Corporate governance trends in Germany


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A new level of investor demands

The AGM season 2023 brought forth a phenomenon rarely seen in the German corporate world before: proxy-fights.

With combined shareholdings below 3%, the hedge funds Primestone and Engine Capital publicly voiced requests for influence at Brenntag, a DAX40 listed distributor of chemicals and ingredients. They demanded a divide of the core and non-core businesses, opposing two company-proposed candidates for the board of directors. While the activists were able to activate support from the two most influential proxy advisories, ISS and Glass Lewis, they ultimately failed to win a majority vote at the AGM.

While shareholder activism and comparable ‘proxy fights’ may be well-known in the US and the UK, the German corporate world had rarely seen such prominent public discussions before, particularly with proxy advisors and activist investors publicly demanding influence. We expect that the Brenntag case will not be the last, considering substantial international funds’ stakes in the German DAX 40 landscape. In fact, this may represent a trend towards a more contentious—or even litigious—investor environment in Germany. Companies and their boards should brace for more aggressive investor input on strategy and senior leadership formation in the AGM 2024 season, as well as pluralism in proxy recommendations.


Pressure for improving diversity beyond gender

Throughout the last decade, speaking about diversity in German supervisory and executive boards referred to gender quotas. However, with women comprising almost 40% of DAX40 supervisory boards in 2023, organizations are increasingly expanding their views on diversity.

Diversity in terms of nationalities and geographic experience in DAX40 supervisory boards is not a new topic in Germany—in fact, after decades-long improvements, about one third of DAX40 board members now have international backgrounds/experience. However, with both foreign revenues and ownership of the DAX40 companies well over 80%, interest in even higher international experience and representation is obvious, particularly in light of rising geostrategic challenges in a multi-polar global economy – with the main drivers of global economic growth outside of Europe. Yet, DAX40 companies face challenges in engaging international board members. Not only may the rather specific German two-tier governance system and employee co-determination in most DAX 40 companies make international candidates hesitate, but so might German boardroom culture, decision processes, and rather modest compensation levels in relation to the commitment required. Regarding compensation, we would not be surprised to see boards quietly make adjustments.

More subtly, reflecting an increasing societal debate in Germany about social and cultural diversity, boardrooms are coming under scrutiny in their representation and openness for diverse backgrounds. As German boards look to tap into a wider talent pool while also addressing diversifying market expectations, boardroom appointments are increasingly looking beyond the ‘traditional’ career tracks with prestigious academic institutions, large corporations, and ‘fitting’ family backgrounds. While this development is only just emerging, we expect increasing attention on these diversity dimensions in the boardroom.


Finding flexibility in a tight regulatory environment

As new regulatory frameworks were introduced over the last few years—particularly in risk and compliance, financial oversight, sustainability, and diversity—board composition has evolved from art to science. Complexity has increased, and specific expertise and demographics were often favored over CEO or other large-scale P&L accountability experience.

In recent years, boards have been forced to cope with disruptions, including the COVID pandemic and resulting supply chain challenges, severe geopolitical tensions, and the sudden hike in global interest rates. In response, German boards are increasingly voicing dissatisfaction with today’s highly regulated environment and resulting processes, which they view as consuming too high a share of their limited capacity. As a result, we are observing a substantial ask for more flexibility in dealing with regulatory frameworks, so that boards can effectively focus on core strategic or operational matters. While nascent, we expect this discussion to pick up momentum in the coming year, underscoring boards’ desire to spend their time most effectively by adding value to the organization. Even more, we expect this sense of ‘back to business’ to become a strong driver of coming director appointments.


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