Corporate Governance
in Germany
Corporate Governace Sound Practices
2 February 2013
Kuwait
A. The German Corporate Governance Code
B. Accountability
C. Enforcement
Corporate Governance in Germany | 2 February 2013 | p 2
A. The German Corporate Governance Code
1. Historical developments
May 2000
Government establishes the committee of „Corporate Governance Corporate Management – Corporate Control – Modernization of the
Stock Corporation Act“.
 Recommendation to develop a „Code of Best Practice“ for German
corporations
Sep 2001
Establishment of the „Committee German Corporate Governance
Code“ by the Federal Ministry of Justice.
Feb 2002
The Committee submits the „German Corporate Governance Code“
to the German government
 The code is reassessed annually by the Committee and if
necessary modified with respect to current (global) developments
in the field of corporate governance (www.corporate-governancecode.de).
Corporate Governance in Germany | 2 February 2013 | p 3
A. The German Corporate Governance Code
2. Objectives of the Code
•
Make the German corporate governance system transparent and
understandable.
•
Promote the trust of international and national investors, customers,
employees and the general public in the management and supervision of listed
German stock corporations.
•
Clarify the obligation of the management board and the supervisory board to
ensure the continued existence of the enterprise and its sustainable creation of
value in conformity with the principles of the social market economy.
Corporate Governance in Germany| 2 February 2013 | p 4
A. The German Corporate Governance Code
3. Content
The Code regulates …
•
Shareholders and the general meeting (voting rights, procedure)
•
Cooperation between management board and supervisory board
•
Management board (tasks, composition, compensation, conflicts of interest)
•
Supervisory board (tasks, responsibilities, formation of committees,
composition, compensation, conflicts of interest)
•
Transparency (disclosure regarding insider, major shareholders)
•
Reporting and audit of the annual financial statements
Corporate Governance in Germany | 2 February 2013 | p 5
A. The German Corporate Governance Code
4. Statutory nature
•
No formal law. The Code recapitulates statutory law and comprises further
recommendations.
•
Addressed to listed companies
•
Public consultation procedure
•
„Comply-or-explain“ regime: Companies may deviate from the
recommendations but must disclose and justify the deviations.
Sec. 161 German Stock Corporation Act
Corporate Governance Code Declaration
(1) The management board and supervisory board of the listed company shall declare annually that the
recommendations … have been and will be complied with or which recommendations have not been or
will not be applied and why. The same shall apply to the management board and the supervisory board
of a company which has exclusively issued other securities than shares for trading on an organised
market …
(2) The declaration shall be continuously available to the public on the company’s Internet page.
 The recommendations of the Code are neither enforceable nor justiciable.
Corporate Governance in Germany | 2 February 2013 | p 6
A. The German Corporate Governance Code
Excerpt
2.3.1
At least once a year the shareholders' General Meeting is to be convened by the Management Board giving
details of the agenda.
4.2.1
The Management Board shall be comprised of several persons and have a Chairman or Spokesman.
6.8
Information on the enterprise which the company discloses shall also be accessible via the company's
Internet site. The Internet site shall be clearly structured. Publications should also be in English.
Recommendations whose deviations must be disclosed and justified are marked
by use of the word "shall“. Recommendations which can be deviated from without
disclosure are marked by use of the word "should".
Corporate Governance in Germany | 2 February 2013 | p 7
A. The German Corporate Governance Code
5. Case study
5.4.1 paragraphs 4 to 6 German Corporate Governance Code
In its election recommendations to the General Meeting, the Supervisory Board shall disclose the
personal and business relations of each individual candidate with the enterprise, the executive bodies of
the company and with a shareholder holding a material interest in the company.
The recommendation to disclose is limited to those circumstances which, in the appraisal of the
Supervisory Board, a shareholder judging objectively would consider authoritative for his election
decision.
Within the meaning of this recommendation, shareholders holding a material interest are
shareholders who directly or indirectly hold more than 10 % of the voting shares of the
company.
Corporate Governance in Germany | 2 February 2013 | p 8
A. The German Corporate Governance Code
Example Allianz SE (as of 12 December 2012)
Allianz SE fully complies and will
continue to fully comply with the
recommendations of the German
Corporate Governance Code
Commission …
Corporate Governance in Germany | 2 February 2013 | p 9
A. The German Corporate Governance Code
5.4.1
Kind of regulation:
Recommendation
Fulfilled?:
Yes
All documents are available on Allianz SE‘s website (www.allianz.com).
Corporate Governance in Germany | 2 February 2013 | p 10
A. The German Corporate Governance Code
Example Volkswagen AG (as of 23 November 2012)
The Board of Management … declare that
they will fully comply with the
recommendations of the … Code … with the
exception of number … 5.4.1 paragraphs 4
to 6 (disclosure regarding election
recommendations) …
… the requirements of the Code are vague
and definitions unclear. As a precautionary
measure, the Board of Management and the
Supervisory Board therefore declare a
deviation from the Code in this respect …
All documents are available on Volkswagen AG‘s website (www.volkswagen.com).
