Investors are increasingly shining the spotlight on the boardroom, according to the Society of Investment Professionals in Germany (DVFA).

Shareholders are increasingly looking at the professionalism and independence of board representatives. During the 2024 Annual General Meeting season potential conflicts of interest, especially in appointed positions on supervisory boards, i.e. in chairmanships or committees, were a cause for concern, for example in the nomination of former CEOs for the chairmanship of the supervisory board.

US proxy advisors opposed the re-election of the chairpersons of the supervisory boards of BASF and Munich Re. The assessment of the extent to which the independence of the boards is guaranteed is often still far apart between corporates and shareholders.

The DVFA has taken the ongoing discussion at an international level about independence requirements as an opportunity to update its position on the topic, which was first published in 2018. „From a strategic perspective, independence is a link between many governance issues,“ emphasises Ingo Speich, Head of the DVFA Governance & Stewardship Committee, in an interview with Börsen-Zeitung.

The discussion about independence requirements has evolved internationally in recent years, something which become clear at this year's Annual General Meetings.

The DVFA had already „clearly positioned itself“ in 2018 with regard to internationally established independence criteria, says Hendrik Schmidt, who was in charge of updating the DVFA position paper. „The non-independence of individual supervisory board members is not harmful per se,“ explains Schmidt. However, with regard to the entire composition of the capital side, and in prominent committee positions, specific independence requirements must be fulfilled from the perspective of investors.

In the DVFA's view, the German Corporate Governance Code does not sufficiently address this issue. The voluntary set of rules for corporate governance has provided a catalogue of indicators for a lack of independence since 2019. However, it does not provide any clear exclusion criteria, and leaves the final assessment to the Supervisory Board's discretion.

The DVFA has tried for years to reach a consensus with companies on the issue of conflicts of interest, but has not succeeded in doing so satisfactorily. With the updated position paper, the investor association wants to raise awareness in the market once again after the 2024 AGM season. In the voting rounds at the shareholder meetings, it became clear that lack of independence is being treated as a serious issue. „The DVFA sees it as its task to uphold integrity in the capital market, and to raise its voice clearly in this regard,“ says Schmidt.

The DVFA's catalogue of criteria includes periods of office held by board representatives, as well as their network of relationships at a personal and business level, and compatibility with other mandates and professional activities. Following this classification of dependencies, the investors' association formulates the goal that more than half of the board members voted on by shareholders should be independent of the Supervisory Board. The calculation should take into account any double voting right for the Chairman of the Supervisory Board.

According to DVFA guidelines, the majority of independent shareholder representatives on the Supervisory Board should also be reflected in the composition of essential committees. For the chairmanship of the Audit, Nomination and Remuneration Committees, the investors' association even requires an independent Supervisory Board member. The DVFA is less strict when it comes to the chairmanship of the Supervisory Board, provided that the majority of the board as a whole is independent.

The DVFA classifies a Supervisory Board member as non independent if they have been in office for more than ten years. Representatives of major shareholders are not considered independent if they directly or indirectly represent more than 10% of the voting capital. Former members of the Executive Board are generally classified as non-independent. The same applies to Supervisory Board members appointed by law or the Articles of Association.

DVFA also categorises former auditors or responsible audit partners as non independent. Former board members of audit firms who were mandated in the past are also categorised in the same way until the external auditor is rotated.

The DVFA also analyses the extent to which politicians or bureaucratic officeholders in supervisory board mandates are to be classified as independent. If they are elected to a supervisory body during their active term of office, the investors' association categorises them as not independent. In the view of the DVFA, persons with a high level of political influence are generally not suitable for supervisory board positions. With a view to transparency requirements and validation, the DVFA would like to demand more from companies than is provided for in the Governance Code. „We propose that the majority independent composition of the Supervisory Board be reflected in the qualification matrix, CVs and skills profile,“ says Schmidt. „We also see this as an aid to orienting ourselves towards a harmonised grid, at least for the German market.“

DVFA stipulates that the company's internal categorisation of independent Supervisory Board members should be validated regularly, preferably annually, by means of an external efficiency audit if possible and corrected if necessary.

From the perspective of the a ssociation, there is a lack of standardised representations of conflicts of interest on the issuer side. „The fundamental problem with some companies is that they interpret independence very individually,“ says Speich. They certify that their supervisory board is sufficiently independent in the annual declaration of the Code. „However, this does not meet our requirements,“ he adds.

What the companies claim with regard to independence is not in line with the investors' criteria. „And then the companies are surprised by the vote of the investors in the discharge resolution or in supervisory board elections,“ says Schmidt.