German Corporate Governance Code Commission Opposes Mandatory Say-on-Pay Legislation

The German Corporate Governance Code Commission opposes federal legislation mandating a binding annual shareholder vote on executive remuneration. In a statement, Commission Chairman Klaus-Peter Müller expressed doubt whether a decision made by the shareholders at the annual general meeting will prevent excessively high management board remuneration. The German Corporate Governance Code instead places emphasis on greater transparency and an improved basis for decisions by supervisory boards as a means of putting a stop to excesses in management board remuneration.

While further regulatory and legislative intervention in setting management remuneration may satisfy certain expectations in some quarters of society, noted the Chairman, it would place fetters on global companies. More broadly, Chairman Müller appealed to policy-makers to trust in the self-regulating force of the German Corporate Governance Code, adding that it is neither necessary nor desirable for every aspect of business life to be governed by binding legislation.

German companies operate under a two-tier system of corporate governance with a supervisory board with oversight power and a management board that daily runs the company. The aim of the German 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 German Corporate Governance Code is on a comply or explain basis under which public companies are required to declare annually whether or not they have complied with the recommendations of the Code.

Chairman Müller also voiced his objection to any attempt to adopt a global, or even an E.U., corporate governance code. Like legislation, he noted, a corporate governance code must take account of specific national factors. As it is, the differences in corporate governance across Europe shows that a European Code would not work, he opined.

That said, however, he emphasized that the Commission still has a goal of developing as much common ground as possible when it comes to good corporate governance. It must be made easier for global companies to meet the requirements expected of them with respect to good corporate governance. The discussion on board remuneration highlights the need for a greater consensus on what this constitutes. Currently, said the Chairman, there is no sufficient underlying international or European consensus on such issues.

He reasoned that, even if Germany were to enact the strictest remuneration legislation,

this would not have the slightest impact on salaries paid on Wall Street or in Silicon Valley or London. If greater restrictions were applied in Germany to management board remuneration compared with other countries, he cautioned, this would result in competitive distortion and the risk of the best minds, notably those with an international background, leaving the country.