Corporate Governance in Germany | 2 February 2013 | p 11
A. The German Corporate Governance Code
6. Effects of “comply and explain”
•
Shareholders and others can verify the level of compliance. A company must
provide justification for non-compliance and such declaration is publicly
available.
•
Public awareness of good corporate governance has increased and is
progressively reflected in the media.
Corporate Governance in Germany | 2 February 2013 | p 12
A. The German Corporate Governance Code
7. Latest agenda (4th Committe meeting on 13/14 June 2012)
• Limitation of management board compensation
• Diversity: An obligatory fixed quota of women in management and supervisory
boards is not recommended
• Early communication of supervisory board candidates in preparation of the
annual shareholders‘ meeting
• Intensify the dialogue with industries and corporations
Corporate Governance in Germany | 2 February 2013 | p 13
A. The German Corporate Governance Code
B. Accountability
C. Supervision : Enforcement
Corporate Governance in Germany | 2 February 2013 | p 14
B. Accountability
1. The lack of the declaration of conformity may lead to
 invalid resolutions about the discharge of the management and supervisory
board
 claims for indemnity of the company against the management and
supervisory board
2. Nonobservance of the Code may lead to
 voidability of the resolutions of the shareholders‘ meeting
3. False declaration regarding the compliance with the Code may lead to
 invalid resolutions about the discharge of the management and supervisory
board
 claims for indemnity of investors against the management and supervisory
board
Corporate Governance in Germany | 2 February 2013 | p 15
A. The German Corporate Governance Code
B. Accountability
C. Supervision : Enforcement
Corporate Governance in Germany | 2 February 2013 | p 16
C. Supervision : Enforcement
1. Oversight on corporate governance
•
BaFin is the integrated federal supervisory authority for all financial services
companies and securities issuers in Germany having emerged from the three
former supervisory authorities for credit institutions, the insurance sector and
securities trading on 1 May 2002
•
Securities trading is regulated by the Securities Trading Act
(Wertpapierhandelsgesetz – WpHG)
•
Transparency rules – that are statutory and also reflected in the Code – are
monitored by BaFin, e. g.
•
disclosure of insider information,
•
exceeding or falling short of certain thresholds in voting rights,
•
timely information of all shareholders and market participants (ad-hoc).
Corporate Governance in Germany | 2 February 2013 | p 17
C. Supervision : Enforcement
2. Reporting and audit of the annual financial statement
The Code contains recommendations beyond the statutory regulations
particularly regarding transparency
Example
7.2.1
Prior to submitting a proposal for election, the Supervisory Board or, respectively, the Audit Committee shall
obtain a statement from the proposed auditor stating whether, and where applicable, which business,
financial, personal and other relationships exist between the auditor and its executive bodies and head
auditors on the one hand, and the enterprise and the members of its executive bodies on the other hand,
that could call its independence into question. This statement shall include the extent to which other
services were performed for the enterprise in the past year, especially in the field of consultancy, or which
are contracted for the following year.
 These recommendations are not subject to supervision and enforcement.
Subject to supervision are only national and international accounting standards
(e. g. German Code of Commerce, IAS, IFRS).
Corporate Governance in Germany | 2 February 2013 | p 18
C. Supervision : Enforcement
3. Supervision of financial reporting of listed companies in Germany*
Supervisory
Board
Auditor
internal
control
Company /
Management
Annual financial
statement
* Securities of the company must be listed on a regulated market
Corporate Governance in Germany | 2 February 2013 | p 19
Enforcement
C. Supervision : Enforcement
4. Two tier enforcement regime
First tier: Audit by FREP
Concrete indications of an
infringement of financial
reporting standards
Error free accounting
Corporate Governance in Germany | 2 February 2013 | p 20
Audit at the request of
BaFin
Error in the accounting
Approval by
company
Lack of
approval by
company
Publication of
error
BaFin Audit
Random sampling audit
without a concrete reason
Company refuses to
cooperate
C. Supervision : Enforcement
Second tier: Audit by BaFin
Company does not
agree with the
results of the
FREP audit
Company refuses
to cooperate with
FREP in an audit
Considerable
doubts about the
accuracy of FREP’s
audit
Audit of banks and
insurance
companies
Sovereign audit by BaFin: Company and auditor are obliged to cooperate, submit
requested documents and grant BaFin employees access to buildings and properties
Mitteilung
Error
überfree
Fehlerfreiheit
accounting
Termination of audit
Corporate Governance in Germany | 2 February 2013 | p 21
Error in the accounting
Publication of error
Thank you for your attention.
Contact
Bundesanstalt für Finanzdienstleistungsaufsicht
INT 1 – Technical Cooperation
Marie-Curie-Straße 24-28
60439 Frankfurt / GERMANY
Jung Yoo – Advisor International Policy / Affairs
E-mail: jung.yoo@bafin.de