Wednesday, July 11, 2012

German Corporate Governance Code Revised

Revisions to the German Corporate Governance Code require the management board and supervisory board of a company to publish a corporate governance report in connection with the statement on corporate governance. The corporate governance report must contain information on stock options and similar securities-based incentive programs unless this information is already provided in the annual financial statements or the compensation report.

This year the Corporate Governance Code Commission also added to the preamble of the code that a well-justified deviation from a Code recommendation could be in the interest of good corporate management. In this way, the Code contributes to more flexibility and more self-regulation in the German corporate constitution.

The full supervisory board must resolve the compensation system of the management board and review it regularly. Regarding payments upon termination, the Code now provides that if the employment contract is terminated for a serious cause for which a management board member is responsible, no payment should be made to that member. In addition, the chair of the supervisory board  must outline to the general shareholders meeting the salient points of the executive compensation system and any changes to it.

The supervisory board must set up an audit committee to handle the monitoring of the accounting process, the effectiveness of internal controls, and the audit of the financial statements. The Chair of the audit committee must be independent and not have been a member of the management board within the last two years. The audit committee Chair must have specialist knowledge and experience in the application of accounting principles and internal control processes. The Chair of the supervisory board must not be the Chair of the Audit Committee.         

The Corporate Governance Code is on a comply or explain basis under which German public companies are required to declare annually whether or not they have complied with the recommendations of the Code. Companies have duty to disclose if they follow the Code and, if the do not follow it, why not. A declaration of compliance should be sufficient, substantive and differentiated. It should not be boilerplate.