The Government Commission met in plenary session on May 21, 2003. The European Commission will shortly be publishing its action plan for modernizing company law and improving corporate governance in the EU. To be able to take account where appropriate of the EU Commission’s various deliberations and against the background of the current national and international debate, the agenda for the plenary meeting focused in particular on executive compensation issues and experience to date with the implementation of the German Corporate Governance Code at exchange-listed corporations. Following lengthy, detailed and in part controversial discussion of these matters, the Commission unanimously resolved changes to the Code, these changes relating primarily to the area of executive compensation.
Greater transparency in executive compensation in the future
The Commission’s deliberations centered on the issue of appropriate and transparent executive compensation, which has also been the subject of lively public debate. Practice has shown that all the issues in the debate surrounding executive compensation are already dealt with generally in the Code. The Commission’s primary aim was therefore to further clarify and concretize certain aspects with a view to eliminating the weaknesses revealed in implementation to date. Several points have been added to the relevant Section 4.2 of the Code:
- Recommendation “Individualized disclosure of Management and Supervisory Board compensation”
Details of Management and Supervisory Board compensation shall be published on an individualized basis with breakdown by components.
- Recommendation “Cap for stock options”
In the future, stock options and comparable schemes shall be related to demanding, relevant comparison parameters. The Supervisory Board shall agree a cap for extraordinary, unforeseen developments.
- Recommendation “Disclosure of value of stock options”
- Recommendation “Publication of compensation system on the internet”
The salient points of the compensation system shall be published on the company’s website in generally understandable form and detailed in the annual report. This shall include information on the value of stock options.
- Recommendation “Informing the Annual General Meeting about the compensation system”
The Chairman of the Supervisory Board shall outline the salient points of the compensation system and any changes thereto to the Annual General Meeting.
These changes serve the purpose of bringing greater transparency to executive compensation systems. To allow investors to assess whether executive performance and compensation are properly correlated, the compensation system including its individual components of fixed salary, bonus and long-term success-related component, as well as the actual amounts paid must be consistently disclosed. If performance criteria are not only strictly adhered to but also openly communicated, criticism of executive pay will start to die down and trust in companies will grow.
In particular, converting the previous suggestion on individualized publication of executive compensation into a recommendation is in line with the Commission’s fundamental conviction that flexible self-regulation by business is preferable to statutory regulation wherever possible.
Wide acceptance of Code recommendations
On behalf of the Government Commission, the Berlin Center of Corporate Governance (BCCG) under the leadership of Prof. Dr. Axel v. Werder from Berlin Technical University assessed the declarations of conformity submitted by companies up to the end of 2002 in accordance with Art. 161 Stock Corporation Act (AktG) and presented its initial findings for the DAX and (former) MDAX companies at the plenary session. This first empirical survey covered the Code’s recommendations (denoted by the word “shall”), but not the suggestions (“should” or “can”), which do not form part of the declaration of conformity.
Concluded in February 2003, the survey revealed that the German Corporate Governance Code is already being widely implemented in the first year since its introduction. For example, once the AGM resolutions required in some cases have been passed, 90% of the 30 DAX-listed companies (27 companies) will have implemented 59 of the 62 recommendations; around 75% of the companies (22) will then comply with all recommendations but one; 46.7% of the companies (14) will have implemented all the recommendations. Five DAX companies –Commerzbank, Infineon, Metro, Schering and ThyssenKrupp – already comply with all the Code’s recommendations.
An executive summary of the BCCG survey is available on the Government Commission’s website.
While there is a high degree of transparency regarding the practical implementation of the Code’s recommendations, the extent to which the suggestions in the Code have been implemented is less clear. For this reason, the recommendation in Section 3.10 of the Code – “The Management Board and Supervisory Board shall report each year on the enterprise's Corporate Governance in the Annual Report” – has been augmented by a suggestion of the Government Commission that this reporting should also include comments on the Code’s suggestions.
Further Code amendments in the future if developments require
The Code Commission addressed further corporate governance issues relating to areas such as the audit committee, accounting and financial statement auditing, conflicts of interest in the Supervisory Board and the switch from Management Board chairmanship to Supervisory Board chairmanship.
The Government Commission agreed that it would first observe and assess further developments, in particular the way companies handle these and other issues in practice. In addition, the Government Commission with its working groups will study the EU Commission’s action plan and incorporate its findings where applicable in its resolutions.
As soon as the amendments to the German Corporate Governance Code resolved by the Government Commission on May 21 have been published in the electronic Federal Gazette (Bundesanzeiger) by the Federal Ministry of Justice, the updated wording of the Code will be available on the Government Commission’s website at www.corporate-governance-code.de, which also includes further information on the work of the Commission.
Dr. Jürgen Claassen
Corporate Communications and Central Bureau
Phone: +49 (2 11) 8 24-36 00 1
Fax: +49 (2 11) 8 24-36 00 5