchase of own shares according to 71, subparagraph 1, No.

8 German Stock Corporation Act, the Company shall observe the principle of equal treatment of

all shareholders. Disclosure and transparency: The point 'Disclosure and transparency' of the

OECD Principles is generally covered by law for German companies through the corresponding

provisions on the obligation to provide and enclose information (20 - 22, 160, 328 German

Stock Corporation Act; 15, 25 German Securities Trading Act; 285, 325 German Commercial

Code; 35, 39 German Antitrust Act; 24 German Banking Act). In addition, the Management

Board shall regularly and with due regard to equal treatment of all shareholders ('Fair

Disclosure') report on all Company matters through Annual and Interim Reports, 'ad hoc'

communications, analyst and press conferences. The OECD information requirements are

covered by these publicity undertakings. The Company shall adopt an accounting standard that

is suitable for international comparison purposes.

As the Management Board and Supervisory Board of German companies have the decisive

functions for Corporate Governance, the relevant points are dealt with in detail below:

II. Management Board

1.)Responsibilities and duties

In the management of the Company, the Management Board is bound by Corporate

interest, Company policy and the Group's guidelines as well as the basic principles of

proper management (76 German Stock Corporation Act).



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The Management Board develops, in consultation with the Supervisory Board, the

strategy for the Group and is responsible for its implementation.

The Management Board is responsible for ensuring compliance with legal provisions

within the Group and to ensure their observation by Group companies.

2.) Information and disclosure requirements

The Management Board will publish without delay any new facts arising in the sphere of

the Company's activities which are not yet publicly known and, due to their impact on

their financial position of the Company or its general course of business, are likely to

impact significantly on the price of the Company's listed securities (15 German

Securities Trading Act).

As part of its regular communication efforts, the dates of major regular publications

(such as annual and quarterly reports, General Meetings) shall be published in a

'Financial Calendar' (at least one year) in advance. The information published by the

company shall also be available in the 'Internet'. This is to include the invitation to

General Meetings, their agenda, as well as shareholder initiatives and management

comments hereto as well as voting results of such meetings. If possible, all publications

are provided in the English language.

The company shall pursue the principle of equal treatment of all shareholders in the

matter of information dissemination.

The regular financial reporting (annual and quarterly reports) will be timely. The

quarterly reports contain segment reporting as well as results per share.

d) The Management Board shall inform the Supervisory Board on a regular basis, in

good time and comprehensively about all relevant matters regarding business

development, risk exposure and risk management of the company and major group

subsidiaries.

e) Should the business trend or risk exposure of the Group change significantly against

plan, the Management Board must immediately inform the Supervisory Board through

its Chairman, who will call an extraordinary Supervisory Board meeting if so indicated.

f) The Management Board shall list in the Notes to the Company Accounts the

corporations in which the Company holds a minimum of 10% of the share capital.

Exempt from this are participations that are of immaterial importance for the Company's

asset, financial and profit situation. Equally, any existing mutual shareholdings and any

shareholdings in the Company which have been notified by third parties as well as the

owner(s) of such shareholdings must be reported in the Notes to the Accounts.



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g) As soon as the Company is notified (25 German Securities Trading Act), or becomes

otherwise aware that another party has obtained, exceeds or no longer holds 5, 10, 25, 50

or 75% of the voting rights in the Company, this will immediately be published by the

Management Board.

h) In the Notes to the Company Accounts details with regard to the Management Board's

interest in shares of the Company (including any existing option rights) and their

changes in relation to the previous year have to be published.

2.)Remuneration

The remuneration of the Management Board and the Executive Staff shall include

sufficient motivation to ensure long-term corporate value creation. This includes share

option programs and performance-related incentives related to the share price

development and the continuing success of the company. In connection with the

granting of share options and similar rights to members of the Management Board and

the executive staff the following points shall be observed: The initial exercise of the

rights arising from share option programs shall not be possible before two years since

the grant. To document the incentive character as well as to balance the surrender of the

subscription right by the shareholders, the exercise shall depend on achieving or

exceeding relevant and transparent benchmarks (e.g. the development of an industry

index). The structure, total amount, exercise prices and exercise periods as well as the

allocations of share options and similar rights in the reporting period shall be published

in the Notes to the Company Accounts, separately by members of the Management

Board and Executive Staff. To ensure compliance with insider laws, suitable precautions

like closed periods of time are implemented.

The fixed and variable remuneration elements of the Management Board shall be

detailed in the Annual Report.

3.)Rules governing conflicts of interest and own-account transactions



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In the running of the management of the company, the Management Board members

must not pursue any own interest that could be in conflict with the interest of the

Company.

Members of the Management Board must disclose to the Supervisory Board material

personal interests in transactions of the Company and Group companies as well as other

conflicts of interest. They must also inform their Management Board colleagues.

All transactions between the Company or any Group company and Management Board

member

cg german model project draft

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