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For an editorial addressing the development of global institutional investor influences on corporate governance reported in the article below, see

Note: Hermes, the U.K. institutional investor reported to be leading the current activist campaign, had supported the organization of the Forum's 2006 program addressing executive compensation issues, and is now represented on the Forum's current Program Panel addressing "Say on Pay" issues that developed from the earlier program.


Financial Times, January 22, 2010 article


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Institutional investors are hoping for a sea change in Germany's corporate governance following the campaign by Hermes, the UK activist investor, to oust Klaus Wucherer , a former Siemens manager, as designate-chairman at chipmaker Infineon.

"This has a signal effect for corporate Germany," says Henning Gebhardt, DWS's head of German equities. "In future, supervisory boards will have to think twice whom they propose as chairman. They will more likely consult shareholders during the selection process."

Institutional investors have long bemoaned the quality of corporate governance at German boardrooms.

Thomas von Oehsen, head of German corporate governance research at RiskMetrics, the US shareholder advisory group, says: "There are several deficits at German supervisory boards - they are too big, they often lack competent members and many of the members have too many mandates."

One of the main criticisms has been the commonplace practice for chief executives to crown their management careers by becoming chairman of the same company.

"There is an inherent conflict of interest if a chairman controls his former work as chief executive," Mr von Oehsen says.

A series of companies such as Volkswagen, Munich Re and Commerzbank have been strongly criticised for this practice.

"At the moment, the supervisory board chooses the chairman without even consulting the shareholders - this is a deficit in German corporate governance," Mr Gebhardt says.

However, there are many in Germany's elite club of blue-chip managers and supervisory board members who staunchly defend the current system, saying it is vital for companies to have the expertise and inside knowledge of a former manager on their board.

Klaus-Peter Müller, head of the German government's corporate governance board, said last year that a rule that would generally prevent chief executives from becoming chairman of the company they have worked for "would have ultimately led to a situation where important expertise would have been banned from a company".

Mr Müller himself became chairman of Commerzbank directly after he quit as chief executive in 2008.

The German government introduced a new law in 2009 that bans executive board members for two years from moving into the group's supervisory board unless a shareholder who owns more than 25 per cent of the shares proposes it.

This law and a voluntary clause in the German corporate governance codex that says chief executives should not usually become chairmen have triggered some changes.

Two years ago, half of the chairmen in the blue-chip index Dax-30 were ex-chief executives, Mr von Oehsen points out. Last year, this was down to 40 per cent, "so the trend goes into the right direction", he says.

Investors have already started to become more aggressive about such matters. In 2009, Hans-Jürgen Schinzler, chairman of Munich Re, the re-insurance company, received a blow at the annual meeting when 64.55 per cent of the shareholders re-elected him to the supervisory board.

"Investors have long been very passive in Germany. This seems to change now," the head of a German law firm said. But some shareholders are sceptical, arguing that Infineon constitutes a special case due to its "awful" performance.

"Change in Germany is normally pretty slow. Infineon is a step in the right direction. But it doesn't mean companies will bow down to all investors' wishes suddenly," says one large European investor.

There are also practical roadblocks that could obstruct a move towards greater professionalism on German supervisory boards.

For one, German law prescribes that half the board members have to be employee representatives.

Second, there are simply not enough skilled managers who are willing to concentrate solely on a career as - comparatively badly paid - supervisory board members or chairmen.

© Copyright The Financial Times Ltd 2010.



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