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Dec 29, 2016

Dirk establishes important guidelines

In the second of a three-part interview focusing on key issues, Dirk CEO Kay Bommer tells Andrew Holt about the association’s work on clarifying the supervisory board issue and the importance of the corporate code

Getting to grips with Germany’s two-tier corporate structure, consisting of separate supervisory and managing boards, is an interesting and sometimes complex challenge even for the most knowledgeable professionals. The supervisory board typically includes representatives of employees – who are clearly not independent of the company – as well as representatives of controlling shareholders. The head of the supervisory board is there to consult the management board, but not run the company.

For IROs there is therefore an issue of communication between German supervisory boards and investors. ‘The question has always been: may supervisory board members talk to investors?’ says Kay Bommer, CEO of Dirk. ‘Ten years ago, if you asked a legal eagle he or she would say they may not – they are just there to supervise, but not speak to investors. That has changed.’

Dirk, along with EY, has devised some guiding principles to help German supervisory boards interact with investors. The report, Guiding principles for the dialogue between investors and German supervisory boards, which Dirk published in July last year, lists eight principles to establish a framework for conversations between the two sides. These principles (listed in full below) cover:  

.    Supervisory board composition and nomination 

.    Management appointment and removal 

.    Remuneration structure of management and supervisory boards 

.    Strategy development and implementation 

.    Auditor appointment. 

The guidelines clarify that communication should focus only on topics within the scope of the supervisory board’s competencies as outlined in the German company and capital markets laws. Currently, the legal framework for supervisory board engagement is not lucidly defined, which creates uncertainty among corporates on how to handle investor requests for corporate governance engagements with supervisory board members.

‘The guidelines help to provide more clarity to all participants,’ says Bommer. He also notes the importance of the German Corporate Governance Code: ‘It is a revolution in the German regulatory compliance governance system. It is on the table of every supervisory board head and every company in Germany now.’

The chances are good that more German corporates will start to engage in an active dialogue with institutional shareholders. 

The eight guiding principles

Guiding principle 1: Initiative and topics

A dialogue between investors and the supervisory board can take place. On behalf of the company, the decision whether such a dialogue should take place rests with the supervisory board. The chair of the supervisory board decides whether to enter a specific dialogue. The dialogue exclusively pertains to topics that are part of the remit of the supervisory board.

Guiding principle 2: Composition and remuneration of the supervisory board

The composition of the supervisory board, its nomination process and remuneration system can be discussed in the dialogue. Specific proposals for the election to the supervisory board or those concerning individual candidates should not be discussed.

Guiding principle 3: Internal organization and oversight

A dialogue between investors and the supervisory board can involve the discussion of: the supervisory board’s report and the supervisory board-related matters of the corporate governance report; the internal organization of the supervisory board; the design of the control and participation processes; the committee formation as well as the supervisory board’s efficiency review; the measures derived from the review. A discussion of the results of the efficiency review regarding individual members of the supervisory board should not take place.

Guiding principle 4: Management appointment & removal and management remuneration

The requirement profile for management board members and the division of duties therein can be discussed in the dialogue. Specific proposals or those concerning individual candidates should not be the subject of the dialogue. In addition, the remuneration system of the management board, contemplated changes, possible suggestions for improvement as well as the interpretation and if applicable the exercise of discretionary powers of the supervisory board pertaining to remuneration-related matters may be discussed with investors.

Guiding principle 5: Strategy development and implementation

The development and implementation of the corporate strategy is the responsibility of the management board. In the context of a dialogue with investors, the supervisory board can explain its participating role within the strategy process and its assessment of the implementation.

Guiding principle 6: Auditor

The criteria and opinion-making for selection process of the auditor as well as the extent and quality of the co-operation between the auditor and the supervisory board can be discussed in the dialogue.

Guiding principle 7: Dialogue participants

The supervisory board’s chair represents the supervisory board in the communication with investors. He/she may call on other supervisory board members (for instance, a chair of a committee), the chair of the management board or other management board members to participate in the dialogue. The supervisory board chair informs the entire supervisory board’s members about the dialogue.

Guiding principle 8: Form of the dialogue

The supervisory board discusses with the management board the basic principles of the content and format of the dialogue with investors.