New German Corporate Governance Code (GCGC 2022) adopted, featuring sustainability update


The new GCGC 2022 provides for numerous sustainability-related recommendations that further increase the pressure for sustainability transformation.

The government commission on the German Corporate Governance Code adopted a new version of the German Corporate Governance Code (GCGC 2022) on 28 April 2022 and submitted it to the German Federal Ministry of Justice for review on 17 May 2022. On publication in the German Federal Gazette by the Federal Ministry of Justice, which is expected shortly, the GCGC 2022 will come into force and thus replace the previous version (16 December 2019) of the German Corporate Governance Code, published in the Federal Gazette on 20 March 2020 (GCGC 2020). 

The new principles and recommendations adopted by the government commission relate on the one hand to adjustments to the legal situation made through the German Financial Market Integrity Strengthening Act (FISGFISG and the German Second Executive Position Act (FüPoG II) FüPoG II and, on the other hand, take into consideration ecological and social sustainability in the management and supervision of enterprises. With the introduction of these sustainability-related code recommendations, the pressure on enterprises for sustainability transformation is likely to increase further. 

Changes to the GCGC 2022 compared to the draft amendment to the Code dated 21 January 2022

Compared to the Draft of the GCGC 2022 dated 21 January 2022, which was opened for consultation until 11 March 2022, there were still some changes, in particular the following modifications to the GCGC 2022: 

  • As stated in their Press Release of 5 April 2022, the government commission has acknowledged the criticism voiced in the consultation process that the Code placed too much emphasis on environmental and social (sustainability) issues in the context of corporate management and supervision, and has adapted the wording for clarification: Social and environmental factors are now to be taken into account "in the company's best interests" (Foreword, para. 2, GCGC 2022); ecological and social objectives are also to be taken into account "in addition to long-term economic objectives" (Recommendation A.1 sentence 2 GCGC 2022). The GCGC 2022 should therefore no longer create the impression of giving undue weight to environmental and social sustainability concerns, or present an unbalanced picture of the duties of management in this regard.
  • Recommendation A.6, which was previously envisaged in the consultation version and which transferred the board-related Recommendations A.1 and A.3 to the supervisory board, was abandoned. Instead, it has been added to Principle 6 GCGC 2022 that the supervisory board's supervision of and advice to the management board also include sustainability issues in particular. This range of duties for the supervisory board as they relate to management board activities are rightly already enshrined in law.
  • One new recommendation is to include a "qualification matrix", which is intended to reflect the implementation status of the specific objectives regarding supervisory board composition and the profile of necessary skills and expertise, and will be disclosed in the Corporate Governance Statement (Recommendation C.1 sentence 5 GCGC 2022).
  • However, Recommendation D.3 sentence 4, which was still envisaged in the consultation version and provides that the audit committee should also arrange for external audits of the governance systems (internal control system – ICS, risk management system – RMS, compliance management system – CMS, internal audit), was not included. The previous requirement for the (dual) expertise of the audit committee chair, in both the fields of accounting and in auditing (Recommendation D.4 GCGC 2020), was also abandoned. 
  • Furthermore, the previous recommendation on the disclosure of the individual participation of the members of the supervisory board in meetings pursuant to D.8 sentence 1 GCGC 2020 was expanded to the effect that the supervisory board report must now also additionally state how many meetings of the supervisory board and the committees were held in person or as video or telephone conferences (D.7 sentence 1 GCGC 2022). The suggestion that participation in (in-person) meetings of the supervisory board and its committees via telephone and video conferences should not be the rule, however, was deleted. The latter is consistent, first, because the virtual format of the board meetings has proven its worth during the last two years of the Covid-19 pandemic, and second, because the increasing and desirable international composition of supervisory boards requires it, not least for diversity reasons.

Changes to the Code in light of sustainability

The focus of the amendments to the GCGC 2022 as against the GCGC 2020 is on the introduction of recommendations on the consideration of environmental and social sustainability in the management and supervision of companies.

According to the Code's rationale, the term "sustainability" as used in the GCGC 2022 means "environmental (ecological) and social objectives", guided by the UN Sustainable Development Goals (SDGs). In the sense that sustainability objectives can present opportunities and risks for companies, the Code also references environmental and social factors.

Foreword (para. 2): social responsibility

With their actions, the company and its governing bodies must be aware of the enterprise's role in the community and its responsibility vis-à-vis society. Social and environmental factors influence the performance of the company, and its activities have an impact on people and the environment. The management board and the supervisory board take this into account when exercising their respective management and supervisory roles in the company’s best interests.

