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.