Exercising voting rights

We support the approach that responsible management and control of the company geared towards long-term value creation is in the interests of its shareholders. The composition, activities and remuneration of the bodies should reflect this. Transparency and open communication should make this evident to shareholders.

When electing executive and non-executive members, we are subject to the critical factors for elections in the ALHV and a correspondingly critical approach is taken in the event of non-compliance or deviations:

• No detailed presentation of candidates’ qualifications on the basis of informative CVs and a competence matrix, in particular including 
  - Career history, including main current occupation
  - Age
  - Nationality
  - Date first appointed
  - Duration and end of current appointment
  - Other positions held, stating any stock exchange listing or group affiliation of the company in question.

The information should be permanently published online and updated. This should be referenced in the agenda.

• More than
  - three positions in total for an executive member, 
  - five positions in total for a non-executive member who does not hold an executive function in any company or more than three positions in total as a Supervisory Board member with an executive function in any company.

Each chair position is counted as two positions; the position to which the candidate is to be appointed is to be included; additional executive activities in companies outside the Group are excluded; multiple positions within a group count as one position but only if clearly identified; positions abroad must be taken into account; comparable activities also count as positions, e.g. Administrative Board or non-voluntary Advisory Board; positions not described in more detail are automatically counted as full positions; any other main occupation is counted.

• Lack of diversity, especially taking account of gender, age and qualifications;
• Diversity targets set by the company itself are not met; 
• For companies with monistic organisation: personal union between Chief Executive and chair person;
• Less than half of the shareholder representatives on the Supervisory Board / overall board are independent; e.g. a member is considered not to be independent in the following cases:
  - has performed this function for more than ten years,
  - is a representative of a shareholder who holds more than 10% of the voting rights,
  - was a member of the company’s Management Board,
  - has an additional connection with the Management Board, Supervisory Board or company.
• Change from the Management Board to the Chair of the Supervisory Board, even subject to a cooling-off period; a long-serving member of the Management Board may become an ordinary member of the Supervisory Board after a cooling-off period of two years or upon proposal by shareholders with more than 25% of the voting rights.
• Insufficiently qualified committee members with a majority of independent members, in particular the chair at least of the audit committee and the remuneration committee;
• No independent member of the Supervisory Board has expertise in accounting or financial statement auditing;
• Special or delegation rights for certain shareholders;
• Block elections;
• In the event of re-election:
  - Lack of control over remuneration, especially in the case of increasing remuneration of      executive members in combination with poorer company results,
  - No individual disclosure of participation in meetings of the Supervisory Board, overall     board and the committees and participation in less than 75% of meetings without sufficient justification,
  - Maximum Supervisory Board term set by the company is exceeded or the term is more than 15 years

When approving the actions of executive and non-executive members, we are subject to the critical factors for elections in the ALHV and a correspondingly critical approach is taken in the event of non-compliance: 

• No appropriate measures to identify, prevent, address and disclose conflicts of interest; 
• Less than half of the shareholder representatives on the Supervisory Board / overall board and the material committees are independent;
• Inadequate risk controlling and audit procedure;
• Non-compliance with statutory provisions, internal company or group guidelines;
• Incorrect compliance declaration;
• Pending proceedings, e.g. contesting the balance sheet, insider trading, corruption or antitrust violations;
• Significant, long-standing violations of generally accepted Social Responsible Investment (SRI) or Environmental Social Governance (ESG) guidelines, including failure to appoint an executive member as responsible for ESG issues;
• No vote held on the Management Board and Supervisory Board remuneration system in the event of major changes or at least every four years;
• Minority shareholder interests demonstrably jeopardised;
• More than
  - three positions in total for an executive member,
  - five positions in total for a non-executive member who does not hold an executive function in any company or more than three positions in total as a Supervisory Board member with an executive function in any company.

Each chair position is counted as two positions; the position to which the candidate is to be appointed is to be included; additional executive activities in companies outside the Group are excluded; multiple positions within a group count as one position but only if clearly identified; positions abroad must be taken into account; comparable activities also count as positions, e.g. Administrative Board or non-voluntary Advisory Board; positions not described in more detail are automatically counted as full positions; any other main occupation is counted.

