The German Corporate Governance Code (“Kodex”) has received a much-needed overhaul this year. Is it too little too late? Shareholders will have to take what they can get.
Since May 15, German companies are required, or rather requested, to comply with the newest stipulations of the Kodex. As in many countries elsewhere in Europe, Germany’s corporate governance code contains comply-or-explain recommendations as well as suggestions for publicly-listed companies.
Many, if not most, of the significant revisions to the Kodex regard the composition and compensation of supervisory boards. German corporations are governed by a two-tiered board structure with a non-executive supervisory board charged with the oversight of management. Now, companies are asked to disclose information regarding the personal and business relationships that board nominees have with a company, its executives or any shareholder holding in excess of 10% of a company’s share capital. The Kodex requests that companies comment on the independence of its supervisory board members and set concrete goals as to the number on independent members that a company considers appropriate. Unlike in neighboring France, the Netherlands, Sweden and Finland, disclosing such information would have been unusual in the past.
While these developments are actually quite striking in Germany, they still leave something to be desired. Ever hesitant to take a hard-line stance, the Commission simply ‘requests’ that companies disclose relationships that “objective” shareholders would consider “authoritative.” Keeping this in mind, companies are nudged to appoint what’s considered an “adequate” number of independent board members.
In this case, perhaps we can expect a 2013 proxy season marked by half-hearted excuses as to why a company couldn’t appoint additional independent directors due to ‘time constraints’ or perhaps why relationships couldn’t be disclosed for ‘competitive reasons’. Cynicism aside though, it’s fair to assume some companies will not only meet, but exceed these recommendations. It will be interesting to see how this addition is received in the year ahead.
In another development, the Kodex now suggests that any performance-based remuneration paid to supervisory board members only be tied to the long-term development of a company. In the past companies were encouraged to compensate board members on the basis of performance, whether measured by yearly financial targets or more long-term objectives. During the 2012 proxy season, Glass Lewis noted that many German companies, preemptive of this change to the Kodex, proposed the removal of any performance-based remuneration for supervisory board members. We’ve supported this development and believe it serves to align practice with the original spirit of the German Corporate Governance Code. Considering this amendment isn’t as drastic as the above, shareholders can expect more willing compliance on the part of companies.
As per another amendment, the Kodex recommends a supervisory board chairman not serve as audit committee chairman. In this instance, an article has been changed to a comply-or-explain provision. Previously, this recommendation did not obligate companies to comment on non-compliance.
On a final note, the Commission has made an interesting semantic change to the Kodex: the word “can” has been replaced by the word “should” throughout the code. While this development could be viewed as minor, it may indicate that the Commission is no longer satisfied with making suggestions that can (and likely will) be easily ignored.
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