hkp/// group experts Regine Siepmann and Hannes Klingenberg discuss the results of a current study by hkp/// group, Georg-August-Universität Göttingen and DIRK – Deutscher Investor Relations Verband regarding the Executive Compensation voting guidelines of the 40 top investors in DAX companies

Ms. Siepmann, Mr. Klingenberg: In your current study, you draw an unambiguous negative conclusion when it comes to the voting guidelines of the major international investors in Germany on the compensation of the Executive Board. What is this assessment based on?
Hannes Klingenberg: After we failed to come across any comparable analysis at an international level, we carried out a detailed analysis of the current guidelines from leading investors in Germany regarding the compensation of the Executive Board in terms of general availability, transparency, content relevance and practicability or quality of guidance.
What exactly was your study able to determine?
Regine Siepmann: Of the 40 leading investors in DAX companies, four have no corresponding guidelines at all, or have guidelines that refer solely to the requirements of proxy voting advisors. 70% of the voting guidelines lacked concrete, detailed and action-guiding information on the structure of executive compensation. Barely a fifth of the investors assessed set up reliable standards, for example, how the company's success should be reflected in the compensation of the Executive Board and/or the requirements placed on equity culture. The topic of discretion in setting compensation, which has been widely discussed in recent years, received only inadequate attention from over 70% of the investors.

A surprising result in the face of growing pressure from investors on companies.
Regine Siepmann: Indeed! It’s even more striking since the politics relating to the European Shareholders Rights Directive and its national implementation in the context of ARUG II places more responsibility for the compensation of the Executive Board into the hands of the Annual General Meeting and therefore of the investors.
Hannes Klingenberg: If investors do not clearly articulate their requirements for Executive Board compensation and make them transparent, they remain an unknown factor to companies. The set-up of Executive Board compensation therefore becomes a lottery with (in the worst-case scenario) unpleasant public debates at the Annual General Meeting - as it was the case in 2016 and 2017 in particular.
Are there any positive examples?
Regine Siepmann: The ranking of the most professional Executive Compensation guidelines is headed by US pension fund CalPERS. Its voting guidelines are convincing across all levels and provide wide-reaching, detailed and comprehensible instructions on how Executive Board compensation systems and their disclosure should be clearly set up.

Are any particular patterns emerging?
Hannes Klingenberg: Not as clearly as one would hope. The major investors are not necessarily role models. With Vanguard, for example, the second-largest group of investors in the DAX is bringing up the rear in the rankings. Their requirements cannot be used by companies in almost any area of review. In addition, investors with extensive voting guidelines do not necessarily make up the most critical - as might be expected. According to ProxyInsight, the second best-rated investor BlackRock has voted "for" a compensation system at Annual General Meetings in the DAX in around 85% of the cases since 2010.
How do German investors perform in your comparison?
Hannes Klingenberg: DWS and Allianz Global Investors achieved the best ratings among the German investors and placed themselves in the upper echelons. The voting guidelines of both investors are at the highest level for the requirements on disclosing compensation and the handling of the Annual General Meeting vote on Executive Board compensation – the so-called "Say on Pay". In addition, however, there is a lack of information on the subject of discretion or detailed requirements for measuring success, which allow companies to form a clear compensation system for their Executive Board.
What are your conclusions? Do we need clearer legal requirements?
Regine Siepmann: We don’t only have the demand for transparent, clear and action-guiding requirements of the investors in terms of Executive Board compensation. It is also important to have a differentiated discussion on the role and influence of investors and their voting advisors. Responsible parties tasked with corporate governance and professional investors must ensure that the topic of Executive Board compensation is handled in a responsible manner.
Hannes Klingenberg: The ever-increasing shift of entrepreneurial decisions toward institutional investors does not make a contribution, in our view. But in order for investors and companies to be able to work constructively with the current legal status quo, there is a need for clear guidelines for responsible action, rather than even more details.
Regine Siepmann: These guard rails or guidelines should be formulated in a stewardship code that is binding on all investors active in Germany and should not address the minority of German investors alone.

Ms. Siepmann, Mr. Klingenberg, many thanks for the interview.
Author Dr. Hannes Klingenberg

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