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Control and Transparency in Business (KonTraG) |
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 Corporate Governance Reform in Germany. The corporate governance
discussion in Germany was prompted by various crises
in the corporate
sector in the past, but they alone were not adequate grounds. Rather, we have noticed the following development taking place:
The turbulence on global financial markets at the end of last year has
illustrated to us the extent to which financial markets have grown
together. National capital markets are no longer isolated. Our quoted
companies raise finance internationally. German stock corporations are
in direct competition with other demands for venture capital worldwide.
The shareholder structure is becoming more international. The influence
of foreign institutional investors and their expectations are growing.
The inflexible structure of shareholdings in Germany is gradually
falling away. At the same time, a better stock market culture is
developing. It is being fed by the demand side: investment behavior is
changing. A generation of heirs is investing in shares. The return on
German share investment is becoming more attractive. But the supply
side is also livening up: more innovative, young companies are aiming
for the stock market (for example: "Neuer Markt"). The list of
candidates is long.
Financial intermediaries are reacting to these changes. Big banks are
gearing up their business in investment banking. They are gradually
withdrawing from long-term holdings in industrial companies. They are
under pressure from their shareholders to maximise profits and to
invest in growth in their core businesses within European borders.
For the legal and political framework, this means that against a
background of institutional competition, there is growing pressure for
changes and adaptation of our company law, stock market law and
accounting law.
Discussion about corporate governance is under way in all the
industrialised nations of the world. After wide-ranging talks with the
parties concerned and with academics, the German government has
recommended a package of changes for the reform of corporate
governance. These are part of the law on control and transparency in
business (KonTraG). The law was approved in March by the Bundestag,
parliament's lower house. It will come into force in April this year.
The parliament has followed these basic principles:
* that the adoption of further mandatory provisions
in our company law ought to be avoided as far as possible;
* that instead of strict legal
directives, it is preferable to leave companies to organise themselves
and for control to be provided by the existing supervisory bodies and
the markets;
* and that the law should actively keep
pace with public companies as they gear up to the requirements and
expectations of international financial markets. This also means that
corporate strategy needs to be more strongly oriented towards
shareholder value.
The KonTraG-Law is therefore directly connected with reforms of the
corporate and capital market legislation already approved, as well as
other planned reforms:
* the so called "Wertpapierhandelsrecht" ("securities trading law") with the new insider trading legislation
* authorisation of no-par value shares ("Stückaktien")
* the law governing small non-listed
stock corporations (kleine AG) and for the deregulation of our stock
corporation law;
* the acceptance of internationally
recognised accounting standards for German companies
(Kapitalaufnahmeerleichterungsgesetz),
* the so-called "Third Law for the
promotion of the German financial market", regarding investment funds
etc.
Summary of the regulations in the "KonTraG"
1. Board
* Risk management; boards of public
limited companies are obliged to ensure that adequate risk management
and internal revision systems exist in their own companies.
* Reporting obligations of the board of
directors to the supervisory board over future corporate planning are
increased.
2. Supervisory board
* "old boys network": The maximum number
of supervisory board seats permitted per person, which is currently 10,
is reduced (chairman's seats count as two).
* Candidate recommendation: in the
recommendation to shareholders on the election of new supervisory board
members, details of their other board memberships and their main
occupations are to be given, so as to avoid conflicts of interest and
overload situations in advance.
* Frequency of board meetings: annual
compulsory supervisory board meetings are increased for quoted
companies from two to at least four (not counting committee meetings).
* Contracts with auditors are no longer
awarded by the board of directors, but by the supervisory board. This
is intended to ensure a greater distance between auditors and
management. The report has to be passed directly to the supervisory
board, for the attention of the chairman.
* It will be obligatory for the auditor
to be present at meetings of the supervisory board held to approve the
annual report and accounts, or at a financial audit committee meeting.
* Distribution of the auditor’s report
to all supervisory board members or members of the financial audit
committee will be mandatory.
