Amendments to the German Corporate Governance Code 2022

Do the amendments promote a sustainable corporate governance?

On 27 January 2022 the government published its proposals to amend the German Corporate Governance Code (GCGC or the Code) for German listed companies.

Are the amendments ESG-driven?

The Deutscher Corporate Governance Kodex, the Code, consists of three key elements: Referring to the German Stock Corporation Act, the Code describes legal regulations for the executive and the supervisory boards of German listed companies – corporate governance. In addition, the Code stipulates national and international acknowledged standards for good and responsible corporate governance via recommendations and suggestions. Deviations from the recommendations – not the suggestions – must be explained and disclosed (comply or explain) with each annual declaration of conformity pursuant § 161 German Stock Corporation Act. The latest amendments address the promotion of sustainability – no surprise, since ESG seems to be the preferred topic despite the pandemic.

Sustainability

Practically all financial market participants have taken up the sustainability topic, whether they sell it under ESG, CSR or other headlines – the latest draft amendments to the Code also address it:

The stated goal is to balance the economic requirements and the ecological and social impacts of corporate activity. The Executive Boards shall systematically identify and assess risks - and opportunities – associated with social and environmental factors; corporate planning shall include financial and sustainability-related targets. Internal control and risk management systems shall include recording and processing sustainability-related data, with key features being described in the management report. The Supervisory Boards shall monitor that environmental and social sustainability are taken into account, and that operational plans and compliance systems are geared to sustainability-related concerns.

Aligning the Code with FISG

Last year, the Financial Market Integrity Strengthening Act (FISG) established considerable innovations for listed companies – the Code follows that trend:

  • the mandatory Audit Committee shall operate in constant dialog with the auditor and the CFO to ensure the effectiveness of internal control systems;
  • the Code describes details on the expertise of the Committee Chairman, which shall be disclosed on the corporate governance statement;
  • the Audit Committee shall meet regularly with the auditors, also without the Executive Board present; this reflects § 109 (1) 3 German Stock Corporation Act which limits the participation rights of the Executive Board in meetings with the Supervisory Board and the Audit Committee.

Aligning the Code with FüPoG II

The Second Leadership Positions Act (FüPoG II) gained public attention mainly with new regulations on quota for women and equality in stock corporations at management board level – the Code tries to reflect these ideas:

  • §76 (3a) 1 German Stock Corporration Act sets out gender-specific minimum shareholding quota which shall now also apply to management boards of companies which are listed and at the same time governed by equal (paritätisch and montan-) codetermination;
  • the Code reflects this in a reworked version, and also provides for the Supervisory Board to set targets for the proportion of women on the management board in cases of companies that are not listed or not subject to parity codetermination.

In Sum

Sustainability has arrived at the Code – no doubt. It was to be expected that the Government Commission made ESG issues more central to its work and included it into the GCGC. The Code places a particular obligation on the supervisory board by emphasizing its structure of duties. Hence, it’s fair to say that the GCGC further develops existing ESG ideas and at the same time provides more details to the demanding questions of the future.

All of this will, of course, not suffice to prevent companies or its management teams from greenwashing activities – which poses a fundamental reputational risk for companies in the near future.

Compliance with the Code`s recommendations are not mandatory, but deviations have to be explained. The Code relies on acceptance without compulsion. This principle gives essential flexibility to companies so that they can take industry or company specific needs into account. Simultaneously, it ensures the necessary transparency“ (Prof. Dr. Rolf Nonnenmacher).

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