The German Corporate Governance Code presents essential statutory regulations for the management and supervision (governance) of German listed companies and contains internationally and nationally recognized standards for good and responsible governance. The Code aims at making the German Corporate Governance system transparent and understandable.
A dual board system is prescribed by law for German stock corporations. Primarily, the Code addresses listed corporations. It is recommended that non-listed companies also respect the code.
The Code clarifies the obligation of the Management Board and the Supervisory Board to ensure the continued existence of the enterprise and its sustainable creation of value in conformity with the principles of the social market economy (interest of the enterprise).
The Management Board is responsible for managing the enterprise. Its members are jointly accountable for the management of the enterprise. The Chairman of the Management Board coordinates the work of the Management Board.
The Supervisory Board appoints, supervises and advises the members of the Management Board and is directly involved in decisions of fundamental importance to the enterprise. The chairman of the Supervisory Board coordinates the work of the Supervisory Board.
The members of the Supervisory Board are elected by the shareholders at the General Meeting. In enterprises having more than 500 or 2000 employees in Germany, employees are also represented in the Supervisory Board, which then is composed of employee representatives to one third or to one half respectively. For enterprises with more than 2000 employees, the Chairman of the Supervisory Board, who, for all practical purposes, is a representative of the shareholders, has the casting vote in the case of split resolutions.
Alternatively the European Company (SE) gives enterprises in Germany the possibility of opting for the internationally widespread system of governance by a single body (board of directors).
The form that codetermination takes in the SE is established generally by agreement between the company management and the employee side. All employees in the EU member states are included.
Cooperation between Management Board and Supervisory Board
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The Management Board and Supervisory Board cooperate closely to the benefit of the enterprise.
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The Management Board coordinates the enterprise’s strategic approach with the Supervisory Board and discusses the current state of strategy implementation with the Supervisory Board at regular intervals.
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For transactions of fundamental importance, the Articles of Association or the Supervisory Board specify provisions requiring the approval of the Supervisory Board. They include decisions or measures which fundamentally change the asset, financial or earnings situations of the enterprise.
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Providing sufficient information to the Supervisory Board is the joint responsibility of the Management Board and Supervisory Board.
The Management Board informs the Supervisory Board regularly, without delay and comprehensively, of all issues important to the enterprise with regard to strategy, planning, business development, risk situation, risk management and compliance. The Management Board points out deviations of the actual business development from previously formulated plans and targets, indicating the reasons therefor.
The Management Board’s reports to the Supervisory Board are, as a rule, to be submitted in writing (including electronic form). Documents required for decisions, in particular, the Annual Financial Statements, the Consolidated Financial Statements and the Auditors’ Report are to be sent to the members of the Supervisory Board, to the extent possible, in due time before the meeting.
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Good corporate governance requires an open discussion between the Management Board and Supervisory Board as well as among the members within the Management Board and the Supervisory Board. The comprehensive observance of confidentiality is of paramount importance for this. All Board members ensure that the staff members they employ observe the confidentiality obligation accordingly.
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In Supervisory Boards with codetermination, representatives of the shareholders and of the employees can prepare the Supervisory Board meetings separately, possibly with members of the Management Board.
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In the event of a takeover offer, the Management Board and Supervisory Board of the target company must submit a statement of their reasoned position so that the shareholders can make an informed decision on the offer. 8. The Management Board and Supervisory Board comply with the rules of proper corporate management. If they violate the due care and diligence of a prudent and conscientious Managing Director or Supervisory Board member, they are liable to the company for damages. In the case of business decisions an infringement of duty is not present if the member of the Management Board or Supervisory Board could reasonably believe, based on appropriate information, that he/she was acting in the best interest of the company (Business Judgment Rule).
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Extending loans from the enterprise to members of the Management and Supervisory Boards or their relatives requires the approval of the Supervisory Board.
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The Management Board and Supervisory Board shall report each year on Corporate Governance (Corporate Governance Report) and publish this report in connection with the statement on Corporate Governance. Comments should also be provided on the Code’s suggestions. The company shall keep previous declarations of conformity with the Code available for viewing on its website for five years.
The Supervisory Board shall examine the efficiency of its activities on a regular basis.
The tasks and responsibilities of the Management Board and Supervisory Board are specified. The regulations with regard to Shareholder rights, General Meeting, transparency in disclosure of information, requirements with regard to Reporting and Audit of the Annual Financial Statements are also detailed in the code.
Conclusion :
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The dual board system and the bifurcation of the powers between the Management Board and Supervisory Board can lead to better governance of enterprise.
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Enterprises with more than specified number of employees also have representation on the Board and the representatives of the employees are equally obliged to act in the enterprise’s best interest. This is an important aspect of the code which should be adapted in India.
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Reviewing and examining of efficiency by the supervisory Board will definitely lead to good and responsible governance which should to the extent possible be implemented in the Boards of Indian Companies..