• Voting guidelines for management board compensation do not fulfill even the minimum requirements when it comes to quality and quantity
  • Deficits contrast with pressure mounting on companies in the context of Say-on-Pay resolutions at the Annual General Meeting
  • A joint analysis by the hkp /// group, University of Göttingen and DIRK (German Investor Relations Association) reveals need for action against the backdrop of ARUG II

Frankfurt, November 7, 2018. Around half of the biggest investors in DAX companies publish no or insufficient requirements for setting up and communicating management board compensation. With a few exceptions, the proxy guidelines often do not meet even minimum requirements. This conclusion of the recently-submitted study, “Vorstandsvergütung als Herausforderung für Investoren” (Management Board Compensation as a Challenge for Investors) forms a contrast to the massively increased criticism from investors and proxy advisors regarding compensation for listed companies in Germany in recent years.

“In stark contrast to the legal and regulatory requirements, investor demands on management board compensation remain largely unknown. Listed companies are often left with few options other than gazing into a crystal ball, as there is a lack of sufficiently detailed, consistent and comprehensible voting guidelines for setting up compensation systems,” concludes hkp /// group Managing Partner and author of the study, Michael H. Kramarsch. CEO of DIRK, Kay Bommer, adds: “If investors fail to make their requirements sufficiently transparent but still wish to enforce them with companies, setting up compensation for management boards becomes a lottery - featuring, in the worst-case scenario, unpleasant public debates at the General Meeting.”

Key findings from the study - an overview

  • Of the 40 top investors surveyed, only 36 have published voting guidelines featuring their requirements for the set-up and disclosure of management board compensation. Four investors did not publish (their own) voting guidelines.
  • 70% of the voting guidelines lack concrete, detailed and action-guiding information on the structure of management board compensation.
  • Barely one-fifth of the investors surveyed provide reliable guidelines on the criteria of performance measurement and equity culture.
  • The ranking of the most professional guidelines is headed by US pension fund CalPERS. Its voting guidelines are convincing when it comes to transparency and communication, and provide detailed and comprehensible instructions on how management board compensation systems and their disclosure should be set up.
  • Vanguard, the second largest investor group in the DAX, is one of the lowest ranked. Their requirements cannot be used by companies in almost any area of review.
  • DWS and Allianz Global Investors (AGI) achieved the highest ratings for German investors. The proxy guidelines of both investors are at the cutting edge of transparency and communication. However, further information enabling a clear set-up of a management board compensation system is lacking.

Image: Applicability and validity of voting guidelines: The top 10 ratings for investors contrast with the results of Vanguard as the second-largest investor in the DAX along with proxy advisors ISS and Glass Lewis

With great power comes great responsibility
The deficits identified emerge at a critical phase: The German implementation of the European Shareholders’ Rights Directive (ARUG II), which is to be transposed into local law by June 2019, shifts the balance of power in German stock corporations regarding compensation of the management board to investors and to the Annual General Meeting. The study shows that most investors are not prepared for this - and as a result, the companies themselves are unable to prepare, according to Professor Michael Wolff, Chair of Management and Monitoring at the Georg-August-Universität Göttingen. “If there are no proxy guidelines or vague proxy guidelines in place aimed at structuring management board compensation according to objective criteria and to manage the voting behavior of investors and voting advisors accordingly, investors as well as companies are unable to fulfill their role in the compensation of the management board.”

Corporate governance expert Michael H. Kramarsch also sees the danger that were the current conflict situation to persist, the stakeholder value approach would be one-sided. “It is important to have a differentiated discussion on the role and influence of investors and their proxy advisors. Parties tasked with corporate governance and professional investors must ensure that the topic of management board compensation is handled in a responsible manner. We don’t need a blueprint of American standards,” says the hkp/// group Managing Partner. From the viewpoint of the study’s authors, the shift of entrepreneurial decisions to institutional investors requires clear guidelines for responsible action. These guidelines formulated in a stewardship code should be binding on all investors active in Germany and should not address the minority of German investors alone.

Further details on the study
The “Vorstandsvergütung als Herausforderung für Investoren” study by management consultancy hkp/// group with the Professor for Management and Monitoring at the Georg-August-Universität Göttingen along with the DIRK (German Investor Relations Association) analyzes publicly accessible proxy guidelines relating to management board compensation of the 40 largest institutional investors in DAX companies on information content and applicability in the compensation of the management board. The investor groups included in the analysis represent around 60% of the investment volume in the DAX. The information provided by the proxy advisors ISS and Glass Lewis was also taken into account. The rating was on a scale of A to D (best to worst rating).