German Corporate Governance Code - Amendments 2017

In the course of the regular review of its set of rules on 7 February 2017, the Government Commission on the German Corporate Governance Code adopted several amendments to the Code. The amendments are effective as of their date of publication in the Federal Gazette and are already published and explained on the Commission’s website (www.dcgk.de).

The main aim of the amendments is to increase transparency with a view to affording stakeholders a better assessment of the company’s management, and to adapt the Code to international best practice. As in previous years, the decision was preceded by a consultation procedure whereby Code users, consultants and legal scholars from home and abroad could comment on the Commission’s amendments published in November 2016.

Apart from a series of editorial changes, the Government Commission has decided on the following amendments to the Code:

Concept of the honorable businessman

The concept of the honorable businessman is enshrined in the preamble of the Code. From now on, the guiding principle is that the principles of the social market economy, on which good corporate governance should be based, shall require not only legality but also ethically sound, self-responsible action by members of management and supervisory boards.

In this regard, the Code also emphasizes the particular responsibility of institutional investors. These should actively and responsibly play their role as shareholders on the basis of transparent principles that take sustainability into account. However, as part of the preamble, both amendments constitute merely an appeal and do not form part of a recommendation or a suggestion.

Compliance management system and whistle-blower system

The Code reiterates the previously applicable obligation of the management board to establish an appropriate compliance management system (CMS) that is aligned with the company’s risk profile. A new addition is the recommendation that the principles of the CMS should be disclosed in the corporate governance report and thus made transparent to the public (section 4.1.3).

In addition, companies should establish a whistle-blower system so that employees would be given the means for confidentially passing on information about violations of the law within the company. The Code suggests that this possibility should also be afforded external third parties.

Composition of the supervisory board

The call for the supervisory board to develop a competency profile for the board as a whole also ensures greater transparency, which should serve as a basis for the development of election proposals for supervisory board members to the Annual General Meeting. The purpose of the corporate governance report is to provide information on the status of the implementation of the competency profile and the appropriate number - in the opinion of the supervisory board - of independent members of the supervisory board, as well as the names of these members. Ownership structure should also be taken into account in deciding the number of independent members of the supervisory board.

In addition, the Commission recommends that candidate proposals be accompanied by a curriculum vitae and an overview of the candidate’s main activities besides those in their supervisory board mandate. Both of these should be published annually on the company website, for all members of the supervisory board.

Interim financial reporting

In response to the abolition of the statutory obligation to draw up quarterly financial reports, the Code recommends that shareholders be informed in an appropriate form of any significant changes in the business outlook and the risk situation during the course of the year, in addition to the half-year financial report (item 7.1.1). This recommendation is above all aimed at companies that are not already required by stock exchange regulations to provide quarterly financial information.

Variable remuneration of the management board

For the multi-annual variable remuneration of the management board that is already provided for by the law, the Code recommends an essentially future-oriented assessment period (see section 4.2.3). In addition, it is suggested that multi-year variable remuneration components are not paid out in advance, but instead only after the end of the respective assessment period.

Assessment of the changes to the Corporate Governance Code

The amendments to the Code are to be welcomed. In addition to the necessary clarifications and adjustments to legislative amendments, the Commission provides some significant stimuli for further development of corporate governance and qualitative improvement of the activities of the supervisory board.

The amendments are expected to become effective within the next few weeks. The companies concerned should therefore first establish whether the changes in the Code are already in effect or have already been implemented in their corporate structure before they submit their declaration of conformity, which in accordance with Section 161 of the German Stock Corporation Act (AktG) is to be issued annually. If companies wish to comply with the recommendations, they may need to change their existing practice.