Changes to the German Corporate Governance Code entered into force

The changes to the German Corporate Governance Code (GCGC) adopted by the Government Commission “German Corporate Governance Code” in its plenary session held on 5 May 2015, entered into force on June 12, 2015. The full text of the revised version can be found here.

Many of the changes only concern formulations or have been made in view of changes to the legal situation (in particular due to the Act on the Equal Participation of Women and Men in Management Positions in the Private and Public Sectors; see also our news item “Act on the Female Representation Quota in Companies comes into force” (in German only). Material changes to the Code have, however, have also been adopted. These are outlined below.

 

Overview of the key new provisions of the GCGC

• When specifying objectives regarding its composition, the supervisory board should now establish a maximum limit for the term of office of supervisory board members (second paragraph of Section. 5.4.1 of the revised GCGC).
• When making its proposals to the general meeting concerning the election of new members of the supervisory board, the supervisory board should satisfy itself that the respective candidates can devote the expected amount of time required (fourth paragraph of Section 5.4.1 of the revised GCGC.).
• The supervisory board should note in its report if a member has only taken part in half or less of the meetings of the supervisory board or the committees to which the member belongs. Participation by telephone or video conference is also deemed participation, but should not be the rule (Section 5.4.7 of the revised GCGC).

 

Practical implications

The key new provisions concern various aspects of the work of the supervisory board. The supervisory boards of the companies concerned will have to decide before submitting the annual declaration of compliance or prior to event-related updates, whether they will comply with the new provisions or will deviate from them.

The recommendation to establish a maximum limit for the term of office of supervisory board members constitutes an additional requirement placed on the composition of the supervisory board. Many listed companies already deviate from the current recommendations regarding the composition of the supervisory board (age limit, diversity, number of independent members etc.). It is to be expected that this trend will also continue with regard to terms of office. If the recommendation is to be complied with, the supervisory board is posed with the question of where to implement this. In practice, the provisions relating to the composition of the supervisory board are sometimes contained in the rules of procedure for the supervisory board and sometimes in separate resolutions on the objectives of supervisory board composition. These regulations will have to be amended accordingly.

The other two new recommendations are designed to ensure that supervisory board members devote sufficient time to their office. Prior communication with supervisory board candidates will be necessary in order to comply with the recommendation that the supervisory board satisfies itself before submitting election proposals that candidates can devote the required amount of time to their office. The supervisory board will, however, have to do more here than just asking the question “Can you devote the required amount of time?” The supervisory board does after all have to “satisfy itself” of this. The candidate will therefore at least have to briefly explain why he or she believes that this is the case. The supervisory board should document any communication in this respect.

The earlier version of the GCGC already provided for the noting of absence from more than half of the meetings of the supervisory board in the report of the supervisory board. The revised recommendation also extends to committee meetings and means that participation in exactly fifty per cent of meetings also now has to be reported. The recommendation will probably be followed by the vast majority of listed companies. While the Code now suggests that participation in supervisory board meetings by telephone or video conference should not be the rule, it is to be expected that above all companies with a large number of international supervisory board members will not follow this suggestion. Deviation from such a suggestion does not, however, have to be disclosed in the conformity declaration.

 

Entry into force and required action

The coming into force of the changes to the GCGC will not per se trigger any obligation to amend conformity declarations which have already been made. However, future declarations of conformity  have to take into account the new recommendations.

This means that the new recommendations relating to candidates proposed for the su-pervisory board and the report of the supervisory board will not have to be observed in this year’s general meeting season in most cases. For general meetings which have already been convened, those conformity declarations are authoritative which applied when the resolution on the agenda of the general meeting was adopted and in which the corporate bodies had not yet declared their conformity with the revised provisions. If the general meeting has not yet been convened, the decisive issue is whether a conformity declaration which refers to the version of the GCGC of 5 May 2015 has been submitted when the resolution on the convening of the general meeting is adopted. Only if this has already taken place (for example in the context of annual or event-related updates) do the new provisions have to be applied in accordance with this conformity declaration.

 

You may also find this interesting: “Act on the Female Representation Quota in Companies comes into force” (in German only)