• For companies with monistic organisation: personal union between Chief Executive and chair person; 
• No regular age limit is set and published for Management Board, Supervisory Board and Administrative Board members;
• A length of service limit set by the company is exceeded;
• No amendment or statement on annual general meeting resolutions with less than 75% approval of the voting rights represented at the previous year’s annual general meeting, especially for remuneration (system and report), approval of actions and elections;
• Rules of procedure for the committee in question are not disclosed;

The following also applies:

• For executive members:
  - Poorer results in comparison to the sector over the long term,
  - Non-compliance with material transparency standards (e.g. not publishing the CVs of executive members).
• For non-executive members:
  - Failure to supervise executive members,
  - Non-compliance with material transparency standards (e.g. not publishing the up-to-date CVs of non-executive members at all times on the website, listing qualifications in elections, articles of association, appointments to committees by name,
  - No detailed, individual reporting on the attendance of Supervisory Board members at Supervisory Board and committee meetings.
• No suitable deductible is agreed for Supervisory Board members’ pecuniary loss liability insurance and this is not disclosed in the company’s report. 

We support the BVI’s sustainability and governance approach, and so we are subject to the critical factors for remuneration in the ALHV and a correspondingly critical approach is taken in the event of non-compliance or deviations:

The following are considered critical factors for remuneration and thus for voting on the remuneration system and the remuneration report, as well as electing/approving the actions of members of the Management Board, Supervisory or Administrative Board:

• No cap on the amount of total remuneration including variable remuneration components;
• Variable remuneration components that are not designed based on the company’s long-term success and linked to published long-term success factors;
• The share of fixed remuneration exceeds the intended share of short-term and long-term variable remuneration;
• The performance parameters for determining variable remuneration are:
  - Exclusively linked to the share price,
  - Do not take account of any ESG factors in target attainment; 
• Subsequent adjustment of performance parameters that make it easier to achieve the targets set;
• The variable remuneration component for share-based components is tied to dividends, except for a relative TSR component;
• No clearly defined, comprehensible bonus/malus components;
• No clawback provision for remuneration components paid;
•  Special bonuses granted;
• Signing bonuses in excess of the settlement of assumed remuneration obligations;
•  No own investment obligation (share ownership guidelines);
• Voting on the remuneration systems/reports of both bodies in one agenda item;
• Lack of transparency, e.g.:
  - The Management Board/Supervisory Board remuneration is not shown individually 
  - Objective and extra-financial performance parameters of remuneration are not sufficiently disclosed,
  - Exercising of discretion granted to a body is not clear and comprehensible to third parties,
• No amendment or statement on approval of remuneration system/report for the Management Board with less than 75% of the voting rights represented at the annual general meeting;
• Stock option plans are issued jointly for members of the Management Board and employees;
• Stock option programs are not disclosed;

The following also applies:

• For executive members:
  - Remuneration increases or is not sufficiently reduced even though company results are poorer,
  - Remuneration or settlements of any kind that are not in line with performance or that are excessive; no bonus/malus remuneration.

Preferably, this should be reported in the form of model tables attached as an appendix to the German Corporate Governance Code dated 7 February 2017 (see annex).

• For non-executive members:
  - Remuneration is not appropriate relative to comparable companies and is not largely fixed remuneration,
  - The variable remuneration component is linked to dividends or comparable parameters;
  - No deductible and/or no statement on whether this exists.

In the case of capital measures and share buybacks, we are again subject to the critical factors for capital measures and share buybacks in the ALHV and a correspondingly critical approach is taken in the event of non-compliance:

Basic:

• Preference shares issued;
• Subscription rights not traded on the stock exchange;
• No explanation or disclosure of the company’s long-term strategy for capital measures;
• Ordinary capital increases do not clearly increase the company’s income opportunities in the long term;
• The amount of the total reserve capital still available and its percentage share of share capital are not provided in the annual general meeting documents.

Plus for advance resolutions:

• The requested capital increase is more than 20% of the share capital; 
• The total advance resolutions cumulatively exceed 40% of the share capital;
• The requested capital increase is more than 10% of the share capital and subscription rights are disapplied. All exclusions of subscription rights – with the exception of the settlement of fractional amounts – apply here. Exclusions of subscription rights are generally to be considered on a cumulative basis; advance resolutions already set out in the articles of association are to be included;
• Limits on exclusions of subscription rights are regulated only by a voluntary obligation, which is not included in the articles of association.

Share buybacks

The requesting company is in financial difficulties;

• Share buyback requests with no explanation or disclosure of the company’s long-term strategy for capital measures;
• Rules on buying back shares are not the same for all investors. There are advantages for individual shareholders;
• The price at which the shares are to be repurchased is 10% higher than the market price; 
• Repurchase volume of more than 10% (advance resolution);
• Approval period of more than 2 years;
• Approval to issue repurchased preference shares.

The distribution policy should be in line with the long-term company strategy and be appropriate. If these criteria are not met, a critical approach is taken.

• The dividend is not appropriate in a sector comparison and does not correspond to the company’s financial result;
• The dividend is (except in justified exceptional cases) paid from capital;
• If authorised to use bonus shares (“scrip dividends”), no option of cash dividends.

