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On March 2, 2020, Professor Eric Nowak , Director of the USI Institute of Finance, was invited by the German Parliament to serve as an academic expert and give an opinion on a proposed change in the stock corporation law. The proposed change in the law aims at increasing personal liability of top managers in case of violation of their fiduciary duties.
In a hearing of the Committee on Legal Affairs and Consumer Protection (Ausschuss für Recht und Verbraucherschut), which took place in Berlin at the Bundestag, Prof. Nowak referred on the issue of the effectiveness of sanctions in the event of serious breaches of duty by company managers. Currently, the shareholders of a company in Germany are reluctant to assert claims for damages when the top managers of their companies commit violations punishable by law, due to the asymmetric effect of the significant costs of legal action which, especially in the event of a negative outcome, fall entirely on the shareholders themselves.
In his audition before the Commissioners of the Bundestag, Prof. Nowak, made arguments for avoiding disproportionate incentives that could lead to a large number of lawsuits being filed - which would benefit the legal consulting industry more than the shareholders - and advocated instead for rules that would mitigate the high cost risk of litigation.
Prof. Nowak’s proposals draw on his academic research on corporate governance and the analysis of the German stock market. In international comparison, the German stock market is still underdeveloped and the protection of minority shareholders is still inadequate. For Nowak, the question lies between government intervention, with legislation that promotes a more active role for shareholders in the corporate governance of public limited companies, and self-regulation, through the Deutsche Corporate Governance Kodex (DCGK), which, however, is not effective when it comes to persuading executives and boards to take measures that are unfavourable to them like, for example, the disclosure of management compensation.
Further details of the Committee hearing: www.bundestag.de/ausschuesse/a06_Recht/anhoerungen_archiv/aenderung-aktiengesetz-670598