German Government Panel on Corporate Governance

Abstract

The work of the Government Panel on Corporate Governance has laid the foundation for a comprehensive reform of German company law. The Panel's recommendations aim to improve corporate management and supervision, transparency and competition. They improve the protection of stockholders and strengthen Germany's financial market. The Government Panel not only has accomplished its mission of formulating recommendations to correct undesirable past trends, but has also developed proposals with well-reasoned future orientation to strengthen the German system of Corporate Governance and eliminate potential shortcomings. To better protect investors, the Panel recommends extending the civil liability of management and supervisory board members of publicly listed companies from its current standard of willful intent to also include gross negligence in connection with the release of false information to the capital market. Quarterly reports should be mandatory for all publicly listed companies and audits by certified public accountants should be required. In addition, the Government Panel recommends measures to improve the independence of auditors. The federal government will immediately act on the Panel's central proposal by appointing a group of experts to draft and continuously improve a Code of Corporate Governance, as well as by creating the legal framework for this new, flexible instrument. In accordance with the principle of comply or explain which the Panel recommends, the Code itself will not be fixed in law. It would only be required that publicly listed companies state in their annual reports whether they observe the Code of Corporate Governance or, in the alternative, set forth the reasons why they do not follow its recommendations. The financial markets will value this innovative element internationally, and this will further improve the financing conditions obtained by German companies. The Government Panel expects that the Code will, among other things, define goals for improving the performance of supervisory boards. This includes, for example, restricting to five per person the number of external supervisory board positions that a supervisory board member may hold, strengthening the independence of supervisory board members, and the recommendation that supervisory board members should not be permitted to fill positions that are in competition with the company. Further, the Code should contain expanded transparency standards, such as for management stock option plans and for the shareholdings of members of the reporting company's management and supervisory boards, as well as increase the duties of the management board to provide information to stockholders. In addition, the federal government will immediately begin drafting a Transparency and Disclosure Act in which further proposals of the Government Panel will be implemented. These will include the legal foundation for the comply or explain principle, measures to strengthen supervisory boards, such as through broader disclosure duties for the management board and tighter confidentiality requirements for supervisory board members, the use of electronic media for company publications and deregulation in corporation law, such as through a further reduction of the minimum par value of stock. In a further stage, the Panel's recommendations will serve as the foundation for a comprehensive reform of corporation law and accounting regulations. The federal government thanks the Government Panel for its excellent work. Thanks go to the international law firm Shearman & Sterling which has provided the translation of the recommendations into English.