We believe that the annual financial statements provide a true and fair view of the company’s financial position and performance. This requires the auditor and audit firm to be independent and impartial, including in terms of remuneration. A critical approach is thus taken in the event of deviations from the BVI requirements.

Audit

• Doubts as to the accuracy of the audit;
• Pending proceedings against the audit firm or auditor responsible.

Independence

• The independence of the audit firm/responsible auditor when preparing and presenting the annual financial statements is not guaranteed at all times. Consulting work is not sufficiently disclosed (where applicable with negative declaration) to determine independence; 
• The responsible auditor is not explicitly named in the annual report. It is not sufficient to name them indirectly in the auditor’s report; 
• The responsible auditor has been appointed for more than five years. Information on the period for which the audit firm and the responsible auditor are appointed must be reported in the annual report/permanently on the website in advance, especially after a five-year mandate.

Remuneration

• Remuneration is not reported and/or is not appropriate;
• Remuneration for the audit of the annual financial statements is not shown separately from the other fees, in particular consultancy fees (known as “non-audit fees”);
• Consultancy fees exceed the audit fees repeatedly or disproportionately with no suitable explanation provided. 

Mergers and acquisitions are in shareholders’ interests if they are in line with the long-term company strategy. Shareholders can assess this only if companies provide information about the background. Legitimate interests in protecting trade secrets must be taken into consideration here. A critical approach is thus taken in the event of deviations from the BVI requirements.

• The bid price does not correspond to the sustainable company value and there is no sophisticated corporate governance;
• Approval is not obtained from shareholders at an annual general meeting for transactions that exceed 30% of the acquiring company’s stock market value. The surcharge should be based on a three-month average share price.
• Measures to prevent takeovers (poison pills). 

Under our fundamental understanding of good corporate governance, the rights of shareholders must be protected while maintaining the principle of equal treatment. Special rights and measures that impair shareholder rights are not in the interests of shareholders. Accordingly, we maintain a critical approach in at least the following cases:

• Non-compliance with the principle of “one share – one vote”; 
• Multiple voting rights, voting caps and special rights (e.g. delegation rights, loyalty dividends or loyalty shares for long-term shareholders);
• Amendments to the articles of associations that impair the rights of shareholders;
• Documents are not provided on the company’s website from the date of convening or are incomplete;
• No archive covering at least five years with all annual general meeting documents, i.e. documents not removed after the annual general meeting;
• Sample voting cards not published on the website in good time when the agenda is published.

Responsible corporate governance that takes account of nationally and internationally recognised corporate governance standards is in the interests of shareholders and so we are guided by the following benchmarks and, where applicable, consider a critical approach:

• Country-specific codes are generally the benchmark for the analysis of critical points in submissions to the annual general meeting; in the case of companies listed on a German stock exchange, these are the requirements of the German Corporate Governance Code. Key elements of recognised principles (e.g. OECD, ICGN) are also to be taken into consideration when assessing critical points.
• Proposed amendments to the articles of association must be justified.
• Requests submitted after the deadline and that thus cannot be analysed in detail (ad hoc requests), are viewed critically.
• Even corporate governance matters that are not expressly mentioned in the previous sections must be reviewed using standard best practice. This could also include other requests, for example for a special audit.
• The development of best practice for responsible corporate governance and SRI/ESG issues must be promoted. Non-financial reporting should also be based on the EU Guidelines on reporting climate-related information.
• The company’s diversity policy should be established and published. Regular progress reports should be prepared.

We assume that reporting is prepared correctly and presented transparently. However, some points should be highlighted, in which cases we reserve the right to take a critical approach:

• Pending proceedings (contesting the balance sheet, other illegal activities);
• No publication;
• The company does not report in accordance with internationally recognised standards (chiefly GRI, TCFD, SASB) or does not publish key information in an internationally recognised way (website, annual report);
• There are concerns about the audit methods;
• Auditor’s report is not unqualified.

Supplementary requests, including for a special audit, pose a particular challenge, especially as these are usually made well after convening the annual general meeting and may trigger an entirely new voting process. Requests from shareholders also require special consideration as these may be in the interests of all shareholders but could also be based on personal interests. We reserve the right to take a critical approach in the following cases:

• Disproportionate cost/benefit ratio;
• Limitation of shareholder rights or disadvantage to shareholders, especially minority shareholders;
• Request results in poorer corporate governance; 
• No or inaccurate justification.

