Glass Lewis: Consultation could lead overhaul of the German Corporate Governance Code

The German Corporate Governance Code has just come to the end of a consultation phase, with market participants being invited to provide feedback on a large number of proposed amendments. The consultation may result in the largest overhaul of the Code since its conception in 2002.

Firstly, the responsible government commission foresees a change to the layout of the Code, with the introduction of “Apply and Explain” principles, which invite companies to provide further disclosure on decisions taken on their governance structures to assist market participants in analysing these, similar to the UK and South African governance codes. This seems like a positive move, but German issuers may need some further guidance to ensure that meaningful disclosure is provided across the board.

In terms of governance best practice, the new Code also foresees the introduction of much stronger guidance to issuers on how to conduct an independence assessment of board members and the maximum number of other positions that board members can reasonably balance. Further, the proposed new recommendations also foresee a reduction in the board term-length of supervisory board members from the legal maximum five years to a recommended maximum of three years as well as a recommendation that companies disclose individualised attendance information for board members in the past year. In our view, these proposed changes would more closely align the German Code with investor expectations and address a number of points for which the Code has received some criticism in recent years.However, there are some proposed changes which we believe will be viewed more critically by the market. For instance, a number of new recommendations regarding management board remuneration have been proposed; while further guidance on this topic in the Code is very welcome, some of the proposed amendments are likely to be viewed as unnecessarily prescriptive by German issuers, such as comply-or-explain recommendations that short-term incentive plans should be cash-settled and long-term incentive plans should be settled in blocked shares. In our view, this would appear to downplay other measures that could be included in incentive plans to align the long-term interests of shareholders and management and may be more suitable based on the structure of a company and the industry in which it operates.

In the interests of establishing a clearer and more compact Code, the Commission also foresees the removal of some current provisions, such as a recommendation that companies announce candidates for the supervisory board chair position in the AGM invitation and a suggestion that companies hold an informational EGM in the case of a takeover offer. Considering the increased scrutiny of board elections in Germany and some cases in the German market where shareholders have complained of their lack of involvement in substantial corporate actions – such as the Bayer/Monsanto and Linde/Praxair mergers – we are concerned that some of the proposed removals of provisions may be viewed negatively by shareholders.

The final version of the Code is currently expected in the summer, alongside the transposition of SRD II into German law. GL’s submission is available here.

Chris Rushton is Lead Analyst – DACH Region at Glass, Lewis & Co.