In late January 2022, the Government Commission approved a new draft of the 2022 German Corporate Governance Code, published the proposed changes, and invited the public to submit comments through mid-March 2022. The BDI has prepared a statement on the proposed reforms.

Sustainability as a Priority

The new Code places particular emphasis on the importance of environmental, social, and corporate governance (ESG). Listed companies are to incorporate social and environmental sustainability into their corporate strategy and planning. This further strengthens the responsibility of executive boards and supervisory boards, particularly with regard to sustainability and social issues. The explanatory memorandum to the Code explains that companies can use the UN’s 17 Sustainable Development Goals as a guide when interpreting sustainability concepts. In addition, the Act on Strengthening Financial Market Integrity (FISG) and the Second Act on Leadership Positions (FüPoG II) necessitated changes to the Code.

The New Provisions in Detail

With the entry into force of the DCGK 2022, the following significant changes result compared to the previously applicable version:

• Social and Environmental Factors in Corporate Governance: The preamble clarifies the company’s role in society and its social responsibility, as well as the impacts of and on social and environmental factors. The Management Board and Supervisory Board must take these into account when managing and overseeing the company in the company’s best interests. Furthermore, this focus is very clearly expressed in the Code’s new Recommendation A.1.
• Sustainability Aspects of the Supervisory Board’s Oversight Role: The ESG focus of the new Code also applies to the recommendations regarding the Supervisory Board. The Code states that the Supervisory Board’s oversight and advisory role with respect to the Management Board also encompasses sustainability issues.
• Competency Profile and Qualification Matrix for the Supervisory Board: Furthermore, the Supervisory Board’s competency profile is supplemented with expertise on sustainability issues relevant to the company. A qualification matrix is to be included in the corporate governance statement.
• Internal Control System and Risk Management System: The legislature had already made it clear in the FISG that the risk assessment of the internal control and risk management system—which had previously been primarily finance-oriented—must be expanded to include operational risks in accordance with the company’s risk profile. The new Code builds on this and clarifies that internal monitoring of the systems is necessary to ensure their adequacy and effectiveness. In the explanatory memorandum to the DCGK 2022, the Code Commission also points out the possibility of external audits.
• Furthermore, the new Code recommends that the internal control and risk management system should also cover sustainability-related objectives in the future.
• The management report should comprehensively describe the key features of the internal control and risk management system, and the Executive Board should provide a statement in the management report regarding the adequacy and effectiveness of the management systems.
• Compliance Management System: The Code clarifies that the establishment of an internal control and risk management system also includes a compliance management system, which must be appropriate to the company’s risk profile.
• Establishment of the Audit Committee: Principle 14 mandates the establishment of an audit committee; the previous recommendation alone is no longer applicable. The background to this is Section 107(4), first sentence, of the German Stock Corporation Act (AktG), newly introduced by the FISG, according to which the supervisory board of a publicly traded company must establish an audit committee.
• Qualifications of Financial Experts on the Audit Committee: With regard to the qualifications of financial experts on the audit committee, Principle 15 stipulates that at least one member of the audit committee must have expertise in the field of accounting and at least one other member must have expertise in the field of financial statement auditing. A further recommendation stipulates that, in addition to knowledge and experience in the application of accounting principles and internal control and risk management systems, as well as knowledge and experience in financial statement audits, the committee members must also possess knowledge of sustainability reporting and its audit.
• Minimum Gender Representation: Principle 9 incorporates the statutory provisions of FüPoG II regarding minimum representation on the Executive Board and the target figures to be set.
• Report on the Format of Supervisory Board Meetings: The Supervisory Board’s report should specify how many meetings of the Supervisory Board and its committees were held in person or via video or telephone conference.

Challenges for Companies

Overall, the new version of the Code makes it very clear to what extent sustainability aspects have also reached corporate management and the supervisory board. In particular, the new requirements for the competence profiles of supervisory board members with regard to sustainability issues will pose major challenges for companies. This is because a generic qualification is unlikely to be of much help. Only a specific understanding of the company, its business activities, and its current situation will enable the supervisory board to provide effective advice and oversight on strategic sustainability issues and specific individual matters.