Saturday, February 19, 2011

Proposed German Sustainability Code Linked to Sound Corporate Governance

Comments on the proposed German Sustainability Code designed to foster corporate sustainability through better governance, social responsibility and enviromental concerns were generally favorable and said sustainability is intertwined with sound governance. The aim of the German Sustainability Code is to make sustainability tangible for all stakeholder groups, to tap opportunities and avert risks. The German Sustainability Code, which is on a comply or explain basis, would apply to all listed companies, with unlisted companies at liberty to comply with the Code. The comment period ended on Feb. 14, 2011.

The German Sustainability Code will be implemented through a statutory provision in the German Stock Corporation Act under which the management board and the supervisory board of listed companies would issue an annual statement detailing how well they comply with the Code. A separate sustainability report would be incorporated into the annual report and be subject to external audit. Also, the company must issue a declaration of conformity with the German Corporate Governance Code.

The Sustainability Code requires the company to link executive compensation to the attainment of sustainability goals. For senior management, sustainability performance should form part of the supervisory board’s evaluation of the management board.

The Code requires a company to analyze the opportunities and risks for its core business arising from the sustainability requirements with regard to their long-term implications. The company should establish relevant industry-specific, national and international standards and ensure it operates in keeping with these standards. The significant opportunities and risks arising from sustainable development should be recorded and form an integral part of the risk management system. Moreover, key indicators on sustainability should be integrated into the company’s internal controls.

The Code also requires companies to implement processes ensuring that employee rights are observed at both national and international level. Compliance should be
based on internationally recognized standards; and the company should systematically involve its employees in the sustainability and strategy process

In a comment letter supporting the Code, the International Corporate Governance Network said that sustainability performance is largely determined by how well sustainability is integrated with the corporate governance processes. A discussion of how a company deals with environmental and social issues that can affect its long-term success and how it identifies and prioritizes such issues provides investors with valuable insights into management’s ability to run the company for the long-term.

The Network suggested that the Sustainability Code include an explicit commitment to genuine integrated reporting that goes beyond including a section on sustainability in the annual report but interlinks sustainability and financial performance to allow an assessment of long-term potential for success. In the Network’s view, companies should support integrated disclosures targeted at economic stakeholders by further disclosures for its social stakeholders.

Regarding compensation, the Network expects companies to investigate actively
whether or not it is appropriate to include sustainability or non-financial targets, and to report publicly what the board has concluded, explaining the reasons why or why not sustainability targets have been included

Equally, the Network seeks assurance that companies will build good stakeholder relationships and maintain ongoing dialogue with their stakeholders and implement mechanisms to solicit their views and take those into account. Moreover, the Network is interested in how a company responds to the challenges of demographic change, human capital management and corporate citizenship in all the countries in which it
operates.

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