* In its report to shareholders, the
supervisory board must state how often it has met over the year, and
how many committees have been formed.
* Enforcement of compensation claims
against members of one of the boards, particularly of supervisory
boards, is eased by lowering the minimum quorum (5 % or a nominal 1
million marks) where there has been serious neglect of responsabilities.
* In an appendix to the annual report
and accounts, quoted companies must list for each board member all
their other supervisory board seats and memberships of similar
controlling bodies.
3. Annual general meeting and shares
* Exercise of proxy voting rights of
banks is more strongly oriented towards the interests of the
shareholders represented. A bank must name a member of the management
who will have to ensure that the statutory obligations involved are
being observed.
* Banks and companies must advise
shareholders of alternative ways of taking part in ballots (through
transferring their vote to a proxy, or shareholders' groups, etc.).
* The banks' reporting obligations to
their depositors will be stricter, where there are possible conflicts
of interest: they must make it known when bank employees are on the
supervisory board of the company concerned, and give details of
stockholdings in the company concerned.
* The annual general meeting is
authorised to provide rules of procedure for the conduct of the annual
general meeting. This should create an opportunity for streamlining and
revitalising annual general meetings.
* Plural voting rights are no longer allowed.
* Existing plural voting rights are to
cease after five years, in exchange for a fair equalisation of their
value. An annual general meeting may also, at any time, with a simple
capital majority, cancel existing plural voting rights.
* Maximum voting rights are no longer
permissible in quoted companies. Existing maximum voting rights will
cease after two years.
* Where there are cross-holdings between
companies, the possibility of the second company exercising voting
rights in the first is excluded in the election of supervisory board
members. This is intended to limit the risk of the administration
controlling itself.
* Listed Companies must also make public
in an appendix to the annual report and accounts all stakes of more
than 5% in large limited companies.
* Stock buy-back is generally allowed.
This should give more flexibility and provide more price growth
potential in the German stock markets.
* The management should gear itself to
increasing the value of the company. For that reason, provision of
stock options as part of remuneration for top management has been made
easier. Abuse must be excluded, however. The annual general meeting has
to regulate the major details of these programs.
4. Banks as stakeholders
* Limitation of exercise of voting
rights: banks may not exercise voting rights stemming from proxy voting
rights at an annual general meeting if, at that meeting, they are also
exercising votes of own holdings in the company of more than 5%. This
regulation is targeted at dealing with criticism of the banks'
accumulation of influence through holding equity stakes and exercising
proxy votes.
* Increased obligation for bank
transparency in connection with annual report and accounts: banks (of
whatever legal constitution) are to make public all the mandates held
by members of their boards and by other employees; any holdings of more
than 5% must also be stated.
5. Audit
* Income dependency: to ensure the
independence of the auditor, the auditor is excluded from performing
the audit if more than 30% (previously 50%) of his total revenue over
the previous five years stems from that company.
* Change of auditor: when the same
auditor is contracted to a company over years, it can give an
impression of dependency. However, as a switch of the auditing company
generally is not expedient, a change at the level of the individual who
signs the audit certificate must take place if the same person has
signed the certificate more than six times in the past ten years.
* The audit report should be geared more to problems.
* The interests of the supervisory board
are to be taken into greater consideration in the preparation of the
audit report.
* Accountability of auditor: liability
will be increased. Instead of the current limitation of liability to DM
500,000, a higher liability limit has been fixed: for audits of
non-quoted companies DM 2 million, for quoted companies DM 8 million.
* Segmentation and cash flow statements
are now a mandatory part of the consolidated financial statement for
quoted companies.
* The legal requirements for the
acceptance of a private-organized standard setting body are introduced
(in GB: ASB, in the USA: FASB). This private body is supposed in
particular to develop proposals for application of the basic principles
of group accounting and to represent Germany in international bodies
(IASC).
 Ministerial Counsellor Dr. Ulrich Seibert
Federal Ministry of Justice, Berlin
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Business 
