In recent years, investors have increasingly focused on the composition of supervisory boards as representatives of shareholder interests. Shareholders are increasingly demanding professionalism and independence from board members.
Potential conflicts of interest, especially in designated board positions, i.e., chairmanships or committee assignments, have also been a source of concern during the proxy season – for example, in the nomination of former CEOs for board chairmanships. For example, US proxy advisors opposed the re-election of the chairmen of the supervisory boards of BASF and Munich Re. Issuers and investors often disagree on the extent to which board independence is ensured.
Position updated
The German Association of Investment Professionals (DVFA) has taken the ongoing discussion on independence requirements at the international level as an opportunity to revise its position on the topic, which was first published in 2018. “From a strategic perspective, independence is a link between many governance issues,” emphasizes Ingo Speich, head of the DVFA Governance & Stewardship Committee, in an interview with Börsen-Zeitung. The discussion about independence requirements has developed internationally in recent years, which was also evident at this year’s annual general meetings. This has prompted the DVFA to sharpen its categories.
The DVFA had already “clearly positioned itself” with regard to the internationally established independence criteria in 2018, says Hendrik Schmidt, who was responsible for updating the DVFA position paper. “The non-independence of individual supervisory board members is not harmful per se,” explains Schmidt. However, in terms of the overall composition of the capital side and in prominent committee positions, certain independence requirements must be met from the perspective of investors.
In the view of the DVFA, the German Corporate Governance Code does not adequately address this issue. The voluntary set of rules for corporate governance provides a catalogue of indicators for a lack of independence. However, it does not provide any clear exclusion criteria and leaves the final assessment to the discretion of the supervisory board.
Raising awareness
The DVFA had been trying for years to reach a consensus with issuers on the issue of conflicts of interest, but had not been successful. With the updated position paper, the investor association wants to raise awareness in the market again after the 2024 AGM season, explains Schmidt.
In the voting rounds at shareholder meetings in recent months, it has become clear that the issue of “lack of independence” has become more serious again. “The DVFA sees it as its duty to maintain the integrity of the capital market and to make its voice heard clearly in this regard,” emphasizes Schmidt.
The DVFA’s list of criteria includes the length of time the members of the Supervisory Board have been in office, their network of personal and business relationships, and compatibility with other mandates and professional activities. Based on this classification of dependencies, the German Investor Association has formulated the goal that more than half of the members of the Supervisory Board should be independent. The calculation should take into account a double voting right for the Chairman of the Supervisory Board.
According to the DVFA guidelines, the majority of independent shareholder representatives on the Supervisory Board should also be reflected in the composition of important committees. For the chairmanship of the Audit, Nomination and Compensation Committees, the investor association even requires an independent member of the Supervisory Board. The DVFA is less strict with regard to the chairmanship of the supervisory board, provided that the majority of the supervisory board as a whole is independent.
Focus on committees
The DVFA classifies a Supervisory Board member as not independent if he or she has been in office for more than 10 years. Representatives of major shareholders are not considered independent if they directly or indirectly hold more than 10% of the voting capital. Former members of the Management Board are generally not considered to be independent. The same applies to Supervisory Board members appointed by law or by the Articles of Association.
The DVFA also considers former auditors or responsible audit partners to be non-independent. Former members of the board of directors of audit firms that have been engaged in the past are also classified in the same way until there is a change in the external auditor.
External judgment
The DVFA also examines the extent to which political or bureaucratic appointees to supervisory boards can be classified as independent. If they are elected to a supervisory board during their active term of office, they are not considered to be independent. In the view of the DVFA, persons with a high degree of political influence are generally not suitable for supervisory board positions. With regard to transparency requirements and validation, the DVFA would like to demand more from companies than is provided for in the Governance Code. “We propose that the majority independent composition of the supervisory board be reflected in the qualification matrix, the curriculum vitae and the competence profile,” says Schmidt. “We also see this as an aid to orientation towards a harmonized grid, at least for the German market.”
The DVFA stipulates that a company’s internal classification of independent supervisory board members should be validated regularly, preferably annually, by an external efficiency audit, and corrected if necessary.
Individual interpretation
In the view of the investors’ association, there is a lack of standardized descriptions of conflicts of interest on the part of issuers. “The basic problem with some companies is that they interpret independence very individually,” Speich criticizes. In their annual declaration on the Code, they certify that their supervisory board is sufficiently independent. “But this does not meet our requirements,” says Speich. What companies claim to be independent does not meet the criteria of investors. “And then the companies are surprised by the vote of the investors in the discharge resolution or in the election of the supervisory board,” adds Schmidt.
Source: Börsen-Zeitung of 16 July 2024, secondary publication right
This is an automated translation of the German original.
