Corporate governance practices in different countries are influenced and determined by an uneven mix of law, regulation, culture and custom. The following overview highlights a number of areas where these influences manifest themselves most strongly. Each section below highlights the features and practices that make corporate governance in Germany different from that of other countries. Here you will find information about how German boards are typically constituted, requirements for audit committees, the breadth of shareholder rights on offer, the role of investors in corporate governance, and much else besides.
German shareholders are entitled to exercise their rights through the annual general meeting (AGM), which is usually convened by each company's management board. Typically, the AGM elects the members of the supervisory board, formally approves the actions of management and supervisory board members, and votes on the company's auditor, on the distribution of dividends and on any other subjects brought forward by the management board. However, shareholders holding shares of more than 5% of the company's capital stock or the proportionate amount of EURO 500,000can place items on the AGM's agenda for a shareholder vote. Also, the AGM can resolve, by a simple majority, to have specific issues examined by a special external auditor.
On April 3, 2009, the German Act on the Modernization of Accounting Law was passed by Germany's legislators. Companies are required to appoint at least one independent member with expertise in the areas of accounting or auditing - either as a member of the audit committee or as a member of the supervisory board or board of directors. Also, the new legislation clarifies that the supervisory board is responsible for monitoring the financial accounting process, the effectiveness of the internal control system, the internal risk management system and the internal auditing system as well as the audit of the financial statements. These tasks can be delegated to an audit committee in their entirety or in parts.
In Germany, the management board of a listed target company is in principle not allowed to perform any actions to obstruct the success of a takeover offer. However, this regulation is weakened by a number of exceptions, including the ability for companies to publicly object to the offer, to search for a "white knight" and to lodge anticipatory resolutions at the AGM. However, the shareholders of listed companies may decide to waive these exceptions by approving specific changes to companies' articles of association. German listed companies are required to publish their capital and control structures and certain takeover hurdles in the Management Discussion & Analysis, which is published together with the financial statements.
Boards of Directors
Under the German 'Co-determination Law', supervisory board members of large companies (defined as those with over 500 employees) are elected both by shareholders and by company employees. Employees elect one third or half of the board (depending on the size of the company). The supervisory board elects the members of the management board, which is responsible for the management of the company. Most supervisory boards of larger listed companies maintain an audit committee, a remuneration (compensation) committee, and a nominating committee.
German corporate governance regulations are in the main set by the stock corporation law as well as the commercial law. The German Corporate Governance Codex is a best practice code that does not form part of the law, but instead works on a comply-or-explain basis. Listed companies are required by the stock corporation law to declare to which extent they comply with the Codex and to publicly disclose this. Following the modernization of the German accounting law, companies will also need to explain why they do not comply with the individual recommendations of the Codex. The Corporate Governance Codex is updated rather frequently in order to enhance corporate governance structures in Germany.
Executive pay remains a topic of considerable debate in Germany. Investors, in particular represented by the DSW, keep close watch on pay schemes that exceed accepted norms. Typically, executives receive a fixed base pay, a variable bonus and participate in long-term incentive programs, for example, through share option schemes. This structure is also recommended by the German Corporate Governance Codex. In the Codex there are also recommendations for companies to install caps, or limits to pay, in particular with regard to "golden parachute" payments in the case of an early termination. Details of executive remuneration must be disclosed in the annual report at the level of individual members of the management board, unless shareholders waive this requirement with a 75% voting majority.
Role of Institutional Investors
Institutional investors play a large role in their ongoing discussions with management, having more resources and expertise than small investors. German institutional engagement has increased in recent years, however it remains behind the scenes more often than in the press. Since the credit crisis, there has been some criticism that institutional shareholders have contributed to the current concerns by demanding short-term gains and taking little account of investee companies' long-term sustainability.