Two cents' worth

Shareholders to get say on board pay

Bayer AG CEO Baumann addresses the company’s AGM in Bonn
So, about that pay raise... Source: Reuters

If there’s one voice senior executives of public firms like to keep out of their pay negotiations it’s that of shareholders. Investors rarely want to reward the hard-working, or not, managers of their cash, and every euro spent on their wages is one less payable in dividends.

But over the last few years there has been a growing call for shareholders to be guaranteed a “say on pay,” and after a nudge from the European Union that’s now exactly what Germany is planning to do. The government has drafted a bill giving shareholders a greater voice in determining salaries of managers and remuneration for board members. The move is part of Germany’s effort to write the EU’s second shareholder rights directive into national law, which it must do by June.

The objective of the law is “the promotion of shareholder participation for the purpose of a long-term stable positive development of the company,” according to the draft seen by Handelsblatt.

The new law is a big shake-up in German corporate governance. First, it will give investors the chance to vote on executive compensation at least every four years. This will not be binding, but if shareholders do object, the supervisory board must review it. This ensures the shareholder vote still carries a certain weight, government officials said. Boards at companies that currently have such votes voluntarily, such as SAP and Munich Re, as a rule do respond when investors are dissatisfied. The remuneration of supervisory board members will also become subject to the same kind of vote. Currently, this is only set in the bylaws.

Shares and shares alike

Another provision, pushed for by the Social Democrats, the junior coalition party, is a requirement for companies to show that executive salaries are in an “appropriate ratio” to average wages of employees. Companies must show the development of the ratio over the last five years in a compensation report voted on by shareholders.

The draft also requires disclosure of golden parachutes for executives in case of premature termination of employment. This follows the controversial departure of Volkswagen executive board member Christine Hohmann-Dennhardt. After only 13 months in the job, she was given a severance payment of €12.5 million ($14.5 million) and a monthly pension of €8,000, which many viewed as excessive.

As well as pay, the new bill also targets increased transparency. It demands that companies more precisely identify shareholders under so-called “know-your-shareholder” rules. Intermediaries, such as banks, investment companies and others who hold shares on behalf of end investors, must provide the names, addresses and email addresses of shareholders and the precise number of shares or voting rights they hold.

The death of shareholder anonymity

This is a big change in a country which historically favors bearer shares, which do not require a name to be given on share certificates, over registered shares, which do. The bill says the distinction will be retained, but the two types “will get closer together” – in short, anonymity will virtually disappear. In addition, companies will be required to publish a “participation policy” on how shareholders are involved and how their long-term interests are taken into account.

The new law pays special attention to increased transparency by institutional investors, pension funds and other asset managers. They will have to disclose any potential conflicts of interest and business relationships with companies to determine if their investment strategy is in the long-term interest of investors. There are similar rules for “related-party transactions” to make sure company assets are not sold to the benefit of friends or family and the disadvantage of shareholders.

Many of the prescriptions in the new law are already best practices for investors or companies, but the legislation means transgressions will now become punishable.

Heike Anger is a Berlin correspondent for Handelsblatt. Dietmar Neuerer covers government policy and consumer protection. Anke Rezmer covers investment funds. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors:,, and

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