21 December 2016 – European Investors generally welcomes the proposed amendments to the German Corporate Governance Code. In our response to the consultation, we support the lean and transparent character of the Code, its emphasis on sustainable value creation and especially its unique recommendation on shareholder engagement which encourages regular dialogue between investors and the Chairman of the Supervisory Board.
At the same time, we urge the Regierungskommission (Commission) to provide more clarification on the recommendations covering compliance management, adherence to ethical standards, compensation structure and requirement profiles for the Management Body.
Dialogue between investors and the Board
We applaud the Code’s recommendation that the Chairman of the Supervisory Board should engage in regular dialogue with investors on Supervisory Board-related topics. In light of recent scandals at key German blue chips, we believe such a progressive and innovative approach towards shareholder engagement improves internal oversight, enhances transparency and strengthens governance at German companies.
European Investors is convinced that the recommendation provides investors with valuable first-hand information on the level of knowledge of the Supervisory Board, the suitability of its composition and whether it carries out its duties effectively. This will enable investors to make well-informed and solid long-term investment decisions.
Nevertheless, we are worried that the opaqueness of the recommendation enables reluctant Boards to keep controversial topics of the agenda, for example in take-over situations. Therefore, we request the Commission to outline a list of topics that can be put on the agenda in all circumstances which could include remuneration policies, nomination procedures and the selection of the auditor.
Compliance Reporting System
European Investors commends the Code’s introduction of internal compliance reporting and whistleblowing mechanisms for employees and third parties. We are of the opinion that both requirements will strengthen trust in German businesses and give investors more insight into the effectiveness of internal compliance policies.
Nonetheless, European Investors argues that German companies should go beyond the Code’s recommendation to highlight the basic features of their compliance management system in their corporate governance report and also provide information on the number and nature of recent compliance incidents and how they were addressed.
Ethical values, compensation, selection and Audit Committee
Finally, European Investors supports the Code’s focus on ethical values and sustainable growth, but feels that the Commission should provide more practical guidance in this regard. Also, we believe that requirement profiles could improve the selection procedures for Board members, although we point out that these profiles should be monitored and updated on an ongoing basis.
European Investors supports the Code’s recommendation for a “future-related” compensation structure for the Management Body, but believes the Commission should be more clear on the applicability and scope of the requirement. Also, we agree with the Commission that the Chair of the Audit Committee should be independent even though we are of the opinion that the Code should extend this obligation to all members of the Audit Committee.
Here you can find our response to the consultation.