<B>Germany seeks moral upgrade with honor code</B>

Stefanie Müller. Journalist. Wirschaftswoche

19 September 2003

The nation¹s Corporate Governance Code for publicly quoted companies aims to offer foreign investors greater transparency. Analysts welcome these long-awaited changes.

Establishing a code of honor for firms listed on the stock exchange - still under discussion in Spain ­ became a reality in Germany in Feb. 2002. The chairman of the board at Thyssen-Krupp, Gerhard Cromme, with the 13 members of the government-named Corporate Governance Commission (www.corporate-governance-code.de) agreed on a measure that could make the nation a more transparent option for investors, and more competitive on the international stage. The highest-quoted companies, 30 corporations that make up the Dax-Index, have adopted this code, which seeks to build on openness already laid down in existing corporate legislation. Though the code is not legally binding, any corporation that acts against its spirit, or fails to respect criteria outlined therein, must explain why in its annual statement.

This is already happening. On its website, sports equipment manufacturer Adidas-Salomon recently published its motivation for failing to meet the code¹s age limit for supervisory board members. We are witnessing a wave of moral obligation that is welcomed by large sectors of the economy. Only the smaller S-Dax-listed firms fear they will be unable to implement the code¹s many points quickly, and that their competitiveness may suffer as a result.

Justice Minister, Brigitte Zypries, along with several analysts, have stated that the Commission ­ whose members include Porsche CEO Wiedeking and Deutsche Börse executive Volker Potthof ­ will improve the code in the coming years and monitor its implementation. Cromme and his colleagues have released a recommendation, following a heated internal debate, that Germany¹s listed companies should in future disclose salaries of all members of their supervisory and management boards as part of their annual statements. Though this has been common practice in Great Britain for some time, the only Dax businesses to do so to date have been Altana, Bayer, Deutsche Bank, Deutsche Börse, SAP and Thyssen-Krupp. The Commission also agreed that a ceiling should be placed on distribution of share options.

Further plans include reducing the number of supervisory board members from 30 to 14, which would mean more efficient control of the management board. Also under discussion is reforming participation of employees¹ representatives on executive bodies, something that does not exist beyond German borders and, as some some economics experts say, limits competitiveness of German firms.

Such a code was urgently needed in Germany ­ more so than in Spain ­ where relations with the supervisory board (really a watchdog body for the management board), were often confused, and board membership seen as more of an insurance policy for retired executives who had been sacked. In Spain, 70 percent of companies listed on the stock exchange have already integrated corporate-governance criteria into the everyday running of their businesses. These include the independence of board members and takeover restrictions. Meanwhile, in Germany - still struggling in an economic crisis - only one-third of publicly quoted companies have adopted such measures.

[*D The code will also indirectly affect foreign branches of German companies *]

The code, which basically aims to make the annual balance sheet more transparent, will also indirectly affect foreign branches of German companies. While they will not be compelled to ensure as great a degree of transparency as headquarters, the Commission¹s press office says, ³They must embrace this philosophy of an open company.² The code is thus one of honor, placing a moral obligation on the enterprise as a whole. In future, it should prevent falsified annual statements from misleading investors ­ a not uncommon occurrence in the new markets - and avoid investors being cheated of their rights as a result of financial mismanagement.

Essential features of the code

Members of the management and supervisory boards work together for the benefit of the company. Operational control is in the hands of the management board, which is appointed by the supervisory board. Together they coordinate business-management strategy at regular intervals. Where this obligation is not fulfilled, both parties will be held liable for negative results. The management board is obliged to furnish information at intervals determined by the supervisory board. Stock-option rights should only be issued with limitations on their disposal. The supervisory board should set an upper limit on handouts in the event of exceptional share-price rises. Individual salaries of management and supervisory board members should be disclosed in the company report, along with the value of all shares they hold.

Likewise, the remuneration system for the management board, which should have both fixed and variable components, should be determined by the supervisory board, which shall watch over its implementation. Since they exercise a control function, members of the supervisory board must be independent. This implies they cannot engage in consultancy or any other activities for companies considered to be members of the competition. Moreover, an individual belonging to a management board may not be a member of more than five supervisory boards at other companies. The supervisory board should not include more than two former members of the management board, and age of its members should be restricted.

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