New Shareholder Rights Policy for EU Member States

Remuneration of Corporate Management to Become More Transparent

The approval rates for executive board remuneration at the annual general meetings of German index companies have developed negatively over the past three years. Shareholders are increasingly dissatisfied with the salaries of German board members. To enhance the long-term participation of shareholders, the European Council already adopted the Shareholders’ Rights Directive in 2017, which is to be integrated into the national laws of the EU member states on June 10, 2019. Among other things, it deals with the remuneration of corporate management. Since 11 October 2018, a draft bill has been available for Germany.

At the moment, the annual general meeting can resolve on the approval of the remuneration system for the members of the Management Board (“Say on Pay”) in accordance with Section 120 (4) of the German Stock Corporation Act. According to the new directive, there will be a vote on the remuneration policy and the remuneration report in future. The new version of the Shareholders’ Rights Directive contains specific regulations on the remuneration of corporate management. Article 9a intends that companies shall draw up a remuneration policy which shall be put to the vote at the general meeting in the event of substantial changes or at least every four years. The developed remuneration policy is supposed to promote the business strategy and the long-term interests as well as the sustainability of the company and to present the individual components of the fixed and variable remuneration in an understandable way. Member states may decide whether this vote shall be binding or consultative. In Germany, the latter should be the case. If the general meeting has not approved the remuneration policy, a revised remuneration policy shall be submitted for resolution at the following general meeting. Following the resolution of the remuneration policy of the general meeting, it must be published on the company’s website in a timely manner together with the results of the voting (at least for 10 years).

According to Article 9b of the Shareholders’ Rights Directive, an annual vote on the remuneration report should also take place within the framework of the general meeting. In future, it must individually list the remuneration paid to each member of the company’s management in the past financial year. As a result, the opt-out option as defined in Section 286 (5) of the German Commercial Code will no longer exist in the future. The remuneration report must be publicly accessible on the company’s website (at least for 10 years).

Proxy advisors and institutional investors are attaching increasing importance to executive compensation as ESG criteria become progressively more relevant. Aggravating the situation, they do not agree on the definition of an ideal remuneration system. After all, they primarily demand transparency and a detailed breakdown of success-oriented targets for members of company management and their achievement in the remuneration report as a basis for assessment.

Henryk Deter, Management Board member of cometis AG, recommends having the topic of compensation on the agenda in capital market communications: “Companies should place the topic of Management Board compensation proactively and in good time with investors and voting rights advisors and find out their requirements. Otherwise there is a risk of unpleasant voting results at the AGM. However, communication should also be open and transparent during the year. Rather explain all parameters clearly than expose yourself to accusations of concealment or favouritism.”

Michael Diegelmann

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Michael Diegelmann
Henryk_Deter

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