According to the reasoning of the government commission, the foreword to the GCGC 2020 needed readjusting in any event because the expectations regarding the consideration of sustainability factors in corporate governance had become much more specific. Furthermore, the EU Commission's proposed draft on sustainability reporting (Corporate Sustainability Reporting Directive – "CSRD") contains the clear requirement for enterprises not only to include the influence of social and environmental factors on the enterprise's success (the "outside-in" perspective), but also the effects of the enterprise on people and the environment (the "inside-out" perspective) (so-called double materiality). 

It has therefore been included in the foreword that the management board and supervisory board take both perspectives into account when managing and supervising the company in the company's best interests. 

Sustainability-related recommendations for the management board

The management board should consider environmental and social (sustainability) objectives in the management of the enterprise. In the government commission's view, corporate interest dictates that sustainability should also be anchored in the corporate strategy.

Recommendation A.1 GCGC 2022 for the management board: identify risks and opportunities, corporate strategy and corporate planning

The management board shall systematically identify and assess the risks and opportunities associated with social and environmental factors, as well as the environmental and social impacts of the enterprise's activities. In addition to long-term economic objectives, the corporate strategy shall also give appropriate consideration to ecological and social objectives. Corporate planning shall include corresponding financial and sustainability-related objectives.

This recommendation which is addressed to the management board relates first of all to the recording of risks and opportunities for the enterprise associated with sustainability concerns (social and environmental factors) with the methods of risk management and in this respect should rather be understood as a clarification; as comprehensive risk management must in any event record all risks and opportunities that are relevant for the enterprise.

By contrast, a new requirement is the systematic identification and assessment of the environmental and social impacts of the enterprise's activities and, therefore, the adoption of the "inside-out" perspective, which as a reflex at best leads back to opportunities and risks for the enterprise. It is probably safe to assume that both perspectives are intended to serve the (further) development and pursuit of an (overall) corporate strategy that encompasses both financial and sustainability-related objectives, with correspondingly aligned corporate planning. In practice, sustainability departments, (Chief) Sustainability Officers and Sustainability Committees are increasingly being established in corporate organisations to deal with environmental and social impacts.

The draft recommendation, specifically that,

the strategy of the company shall provide information on how the economic, environmental and social objectives can be achieved in a well-balanced manner,

and the accompanying rationale that,

the corporate strategy should strike the right balance between economy, environmental and social issues,

have been amended following strong criticism in the consultation process. Now the GCGC 2022 recommends that,

in addition to long-term economic objectives, the corporate strategy shall also give appropriate consideration to ecological and social objectives (Recommendation A.1 sentence 2 GCGC 2022).

This adjustment by the government commission was the right thing to do and an important step, as the consultation version could have be misconstrued to mean that economic and sustainability-related objectives should be given equal priority or weighting. However, the crucial issue is actually not striking a balance of interests, but ensuring an appropriate consideration of interests. The key but vague concept of the "company's best interests", which is at the very heart of management and supervisory board duties, is today predominantly understood in legal commentary on stock corporation law to mean that the administrative bodies must, as a matter of principle, take into account all the interests of the various stakeholders (including shareholders, lenders, employees, customers, suppliers and the general public or public welfare) that come together in the enterprise, and that these bodies are duty-bound to reconcile conflicting interests using their discretion (stakeholder approach). It is disputed whether, and to what extent, there is a (slight) advantage in favour of the shareholders' interests – to be determined in an abstractly typified manner – over the interests of other stakeholders. In practice, the controversy is partly put into perspective by the fact that even according to an approach that places the (long-term) shareholder interests and, therefore, the securing of permanent (sustainable) profitability and earning power in the foreground, the consideration of other stakeholder interests is always indirectly included (within the meaning of Corporate Reputation Management, for example the well-understood shareholder interest, i.e., that increases the value of the enterprise). The Rationale to the GCGC 2022, which also expressly advocates the stakeholder approach in determining the specific best interests of the company, also states to this effect:

In the long term, economic, environmental and social objectives are often mutually dependent. Ecological and social sustainability are just as much a prerequisite for long-term increase in value as economic strength and stability are a prerequisite for investments and other measures that serve ecological and social objectives.

In defining the specific best interests of the company, the administrative bodies have broad discretion, which is only justiciable to a limited extent if the business judgement rule is observed (see section 93 (1) sentence 2 German Stock Corporation Act (AktG), if applicable in conjunction with section 116 sentence 1 of the same). However, discretion reaches its limits where the decision in question would risk jeopardising the company's existence, and thus its long-term profitability.

Recommendation A.3 GCGC 2022 for the management board: internal control and risk management system

The internal control system and the risk management system shall also cover sustainability-related objectives, unless required by law anyway. This shall include processes and systems for collecting and processing sustainability-related data.

