The German Corporate Governance Codex (GCGC) 2020 further suggests that the chairman of the supervisory board should be prepared, within appropriate limits, to hold discussions with investors on supervisory board specific issues. This provision is important, but it is not always easy to apply in practice: communication may be inadmissible in individual cases due to stock corporation or capital market law. Classifying topics as specific to the supervisory board and the necessary coordination with the management board can be difficult.
Supervisory and advisory board work is becoming increasingly important in the context of the discussion on transparent, efficient and comprehensible corporate governance. The demands on members and their work are constantly increasing – not only due to the greater focus on their responsibility and possible liability, but also due to the increasing number of regulatory requirements.
Expansion of the regulations in the new GCGC
In the GCGC, which was structurally redesigned and revised in 2019 (in force since 20 March 2020), the government commission qualified some of the provisions of the previous version as principles. These reflect key requirements and form the basis for the recommendations and suggestions also contained in the code. The latter have been adopted partly unchanged and partly adapted.
Key principles
With regard to the composition of the supervisory board, the principles required beyond the provisions of the law are (i) the knowledge, skills and professional experience required for the proper performance of the tasks, as well as compliance with the statutory gender quota and (ii) sufficient time to perform the tasks.
One of the principles motivates larger companies to adopt the supervisory board’s working methods, in particular to work in committees, as this promotes the effectiveness of the work of the full supervisory board.
Significant additional recommendations
Maximum number of mandates
In order to avoid an accumulation of office (so-called overboarding) for supervisory board members, the GCGC 2020 now recommends a limitation to five mandates at non-group listed companies; a supervisory board chairmanship counts twice. Members of the board of management should now hold no supervisory board chairmanship and no more than two supervisory board mandates at non-group listed companies.
Independence from shareholder representatives
According to the GCGC 2020, the shareholder representatives must be independent of the executive board or the company and of the controlling shareholder. Furthermore, the supervisory board should have an appropriate number of independent shareholder representatives, although more than half of them should be independent of the management board or the company. The government commission has now added a catalogue of indicators for lack of independence: in particular, due to one’s own previous proximity to the company (during the cooling-off period), current, significant business relationship (e.g. customer, lender), personal relationship with a member of the management board or own length of service on the supervisory board.
Self-assessment
The supervisory board should continue to review the effectiveness and efficiency of its work (self-assessment as a clarification of terms). However, it was expressly added that the efficiency of the committee work should also be reviewed.
Subject to approval for material related party transactions
According to ARUG II (in force since 1 January 2020), the conclusion of so-called related party transactions (RPTs) is subject to the approval of the supervisory board if they are material.
RPT approval is subject to the business judgement rule. Accordingly, the RPT must be conducted at arm’s length (third-party comparison) and must be in the company’s interest (stakeholder interests). In this respect, the supervisory board monitors that extraneous interests and uncontrolled outflows of assets in favor of related parties are prevented.
The relevant group of companies/persons is derived from the reference to IAS 24, according to which an RPT is a transaction between the company and a member of its management or supervisory body (or of a group-affiliated company) and persons with close family ties to them. In the case of a shareholder who (un)indirectly holds more than 20% of the voting rights, the related party is rebuttably presumed to be the related party. In the case of ongoing relationships with third parties (e.g. sister companies) or coordinated cooperation between several (acting in concert), a relevant close relationship may also exist.
An RPT is material if the economic value exceeds 1.5% of the sum of fixed and current assets in the last annual or consolidated financial statements. Exceptions are transactions in the ordinary course of business and where special minority protection is not necessary or otherwise guaranteed (for example, within a contract group).
The full supervisory board can delegate its right of approval to a committee (also ad hoc). Members who are in conflict may not participate in either the plenary session or the committee. If there is (only) a concern of a conflict of interest, the member may vote in the committee, whereas in the plenary session he or she is subject to a ban on voting. The legislator thus wanted to create an incentive to set up a committee that would examine arguments from all sides. However, the committee must be composed of a majority of members who do not have a conflict of interest. Such a concern exists if it cannot be objectively ruled out that the member could not base his or her decision solely on the interests of the company, e.g. because he or she is remunerated by the related party (e.g. on the basis of a consultancy contract).
Voluntary implementations also in other supervisory bodies
The amendments made by the GCGC 2020 and ARUG II are aimed at listed and capital market-oriented companies. They are therefore not originally relevant for other mandatory or optional supervisory or advisory boards. An optional or parity co-determined supervisory board as well as a supervisory board with a third party shareholding must partially comply with the canon of duties under stock corporation law due to the statutory reference standards. An advisory board, on the other hand, is basically only bound by individually set limits, such as provisions in the articles of association and, if applicable, rules of procedure.
Nevertheless, practice shows that international investors regard the GCGC in particular as the “gold standard”. To this extent, and not least in terms of liability law, the GCGC 2020 and the amendments to RPTs offer a generally applicable orientation for the corporate governance of all companies and their supervisory bodies.
This article was first published in: Going Public, Special Corporate Finance Law, March 2020, pp. 80-82
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