Sunday, February 12, 2012

German Corporate Governance Code Commission Proposes Enhancements to Supervisory Board and Audit Committee Independence

The Government Commission on the German Corporate Governance Code has proposed amendments to the Code to enhance the independence of supervisory board members and audit committees. The supervisory board should include an appropriate number of independent members in order to encourage the independent provision of advice to and the supervision of the management board. The Commission also proposes that the chair of the supervisory board should not also be the chair of the audit committee.

The audit committee chair should be independent and not be a former member of the company's management board whose appointment ended less than two years ago. The Commission also proposes to modify the definition of independence to include relations with third parties over and above business or personal relations with the company or its management board. The modified recommendation will have no effect on the special situation arising from the Act on Co-Determination of Employees in the Supervisory Board or the One Third Employee Representation Act. Further, the supervisory board is in the future to specify concrete objectives for the number of its independent members in connection with its composition.

In addition, the Commission proposes the revision of the compensation structure of the supervisory board members so that where performance-based remuneration is also awarded in addition to a basic salary, the former must primarily be related to long-term company performance. Moreover, the Code recommendation on the matters on which the chair of the supervisory board should regularly consult with the management board would be broadened to include planning, the risk situation and compliance. As a result, this catalogue would be identical to the information duties of the management board towards the supervisory board.

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. Germany embraces a dual system of corporate governance involving an executive board and a supervisory board. The executive board is responsible for managing the enterprise, while the supervisory board appoints, supervises and advises the members of the executive board and is directly involved in decisions of fundamental importance to the enterprise.