Certain companies are already under statutory duties concerning the inclusion of certain sustainability-related objectives in the risk management and internal control systems; such duties are governed by the German Supply Chain Due Diligence Act (LkSG) (see sections 3 ff.), which is due to come into force on 1 January 2023. 

Irrespective of this, the Corporate Sustainability Reporting Directive (CSRD), which is about to be adopted – and which, according to the current trilogue negotiations, will apply to financial years beginning on or after 1 January 2024 or, in the case of publicly traded small and medium-sized enterprises (SMEs) (excluding micro-entities), to financial years beginning on or after 1 January 2026 – requires that sustainability aspects, which must be reported in great detail, be comprehensively integrated into governance systems. Only if these aspects are adequately identified and evaluated, appropriate measures put in place, processes implemented and monitored, will such reporting be possible in the required form.

In addition, sustainability reporting – which has been massively expanded compared to the CSR Directive (see sections 289b ff., 315b f. German Commercial Code (HGB)) – will in future be placed on an equal footing with financial reporting (among other things, a mandatory part of the [group] management report, audit by audit committee and auditor or other auditing firm and – according to the idea of the EU Parliament Committee on Legal Affairs – alternatively also audit by so-called independent providers of assurance services). Logically, therefore, sustainability objectives should be incorporated into the internal control system (ICS) and risk management system (RMS). 

In this context, the GCGC 2022 now also states that the internal control and risk management systems should also comprise a compliance management system (CMS) aligned to the enterprise's risk situation (see Principle 5 sentence 2 GCGC 2022). In addition, internal auditing will also have to be expanded to include sustainability aspects in the future. The government Commission correctly points out in the Rationale to the GCGC 2022 that the collection and processing of sustainability-related data within the governance systems is a mandatory prerequisite for the effective implementation of the (overall) corporate strategy.

Sustainability-related recommendations for the supervisory board

The supervisory board must monitor how the management board deals with sustainability issues. To be able to perform this role, supervisory board members need appropriate sustainability expertise.

Recommendation C.1 sentence 3 GCGC 2022 for the supervisory board: corporate sustainability expertise

The supervisory board's skills and expertise profile shall also comprise expertise regarding sustainability issues relevant for the enterprise.

This recommendation is intended to ensure the relevant corporate sustainability expertise within the supervisory board so that the supervisory board is able to perform its sustainability-related supervisory duties. In the Rationale to the consultation version, the government commission still expressly stated that expertise on sustainability issues relevant to the company should be independent of expertise required for sustainability reporting and auditing (see below, Recommendation D.3 GCGC 2022). That said, it is still necessary to distinguish between more substantive expertise on relevant sustainability issues and reporting/audit expertise within the framework of accounting. The government commission deems it crucial to the supervisory board's corporate sustainability expertise that it is in particular capable of monitoring how environmental and social sustainability objectives are reflected in companies' strategic orientation and corporate planning. Relevant sustainability expertise need not be focused on a single supervisory board member. Instead, different supervisory board members can also contribute expertise on relevant aspects, which would then have to be included in the new qualification matrix required by the GCGC 2022. The new qualification matrix is intended to reflect the implementation status of the specific objectives regarding supervisory board composition and the profile of necessary skills and expertise, and will be disclosed in the Corporate Governance Statement (Recommendation C.1 sentence 5 GCGC 2022).

Relevant corporate sustainability expertise, which previously only featured as a requirement in individual companies' AGM voting guidelines regarding the composition of the supervisory board (e.g. at Union Investment, DWS and DSW), will be scrutinised in particular by activist investors at future supervisory board elections, and may indeed challenge supervisory boards with their own nominees. 

Recommendation D.3 GCGC 2022 for the supervisory board: skills and expertise profile for the audit committee 

The expertise in the field of accounting shall consist of special knowledge and experience in the application of accounting principles and internal control and risk management systems, and the expertise in the field of auditing shall consist of special knowledge and experience in the auditing of financial statements. Accounting and auditing also include sustainability reporting and its audit and assurance. The chairman of the audit committee shall have appropriate expertise in at least one of the two areas. The corporate governance statement shall name the relevant members of the audit committee and provide details of their expertise in the areas mentioned. The chair of the supervisory board shall not chair the audit committee.

