In a move highlighting the changing landscape of shareholder-company relations in Germany, two DAX 30 constituents are meeting with investors in advance of the first shareholder votes on executive pay. Top executives from Siemens AG and Thyssen-Krupp AG — which will convene AGMs on 26 January 2010 — will huddle with several key investors today, with executive remuneration likely to be a point of emphasis in the discussion. While such pay engagement meetings are commonplace in other markets, German companies had not previously been expected to submit a remuneration report to shareholder vote, and therefore had little incentive to collaborate with investors on the issue. As Manifest noted in an earlier blog post, amendments to German company law have brought on wholesale changes to the way companies and shareholders interact with regards to executive remuneration, as German companies are now required to submit more detailed remuneration disclosures, and company may propose an advisory vote on remuneration policy at the AGM.
The Gesetz zur Angemessenheit der Vorstandsvergütung (Act on the Appropriateness of Management Board Remuneration, or “VorstAG”) was ratified by the German Bundestag in September 2009 and was drafted as a response to the fallout of the market crisis. Disillusioned investors reacted to the crisis by for a facility to express their disapproval of any irresponsible remuneration practices. The Bundestag acknowledged one of the issues at the crux of the market turndown was negligent pay policy, which could reward executives with windfall incentives linked to short-term profits or share price. In a September 2008 press release, the Bundestag stated, ‘…the incentives in remuneration systems promoted the wrong kind of conduct. By virtue of a number of different rules, the new Act ensures inter alia that, when executive remuneration is determined by the supervisory board, there will be a greater focus on incentives concerning the company’s long-term development’.[1]
The VorstAG addressed the issue in a number of ways, introducing caps limiting the maximum amount available under variable pay schemes, requiring share options to be held a minimum of four years before vesting, allowing for claw-back measures where a company’s situation markedly worsens after bonus payments and placing full accountability for remuneration levels on the supervisory board — in the form of a shareholder advisory vote. It should be noted that the Act does not require companies to propose the remuneration policy to shareholders, only providing for companies to offer this facility on a voluntary basis. It appears, however, that the remuneration vote will be regarded as local best practice moving forward. Siemens and Thyssen-Krupp have thus proposed the resolution on a voluntary basis following a request from the DSW.
The DSW has stated that it requested the vote from Thyssenkrupp, Siemens, Infineon and Wincor Nixdorf, and if the companies will not comply DSW will seek the appropriate quorum to put the item on agenda as shareholders
The advisory vote in Germany is representative of a trend in European markets over the last 12 months, as shareholders are more frequently being given the opportunity to register their sentiment on executive remuneration. This is likely due in part to the EU Recommendation issued in April 2009, which focused on remuneration policy and structure for senior managers, particularly within the financial services sector. Recently, the drive to convince companies to proffer ‘say-on-pay’ resolutions has impacted on markets both within and outside of the EU, in Ireland and Switzerland. In Germany, however, the efforts of institutional investors on this front are validated by the VorstAG, which brings the ‘say on pay’ voting procedure among German companies closer to current market practice in the UK and Netherlands, where a shareholder vote on remuneration is mandatory. The workings of the remuneration vote will operate similarly to that of UK-incorporated companies, and are to be on an advisory basis -– that is, the vote outcome will not legally bind a company to pursuing any particular remuneration policy. Nevertheless, the adoption of ‘say-on-pay’ will expose those companies that excessively remunerate their directors, and will entail increased disclosure on remuneration, particularly in regard to termination payments and pension arrangements.
Among German-incorporated companies, the proposal of the annual report and accounts is not common practice (with the exception of KGaA companies [association limited by shares]), therefore prior to the VorstAG shareholders were precluded from weighing in on remuneration even in this indirect, limited capacity. Consequently, the introduction of the remuneration vote represents a significant leap forward for shareholders’ rights in Germany, and no doubt will garner a great deal of scrutiny as the first ‘say on pay’ votes are registered in the German proxy season.
Further Reading
[1]Press release from the German Federal Ministry of Justice, dated 16 September 2008
FT – German groups move to ease pay criticism
Last Updated: 15 January 2010