Wednesday, July 06, 2011

Germany Reiterates Commitment to Voluntary Corporate Governance Code Based on Principle of Comply or Explain

In the wake of the financial crisis, German officials reiterated their confidence in the voluntary nature of the German Corporate Governance Code. In remarks on the tenth anniversary of the Code’s initiation, Klaus-Peter Müller, Chair of the Government Commission on the German Corporate Governance Code said that the comply or explain principle at the core of the Code allows for the needed transparency. The generally accepted Corporate Governance Code provides listed German companies with a flexible framework for good corporate management that can stand up to comparisons with international rules, noted the Chairman.

He said that the Code has made positive contributions and focuses on long-term results and the interests of all stakeholders, as well as diversity on supervisory boards. The aim of the Corporate Governance Code is to make Germany’s corporate governance rules transparent for both national and international investors, thus strengthening confidence in the management of German corporations. The Chairman also emphasized that the principles of good corporate governance should never be compromised.

He said that amendments to the Code are not on the agenda this year. Rather, the Commission is analyzing European Commission proposals on corporate governance. The Commission has debated in detail the green paper on the European corporate governance framework presented by the EU Commission and will submit its opinion in the summer of this year. The Commission welcomes in principle the declared objective of the green paper, which is to assess the effectiveness of the current Corporate Governance Codes for European companies. Many of the measures which the EU Commission is attempting to initiate with its green paper are already contained in the German Code, said the Chairman.

Sabine Leutheusser-Schnarrenberger, Federal Justice Minister, emphasized that the German Corporate Governance Code will remain a voluntary best practice code and that the federal government fully supports the Code and the work of the Commission. While best corporate governance practice is not German law, she noted, companies are well advised to follow the Code. She commended the Commission for not bowing to pressure to constantly amend the Code. Indeed, the Minister believes that acceptance of the Code could be affected detrimentally by amending it too often. Thus, the Minister applauds the Commission’s self restraint.

The Minister also specifically endorsed the Code’s comply or explain mechanism, under which companies have duty to disclose if they follow the Code and, if the do not follow it, why not. German companies make a declaration of compliance that should be sufficient, substantive and differentiated. It should not be boilerplate. The Minister is skeptical of the European Commission suggestion of the monitoring of declarations of compliance by the authorities, which, in her opinion, runs counter to a best practices Code. Either the markets and shareholders will react to deviations from the Code or they will not, reasoned the Minister, and monitoring by the authorities and making declarations more substantial will not change that dynamic. Thus, at the EU level, the Minister calls for self-restraint.