Corporate Governance in Germany Corporate Governace Sound Practices 2 February 2013 Kuwait.

Corporate Governance in Germany

Corporate Governace Sound Practices2 February 2013

Kuwait

Corporate Governance in Germany | 2 February 2013 | p 2

A. The German Corporate Governance Code

B. Accountability

C. Enforcement

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-governance-code.de).



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

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



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.

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".



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.

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 theSupervisory Board, a shareholder judging objectively would consider authoritative for his election

decision.

Within the meaning of this recommendation, shareholders holding a material interest areshareholders who directly or indirectly hold more than 10 % of the voting shares of thecompany.

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 …



All documents are available on Allianz SE‘s website (www.allianz.com).

5.4.1

Kind of regulation:Recommendation

Fulfilled?:Yes

Example Volkswagen AG (as of 23 November 2012)



All documents are available on Volkswagen AG‘s website (www.volkswagen.com).

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 …

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.



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





B. Accountability

C. Supervision : Enforcement

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



B. Accountability




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).



2. Reporting and audit of the annual financial statement

The Code contains recommendations beyond the statutory regulations particularly

regarding transparency

Example

7.2.1Prior 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).



external

control

3. Supervision of financial reporting of listed companies in Germany*

Annual financial statement

Auditor

Company / Management

Enforcement internalcontrolprepare

Supervisory Board

* Securities of the company must be listed on a regulated market

Approval by company

Random sampling auditwithout a concrete reason

Error free accounting

Audit at the request of BaFin

Concrete indications of an infringement of financial reporting standards

Company refuses to cooperate

Error in the accounting

BaFin Audit

Lack of approval by

company

Publication of error

4. Two tier enforcement regime

First tier: Audit by FREP



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

Error in the accountingMitteilung über FehlerfreiheitError free accounting

Termination of audit Publication of error



Thank you for your attention.

ContactBundesanstalt für FinanzdienstleistungsaufsichtINT 1 – Technical CooperationMarie-Curie-Straße 24-2860439 Frankfurt / GERMANY

Jung Yoo – Advisor International Policy / Affairs E-mail: [email protected]

Corporate Governance in Germany Corporate Governace Sound Practices 2 February 2013 Kuwait.

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