In the case of international companies, we adapt our voting behaviour to local conditions in accordance with section 7 “Corporate Governance and Best Practice” of the BVI ALHV, where this is required on account of statutory conditions or market standards. However, as well as fundamental governance issues the following requirements based on the Glass Lewis ESG policy also apply in line with our understanding of ESG:

Board (Management Board and Supervisory Board)

• Against the election if a maximum of 5 positions for non-executive directors or a maximum of two additional positions in addition to an executive function are exceeded in total;
• Against members of the nomination committee if the Board is in office for an average of more than 10 years and the Board has not nominated at least one new candidate in the last 5 years;
• Against male members of the nomination committee if less than 30% of the Board are female (large cap) or, for smaller companies, there is not at least one woman on the Board.

Virtual meetings

• Against exclusively virtual meetings, i.e. where applicable against members of the nomination/governance committee if the company does not ensure that shareholders have the same rights and opportunities as at an in-person AGM.

Tax havens

• Shareholder proposals are supported that require the company to report on risks relating to business activities in tax havens;
• Shareholder proposals are supported that require the suspension of activities in tax havens;
• If the company requests to move its headquarters to tax havens, this request will not be approved.

Auditor

• Against, if the audit firm has not changed in more than 20 years.

Management board remuneration (executive remuneration)

Remuneration should essentially take a “pay for performance” approach. In additional, key sustainability aspects are explicitly included.

• Against remuneration systems where sustainability is not explicitly integrated into the system;
• Requests are supported for separate votes on executive and non-executive remuneration;
• Annual votes on remuneration are supported.

Shareholder proposals on remuneration

• For requests that propose linking executive remuneration to performance indicators such as compliance with environmental protection requirements, health factors, anti-discrimination laws and international human rights standards; 
• Fundamental support of proposals that aim to measure management’s overall performance on the basis of environmental and social aspects; 
• The guidelines support proposals requesting that shares may be withheld and that prohibit early share allocation;
• Shareholder proposals requesting linking remuneration with performance or introducing clawback provisions are supported;
• The guidelines support proposals that request disclosure of pay equity. Proposals that are intended to help reduce pay discrepancies between men and women are also supported.

Shareholder proposals on governance

• For proposals intended to improve shareholder rights, e.g.
  - The introduction of a simple majority when electing directors,
  - Accepting and amending the rules of procedure for access to powers of attorney, 
  - Elimination or reduction of qualified majority decisions, 
  - Declassification of the Board (i.e. staggered terms),
  - Proposals for equal shareholder treatment, e.g. one share one vote
• For proposals to improve diversity on the Supervisory Board and/or Management Board;
• For proposals that strengthen anti-discrimination measures.

Shareholder proposals on the environment

• In general, proposals on environmental issues are supported. In particulate, this relates to those that call for improved sustainability reporting and the disclosure of business practices related to the environment;
• Support of proposals to report on and comply with international environmental conventions and comply with environmental principles;
• Support of proposals that request the company to develop targets for reducing greenhouse gas emissions and introduce comprehensive recycling programs and other pro-active measures to reduce a company’s environmental footprint;
• Support of proposals that request companies to disclose information about their scenario analyses or to publish information in line with certain reporting recommendations;
• For proposals that request detailed reporting on bioengineering and nano technology.

Labour and human rights

• The guidelines support the rights of employees and groups affected by the company’s business activities;
• For proposals for greater transparency regarding the potential impact of business activities on local interest groups, employee rights and human rights generally;
• For proposals for companies to comply with certain codes of conduct regarding working conditions, the Human Rights Convention and corporate responsibility;
• For proposals requesting independent verification of compliance with labour and human rights standards by a company’s contractors;
• The guidelines support the International Labour Organization and encourage companies to apply these standards in their business operations;
• The guidelines stipulate voting against directors if they have not appropriately monitored the general company strategy so as to ensure compliance with fundamental human rights or if a company is subject to regulatory or legal measures on account of human rights violations.

Health and safety

• For proposals that request greater disclosure of public health and safety. This includes proposals relating to product responsibility;
  - For proposals that request the labelling of genetically modified products, the reduction of emissions and use of toxic substances and that forbid the sale of tobacco products to minors;
  - For proposals that request reporting on the company’s guidelines on the import, distribution and manufacturing of pharmaceuticals;
  - For requests regarding employee safety and compliance with internationally recognised human rights standards and safety standards.

Business ethics

• For proposals that request greater transparency of business ethics, the code of conduct and social benefits;
• For proposals that request the company to develop sustainable business practices, for example on animal welfare, human rights or fair lending;
• For proposals to support the reporting and review of a company’s political and charitable spending and lobbying work;
• For proposals that request companies to suspend their political spending or related activities.

“Trojan horse” proposals

• Against proposals that have the pattern of a Trojan horse