Hermes EOS and EY publish guidelines for investor engagement with German companies

Eight guiding principles aim to avoid future governance failures

Hermes Equity Ownership Services and consulting firm EY have established a framework for guiding how investors engage with German supervisory boards ahead of the German Government’s Commission for the Corporate Governance Code (DCGK) publishing amended set of regulations governing stakeholder and board interactions.

The report, written by a working group that includes EY’s Head of Corporate Governance Board Services Daniela Mattheus and Hermes EOS co-head Hans-Christoph Hirt, outlines eight guiding principles intended to shape – but not mandate – discussions that can be made with a supervisory board. They are intended, it reads, to fit within existing legal structures and the German Corporate Governance Code but push to improve the quality and standardize the format of such discussions.

The guidelines were also produced with a view to the upcoming EU Shareholders’ Rights Directive which, once implemented, will also require institutional investors to pursue a more active role monitoring and engaging with listed companies.

The principles establish some basic ground rules: supervisory boards, rather than investors, decide whether to enter any given dialogue, only the supervisory board’s chair is necessary for a discussion but can call on other members of the supervisory or management boards to join them, and both boards should discuss the content and format of any discussion.

Investors are also invited to discuss any issues surrounding composition or remuneration of either board, the internal organization and oversight of the supervisory board, the development and implementation of broad corporate strategy and appointing a board auditor. In any other instances “responsibility for communication remains with the management board as the company’s legal representative”, the paper’s authors write.

Hirt added that codifying this type of engagement is important. He continued: “The dialogue forms part of good stewardship practice and proves very valuable for all involved: it increases transparency, fosters mutual trust and facilitates a better understanding of company specific corporate governance arrangements.”The principles also offer supervisory boards guidance about how to select which investors to speak to without falling foul of the principle of equal treatment of all shareholders.

At German listed companies, the supervisory board oversees and appoints the board of management but is not involved in its day-to-day running. There are matters which require supervisory board input and require their prior consent before being resolved, often if such decisions will have an impact on the company’s assets or financial situation.

This arrangement has arguably led to confusion about the role of each governance structure in influencing a company’s decision.

An example that Hirt uses is Hermes’ engagement with DAX 30 company, semiconductor manufacturer Infineon AG, which was accused of squandering shareholder value by delaying strategic decisions and poor board appointments.

In the end, Hermes proposed its own candidate for Infineon’s supervisory board, who received popular backing and was elected, paving the way for investors to name suitable additions in the future.

Since then, Hirt noted, communications between shareholders and German supervisory boards have “significantly improved”. He added: “We welcome the guidelines as they address some of the legal questions and concerns about this important dialogue and will help companies and investors in understanding and adopting best practice.”

Members of the working group (selected):

  • Jürgen Hambrecht (BASF, Daimler, Fuchs Petrolub)
  • Hans-Christoph Hirt (Hermes Investment Management)
  • Ulrich Lehner (E.ON, Henkel, Deutsche Telekom, Porsche Automobil, ThyssenKrupp)
  • Stephan Lowis (RWE)
  • Ingo Mainert (Allianz Global Investors)
  • Daniela Mattheus (EY)
  • Christian Strenger (ex-Deutsche Asset Management Investment)