Corporate Governance
The corporate governance practices of the company generally derive from the provisions of the German Stock Corporate Act ("AktG"), the German Co-determination Act ("MitBestG") and the German Corporate Governance Code adopted by the German government commission. German standards differ from corporate governance standards adopted by the New York Stock Exchange (NYSE) for U.S. companies. A summary of the principal differences follows.
Like all German stock corporations (Aktiengesellschaft) the company has three corporate bodies – the general meeting of shareholders, the board of management (Vorstand) and the supervisory board (Aufsichtsrat). The German Stock Corporation Act requires a clear separation of management and oversight functions and therefore prohibits simultaneous membership on both boards. Members of the board of management and the supervisory board must exercise the standard of care of a prudent and diligent business person when carrying out their duties. In complying with this standard of care, members of both boards must not only take into account the interests of shareholders, as it would typically be the case with a U.S. board of directors, but also the interests of other constituents, such as the company's employees, and, to some extent, the public interest.
The board of management of the company is responsible for managing the company and representing it in its dealings with third parties. The board of management's functions are comparable to those performed in the ordinary course of business by the senior executive officers of a U.S. company. However, the members of the board of management, including its chairman, are regarded as peers and share a collective responsibility for all management decisions.
The supervisory board oversees the company’s board of management and appoints and removes its members. Members of the supervisory board may not be involved in the day-to-day management of the company. However, our supervisory board decided that certain specified matters will require its approval. Matters requiring such approval include decisions and actions which would fundamentally change the company's assets, financial position or results of operations.
According to the German Co-determination Act the supervisory board of the company consists of twenty members, who are equally divided between shareholder representatives and labor representatives. The chairman of the supervisory board is a representative of the shareholders. In case of a tie vote, the supervisory board chairman may cast the decisive tie-breaking vote.
German law has several rules applicable to supervisory board members which are directed to the independence of the board's members. In addition, to prohibiting members of the board of management from serving on the supervisory board, German law requires members of the supervisory board to act in the best interest of the company. They are not bound by directions or instructions from third parties. Any service, consulting or similar agreements between the company and any of its supervisory board members must be approved by the supervisory board.
Furthermore, the German Corporate Governance Code, updated in May 2003, contains additional corporate governance rules directed to the independence of supervisory board members. In accordance with those rules, our supervisory board takes into account potential conflicts of interest when nominating candidates for election to the supervisory board. If a material conflict of interest arises during the term of a member of the supervisory board, then our internal rules provide that such member shall resign from the mandate. In addition, the supervisory board meets without the board of management if deemed necessary.
In an effort to introduce a broader range of experiences and expertise and a larger degree of independence, consistent with the German Corporate Governance Code, the memorandum and articles of incorporation of the company provide that no more than two former members of our board of management may be elected by the annual meeting of shareholders to be members of the supervisory board. Furthermore, no person who holds an executive position or advisory role in a major competitor of the company may be a member of our supervisory board, and no member of our supervisory board may hold more than four other supervisory board mandates in listed companies outside the Group, if he is also a member of the board of management of a listed company. Details regarding the compliance with the German Corporate Governance Code’s recommendations and suggestions can be seen here.
With one exception, the German Stock Corporation Act does not mandate the creation of specific supervisory board committees. German corporations are only required to establish what is called a mediation committee (Vermittlungsausschuss) with a charter to resolve any disputes among the members of the supervisory board that may arise in connection with the appointment or dismissal of members of the board of management. In addition to the mediation committee, the company has an audit committee under German law (Prüfungsausschuss) which handles the formal engagement of the company's independent auditor once the auditor has been elected by the annual meeting of shareholders. Our audit committee also addresses issues of accounting, risk management and auditor independence. It reviews the annual, half-year and quarterly reports of the company, taking into account the results of the audits and/or reviews performed by the independent auditors. The audit committee also maintains procedures for dealing with complaints regarding accounting, internal controls or auditing matters and procedures for the confidential and anonymous submission of communications from employees of the company concerning questionable accounting and auditing matters. In addition, a presidential committee (Präsidialausschuss) has been constituted to deal with compensation for the board of management and nomination issues as well as service agreements with members of the supervisory board. It also prepares for the meetings of the supervisory board. Members of the supervisory board elected by employees serve on all committees established by the supervisory board.
