German bosses face shorter contracts (FT)

The long contracts awarded to German senior executives could be shortened if reformers on the government’s corporate governance commission force through proposed changes next month.

According to the agenda of the Regierungskommission Deutscher Corporate Governance, which holds its next meeting in Berlin on June 22, the 13-strong panel is to debate a proposed shortening of contracts from five years to three years, a move that would shift Germany more into line with international norms.

If the motion is passed, companies would have to comply, or explain why they should be exempt.

International corporate governance standards have been making steady inroads into Germany in recent years, as foreign investors increasingly make their presence felt. Last week, Hermes, the activist UK pension fund, led a revolt against corporate governance at Volkswagen.

The length of senior executives’ contracts has traditionally been seen by German companies and executives as a defence against being ejected from their jobs. Executives are typically paid for the remaining portion of contracts if they leave early.

Last year, Werner Seifert, Deutsche Börse’s chief executive, walked away with a €10m ($12.7m) pay-off after being forced out by rebel investors.

Clemens Börsig, Deutsche Bank’s finance director, recently agreed to move from the role of finance director to supervisory board chairman – in part, according to people close to him, because he would receive the four years’ entitlement remaining on his executive contract alongside his chairman’s pay.

Reformists on the commission, such as Christian Strenger, a board member at fund management house DWS; Ulrich Hocker, head of the DSW small shareholders’ association; and former Deutsche Börse executive Volker Potthoff, are pushing for urgent change.

Mr Potthoff said: “German contracts should move into line with international norms. In that context, three years is more appropriate than five.” UK best practice is now a one-year contract.

International governance experts dismiss claims that a period of less than five years is insufficient for chief executives to prove their strategies.

David Dando, a director at Georgeson Shareholder Communications, a firm specialising in proxy voting, said: “Investors would always give chief executives two or three years to prove themselves. But to get a five-year pay-off if they’re not performing is absolutely generous.”

Since the commission’s most controversial reform, that covering the disclosure of executive pay, companies are now forced by law to “comply or explain”, following new legislation last year.

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