Final consultation on German Corporate Governance Code expected soon

More transparency and more precise recommendations – these are the adjustments the government commission in charge of the German Corporate Governance Code (DCGK) would like to see in 2017. The commission published its proposed wording back in November 2015 and interested parties had until 15 December 2016 to comment. The commission’s final consultation is expected this month.

Ethical conduct

One of the key changes the commission proposed is the addition of a “clear core message on the topic of ethical conduct” to the DCGK’s preamble. The commission suggests that this addition is needed to make clear that the principles of the social market economy are also ethically oriented. The commission further states that inclusion of these ethical principles would demand – with reference to the principle of the honourable businessman – not only the legality, but also the legitimacy of corporate conduct – a concept that lacks clear legal definition. In our opinion, it would be preferable to address “ethical conduct” in the context of corporate social responsibility, which after all has already found its way into statutory regulations and will make additional demands on boards of directors and supervisory boards, in the future, by way of the reporting duty set out in the draft act implementing the CSR Directive.

Compliance management system

To increase transparency in the area of compliance, the commission included the new term “compliance management system” to describe a system to be implemented by a board of directors in order to ensure compliance and provide an adequate management system to assess and monitor the company’s compliance risk situation. By including this term without using the words "should" (for requirements) or "could" (for suggestions), the commission intends – according to its own account – to reflect the legal situation. However, many question whether this is a correct assessment of the legal situation. That boards of directors are responsible for compliance is beyond all doubt. However, it is also presumed, in most cases, that boards of directors have considerable organisational discretion regarding how they adequately ensure compliance. Furthermore, confusion will likely arise since other legislative provisions refer to a “compliance function”, not a "compliance management system", and stock corporation law does not mention either term.

The commission also recommends the establishment of a whistleblower system as an integral part of a compliance management system. However, the proposed wording appears to go beyond the requirements already introduced for specific regulated sectors, such as those in the German Banking Act. Establishing a procedure to make it possible for employees and third parties to report irregularities under the protection of anonymity, is recommendable. However, although sensible, it might be questioned whether a whistleblower “organisation” is necessary in every listed stock corporation, regardless of size, sector and other risk potential.

Outlook: corporate governance gains importance

In expanding the recommendations on the topic of compliance, the commission makes it apparent that compliance issues are becoming more important for German companies. The adaptation of the DCGK to international standards is desirable and necessary. Generally, the amendments proposed by the commission are thus to be welcomed.

It is already foreseeable that compliance will gain ever more importance as an aspect of corporate governance in German companies. In particular, the creation of a compliance organisation – as proposed by the commission – will be a task that many companies will have to take on to a greater extent in the future.

We will keep you updated as more information becomes available. In the meantime, if you would like more information, please contact Dr Petra Schaffner.