I. Overview

The new version adopted by the Government Commission in May replaces the version of the Codex in force since 2017 (“Codex 2017”). It does not merely contain revised individual regulations, but a completely new systematic approach designed to improve clarity and comprehensibility. For example, the purely descriptive representation of the legal situation contained in numerous sections of the Codex is now placed before the recommendations and suggestions derived from it as a new category called “Principles”. The previous structure, which was essentially oriented towards the executive board and supervisory board, has been abandoned in favor of a task-oriented structure based on management and supervision. In addition to these systematic changes, there are also significant changes to the content.

II. Major changes

1. Compensation of the executive board

The Codex 2019 contains comprehensive recommendations on executive board compensation. On the one hand, the concept of target and maximum total compensation also provided for in ARUG II is adopted, in which a “top-down approach” is pursued. The supervisory board shall link the target compensation to a hundred percent achievement of the set targets. In addition, a maximum compensation (“Cap”) is specified in the event that the agreed targets are exceeded. The long-term components of the variable remuneration are supposed to be greater than the short-term components. The performance criteria are supposed to be defined primarily by strategic goals, not just operational goals. Long-term variable compensation elements are to be granted mainly on the basis of shares and will only be available to the executive board after four years. Another new provision is the recommendation on so-called “claw-back clauses”. It should be possible for the supervisory board to withhold or reclaim variable portions of the compensation, but only in exceptional cases with special justification. The previous sample tables on remuneration from the 2017 GCGC no longer apply due to the statutory changes to the remuneration report in section 162 German Stock Corporation Act [Aktiengesetz – AktG] as amended by the ARUG II, which provide for much more detailed reporting than previously.

2. Overboarding

Another focus of the Codex 2019 in terms of content is overboarding. The Codex 2019 recommends that supervisory board members should in future hold a maximum of five supervisory board mandates at stock exchange listed companies outside the concern. A supervisory board chairperson is counted twice in this context. This is a considerable tightening compared to the 2017 GCGC, which merely stated in general terms that each member of the supervisory board shall ensure that he or she has sufficient time to perform his or her mandates. Acting executive board members of listed companies shall hold a maximum of two supervisory board mandates (Code 2017: three) in stock exchange listed companies outside the group and shall not hold a supervisory board chairmanship.

3. Independence of supervisory board members

The requirements regarding the independence of the supervisory board members were specified. The recommendations concern (for clarification purposes) only the shareholder representatives, as only these are proposed by the supervisory board. The definition of independence is now positively formulated: A supervisory board member is independent of the company and its executive board if he or she has no personal or business relationship with the company that could give rise to a conflict of interest. It is the sole responsibility of the members of the supervisory board elected by the shareholders to assess their independence. In addition, the so-called indicator solution is new: The Codex 2019 specifies circumstances which speak for the lack of independence of supervisory board members and which the supervisory board members should take into account when assessing their independence. Indicators of the lack of independence of a member of the supervisory board are considered to be the following:

• Acting as a member of the executive board of the company for a period of two years prior to his/her appointment to the supervisory board;
• material business relations of the supervisory board member (directly or as shareholder or in a responsible function of a company outside the group) with the company or a company controlled by it in the year up to his/her appointment as supervisory board member;
• qualifying as a close family member of a member of the executive board;
• having been a member of the supervisory board for more than twelve years.

However, if one or more of the indicators mentioned are fulfilled, the supervisory board member concerned is not necessarily and automatically deemed to be not independent. The supervisory board may nevertheless assess the member concerned as independent, but must then justify this assessment in the corporate governance statement.

III. Outlook

The structural and substantive changes to the Codex 2019 will require extensive adjustments to the companies’ annual declarations of conformity. The practical test will show whether the Codex 2019 and the changes to stock corporation law introduced by the ARUG II harmonize in every respect. The ARUG II is going to come into force in January 2020, but contains transitional periods, in particular with regard to the changes to the compensation of the executive board, which have not been implemented in the same way in the Codex 2019 as it stands to date. The date on which the Codex 2019 will enter into force by publication in the German Federal Gazette in 2020 has not yet been determined. Companies that avoid uncertainties and would rather wait for further developments could, if necessary, make use of the time gap and initially issue an updated declaration of compliance with the Codex 2017, in order to gain one year of flexibility until the next regular declaration of compliance. The entry into force of Codex 2019 during the year does not create any obligation to update the declaration of conformity.