This recommendation ties in with the legal requirements for the composition of the audit committee of public interest entities as defined in section 316a sentence 2 German Commercial Code (HGB), which have been tightened by the FISG. Under these requirements, at least one member must have expertise in the field of accounting and at least one other member must have expertise in the field of auditing (see section 107 (4) sentence 3 in conjunction with section 100 (5) German Stock Corporation Act (AktG); Principle 15 GCGC 2022). The GCGC 2022 now stipulates that such accounting expertise must comprise special knowledge and experience in the application of accounting principles and internal control and risk management systems, while audit expertise must comprise special knowledge and experience in the auditing of financial statements. With regard to the auditing of financial statements, the qualification requirement has been tightened to the effect that in future, special knowledge and experience will also be required here instead of (mere) familiarity with the subject area. According to the Rationale to the GCGC 2022, experience in accounting and auditing requires a member having worked in the respective fields, though not necessarily having trained and worked as an auditor. 

In addition, the competence profile for the accounting or auditing expert has been expanded in each case with regard to sustainability reporting or its audit; this constitutes a further tightening of the rules, but also a necessary step in view of the upcoming CSRD. 

However, the previous stipulation has been abandoned requiring dual (financial) expertise of the audit committee chair, who had to have special knowledge and experience in the application of accounting principles and internal control procedures as well as being familiar with the auditing of financial statements (D.4 sentence 1 GCGC 2020). In future, it will be sufficient for the audit committee chair to be an expert in one of either accounting or auditing, as described above.

Amendments to the Code in light of the German Financial Market Integrity Strengthening Act (FISG

The new regulations brought by the FISG have – as a legislative reaction to the Wirecard case – in parts codified the already existing best practice on the audit committee and on governance systems in stock corporation law and have now made the previous Recommendation D.3 GCGC 2020 (establishment and duties of the audit committee) obsolete. 

Furthermore, the establishment of a CMS is now no longer worded as a recommendation (see A.2 sentence 1 GCGC 2020), but as a principle (see Principle 5 sentence 2 GCGC 2022). This must be viewed against the background that for listed companies, due to their risk exposure, an obligation to set up a CMS can generally be derived from the duty of legality and general duty of care (including organisational duties) under sections 93 (1) sentence 1, 76 (1) German Stock Corporation Act (AktG) (see also Begr. RefE FISG, p. 116; the clarification can no longer be found in Begr. RegE FISG, p. 114 f.).

However, even after the introduction of section 91 (3) German Stock Corporation Act (AktG) through the German Financial Market Integrity Strengthening Act (FISG), it is still disputed in stock corporation law whether the management board is per se (mandatorily) required to set up such a comprehensive institutionalised compliance organisation (as is the government commission's view underpinning the GCGC 2022) or whether the respective obligation depends on the situation – taking into account, in particular, the size of the enterprise and the risk situation (e.g. regulations to be observed, industry, geographical presence) – if otherwise the assurance of legality in the company cannot be guaranteed. The latter view corresponded to the previous distinction in Principle 5 and Recommendation A.2 GCGC 2020, which has now been abandoned in GCGC 2022. At least for smaller listed companies with low-risk exposure (e.g. holding companies), for which this debate is also relevant (in terms of liability), this will be seen as overly burdensome.

Furthermore, Principle 4 DCGK 2022 has been adapted to the wording of section 91 (3) German Stock Corporation Act (AktG) to the effect that "appropriate" (previously: "suitable") and effective internal control and risk management systems are required for the responsible handling of business risks. In addition, the Code now makes clear that the appropriateness and effectiveness of internal control and risk management systems presuppose their internal monitoring (see Principle 4 sentence 2 GCGC 2022).

Other amendments to the Code

Finally, further new recommendations of the 2022 Code concern the description of the essential features of the entire internal control and risk management systems, and the statement on the adequacy and effectiveness of these systems in the management report (recommendation A.5, 2022 Code), the additional disclosure of the form of meetings in addition to the number of supervisory board and committee meetings (recommendation D.7, 2022 Code) as well as the working methods of the audit committee such as, in particular, its cooperation with the auditor (D.10, 2022 Code).

On the way to increasing sustainable board governance

Sustainability aspects already form an integral part of the corporate strategy, management and planning at many listed enterprises and are accordingly included as (ESG) risks in the governance systems (ICS, RMS, CMS, internal audit). Therefore, for these enterprises, the changes in the 2022 Code result in only a minor need for adjustment at most.

The government commission's reluctance to include further recommendations on the composition and internal organisation of the management board and supervisory board is welcomed, therefore leaving other details of the (self-)‌organisation of the bodies up to the specific characteristics of the enterprise. This applies, for example, to the (special) sustainability expertise within the management board, as such expertise can also be provided comprehensively at downstream management levels – for example, in the form of sustainability committees, which are entrusted by the management board with steering the sustainability strategy, defining certain sustainability KPIs and (internal and external) sustainability reporting. 

In any event, due to their (increasing) strategic relevance, sustainability and ESG aspects will become an integral part of management and supervisory board activities and, as a cross-functional issue, will keep executive bodies as a whole even busier than before.