Post-Enron: U.S. and German Corporate Governance

Only five years after Henry Hansmann and Reinier Kraakmann announced the End of History of Corporate Law – borrowing the words of Francis Fukuyama–, this observation seems at least questionable. Following two major failures of the “American Model” with the bankruptcy of Enron and WorldCom, the question of the right Corporate Governance regime is again under discussion. Legislators around the globe assume that further development of Corporate Governance is necessary. There is consent for the need of improvement, but no clear answer on how to improve. A first step to solving the arising problems might be to evaluate the reasons for collapse of the Corporate Governance regime in place. In the U.S., the fall of Enron has been understood primarily as a failure of the gatekeepers, meaning the intermediaries who provide verification and certification services to the investors (e.g. securities analysts and especially the auditors). U.S. legislation in the aftermaths of Enron reacted correspondingly: the Sarbanes-Oxley Act further regulated the accounting profession by implementing a new administrative agency, the Public Company Accounting Oversight Board (PCAOB), to set new standards with respect to the auditor’s independence, especially with respect to compensation via consulting services provided for audit clients. This first step of legislation has been criticized for dealing with only part of the relevant concerns. Questions relating to auditors have been largely left open. Instead of addressing the issue of rotation of audit firms directly, the Sarbanes-Oxley Act orders a study on this topic. Other problems connected to compensation of the persons involved have been ignored. Foremost to mention is the management compensation with equity instruments. Remuneration with stock options rewards risk oriented management decision without penalizing for failure. Sarbanes-Oxley Act does not respond to this issue. How do other jurisdictions cope with these problems? It might be worth examining the approach of the German labor- or stakeholder oriented model of corporate governance. Under German law the auditor is not only understood as a gatekeeper, assuring the interest of the investing public, but also acts as assistant for the supervisory board in its internal control of the management. This complementary role does not necessarily trigger different approaches with respect to Corporate Governance – under the German concept auditor’s independence is the key as well, as shown by new legislation after Enron. Given similar approaches to similar problems in both jurisdictions, a convergence to the one right Corporate Governance model might take place. The paper will discuss the question of managerial and gatekeeper compensation, focusing on compensation of auditors. Not only remuneration for consulting services, but also compensation schemes within the accounting firms might be an issue. Mandatory transparency reports of audit firms, proposed by the European Commission, could be a step in this direction. The paper will discuss and evaluate these topics