Government Commission resolves changes to the German Corporate Governance Code
- Independence of supervisory board members strengthened
- Switch from management board chairman to supervisory board chairman not the rule
In its plenary meeting in Frankfurt on June 2, 2005, the Government Commission on the German Corporate Governance Code resolved a number of changes to the German Corporate Governance Code, aimed in particular at further enhancing supervisory board work. Dr. Gerhard Cromme, Chairman of the Government Commission: "We have again updated the Code in line with its basic principles of flexibility and self-responsibility and created even more transparency – in the interests of investors, companies, and Germany as a business location. The changes will make the two-tier management structure of German stock corporations even easier for foreign investors to understand."
The amendments to the Code were based firstly on an analysis of recent international developments in corporate governance, in particular at European level. The Code amendments implement to a large extent the EU recommendation on the duties of independent board members. Secondly, the changes reflect the extensive legislation on corporate governance recently introduced in Germany in the form of the balance sheet monitoring act, the accounting law reform act and the investor protection improvement act.
In view of the current draft of the management compensation disclosure bill approved by the Government in mid-May, the Government Commission decided against updating its recommendations and suggestions on the matter of management compensation for the time being. A decision on this cannot be taken until the final version of the bill is available.
The amendments resolved today relate among other things to the Code's recommendations and suggestions. The Code's recommendations are denoted in the text by the use of the word "shall". Companies may deviate from these recommendations, but in this case they are obliged to disclose their non-compliance in a declaration of conformity to be issued each year by the management board and supervisory board (Article 161 Stock Corporation Act (AktG)). This allows companies to take into account requirements specific to their sector or enterprise. In this way the Code helps make corporate governance in Germany more flexible and self-regulating. Further, the Code contains suggestions, non-compliance with which is not subject to disclosure. Suggestions are denoted in the Code by terms such as "should" or "can".
The new recommendations and suggestions in the Code are as follows:
- Section 3.10
The company shall keep previous declarations of conformity with the Code available for viewing on its website for five years (recommendation).
- Section 5.3.2
To improve work in the audit committees, the Government Commission recommends that the chairman of the audit committee shall have specialist knowledge and experience in the application of accounting principles and internal control processes (recommendation).
- Section 5.4.2
The supervisory board shall include what it considers an adequate number of independent members (recommendation). A supervisory board member is considered independent if he/she has no business or personal relations with the company or its management board which could cause a conflict of interests.
- Section 5.4.3 (new)
Elections to the supervisory board shall be made on an individual basis (recommendation). An application for the judicial appointment of a supervisory board member shall be limited in time up to the next annual general meeting (recommendation). Proposed candidates for the supervisory board chair shall be announced to the shareholders (recommendation).
- Section 5.4.4 (new)
It shall not be the rule for the former management board chairman or a management board member to become supervisory board chairman or the chairman of a supervisory board committee (recommendation). If this is intended, special reasons shall be presented to the annual general meeting (recommendation).
The Code recommendations resolved today will become binding as soon as the amended Code is published in the electronic Federal Gazette (Bundesanzeiger) by the Federal Ministry of Justice. The updated wording of the German Corporate Governance Code will shortly be available on the Government Commission website at www.corporate-governance-code.de, which also includes further information on the work of the Government Commission.
Dr. Jürgen Claassen
Corporate Communications, Strategy, and Executive Affairs
Telephone: +49 (2 11) 8 24-36 00 1
Fax: +49 (2 11) 8 24-36 00 5