Corporate Governance and Directors’ Remuneration: A German Perspektive Prof. Dr. Christine Windbichler, LL.M. (Berkeley) Humboldt-Universität zu Berlin

Two-Tier Board System Managing Board Supervisory Board Shareholders’ Meeting - shareholders‘ meeting selects members of supervisory board (term: 4 years, removal anytime but supermajority required) - supervisory board appoints managing board (term: maximum 5 years, removal only for cause [wichtiger Grund]) result: change of majority ownership not immediately transformed into change of management powers and tasks: managing board manages the corporation in its own responsibility and discretion to the best interest of the corporation; has original & supreme authority to bind corporation in contract supervisory board is excluded from day-to day management and restricted to general policy matters; represents corp. only for contracting/litigation with members of managing board, contract with auditors this basic structure is mandatory, i.e. cannot be changed by articles of incorporation facts: co-optation of members of both boards, dominating influence of blockholders Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

1 Member in Charge of Human Resources Co-Determination Law 1976 Managing Board 1 Member in Charge of Human Resources 10 Shareholders‘ Representatives 10 Employees‘ Representatives Shareholders‘ Meeting Employees Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

1 Member in Charge of Human Resources Managing Board 1 Member in Charge of Human Resources 10 Shareholders‘ Representatives 10 Employees‘ Representatives Is the supervisory board still the board of the (parent) corporation or is it a structural element of the group? Equivalent on shareholders‘ side? Shareholders‘ meeting of parent Employees of domestic group Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Supervisory Board: Committee Structure Committee prescribed by law: § 27 III MitbestG: nominating and compensation committee Audit committee (prescribed by Sarbanes Oxley Act, recommended by GCGK, recognized by §§ 170 III 2, 171 I 2 AktG) Other committees, § 107 III 2 AktG - Composition of committees ? - Composition proportional to board composition? Including tie-breaking mechanism? Decided cases: no fixed rule, but spirit of co-determination law has to be honored, i.e. for issues of no interest to employees, committee may consist only of shareholders‘ representatives; just one may be enough; How did theses cases come into courts? Change of articles of incorporation to form mandatory committee structure – challenge of shareholders‘ resolution - rules Board organisation by majotiy vote: challenge? Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Building Blocks Board of Directors Shareholders’ Meeting Officers Management Audit Committee “Statutory Auditors” Nomination Committee Compensation Committee Shareholders’ Meeting Outside Accounting Auditors Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin M.J. Roe, Political Determinants of Corporate Governance Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin M.J. Roe, Political Determinants of Corporate Governance Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Supervisory Board: Committee Structure Committee prescribed by law: § 27 III MitbestG: nominating and compensation committee Audit committee (prescribed by Sarbanes Oxley Act, recommended by GCGK, recognized by §§ 170 III 2, 171 I 2 AktG) Other committees, § 107 III 2 AktG - Composition of committees ? - Composition proportional to board composition? Including tie-breaking mechanism? Decided cases: no fixed rule, but spirit of co-determination law has to be honored, i.e. for issues of no interest to employees, committee may consist only of shareholders‘ representatives; just one may be enough; How did theses cases come into courts? Change of articles of incorporation to form mandatory committee structure – challenge of shareholders‘ resolution - rules Board organisation by majotiy vote: challenge? Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

1 Member in Charge of Human Resources Co-Determination Law 1976 Managing Board 1 Member in Charge of Human Resources 10 Shareholders‘ Representatives 10 Employees‘ Representatives Shareholders‘ Meeting Employees Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Employees‘ Representatives 7 Employees including 1 with managerial tasks 3 Union Representa-tives Mandatory § 7 I # 3: large corporations with over 20.000 employees note: union representatives are nominated by unions that have members in the corp‘s workforce but elected by workforce, i.e. they represent the workforce not the union they don‘t have to be employees of the corp., therfore called „external“ members reason: workforce shall have the opportunity to tap into external expertise (cf.: financial literacy); „democracy“ may lead to trusted but not to qualified representatives practical result: union nominees are union leaders and represent union views managerial personnel, executive officers are employees, too (i.e. not members of the managing board); they do not fall within the competence of works councils, have their own (voluntary) council, at DaimlerChrysler: Management Representative Committee however, electorate is the whole workforce Unions: Nomination Employees Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin

Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin Managing Board 3 Empl.Reps 6 Shareholders‘ Rep.s Applicable in corp.s with workforce between 500 and 2000 size of board according to § 96 AktG (always divisible by 3) 3-person board: 1 employee 6-person boeard or larger: 2 employees, other workers‘ representatives may be employees or not nomination right lies with works councils and employees unions informally involved (counselling) practically: external members are union officials like in ‚76 model Original: Wirtschaftsrat der CDU e.V. 1973 Prof. Dr. Christine Windbichler Humboldt-Universität zu Berlin