Power Structures Disputed between Baum and Borke Bodies over Supervision

Power Structures Disputed between Baum and Borke Bodies over Supervision

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Lifting the Veil on 2025's AGM Season: A Focus on Executive Remuneration

By Klaus von der Linden *

The 2025 AGM season is shaping up to be an electrifying spectacle! The buzz is brewing with notable moves and discussions on the horizon, such as Adnoc's successful voluntary takeover offer for Covestro, Continental's spin-off of its automotive business, and UniCredit's pursue of Commerzbank expansion. Each of these transactions has sent ripples throughout the corporate world.

Nevertheless, the spotlight isn’t solely on these deals—agendas for listed companies are brimming with special points.

Virtual or In-Person?

In the realm of corporate law, the authorization to hold annual general meetings has been extended to virtual and in-person formats since the summer of 2022. The option has been embraced by most listed companies, although not for the maximum legal duration of five years due to certain investor and proxy advisor restrictions. As a result, this topic will reappear on the agenda for the 2025 season.

Switching to the virtual format was widely adopted in 2023 and 2024, but it didn't entirely dethrone the in-person meeting. In the Dax, about three-quarters of companies opted for the virtual format in both years, while a quarter chose the in-person format, often combining it with digital features. In the MDax, the preference is balanced, while in the SDax and other listed companies outside the Dax indices, the physical gathering is favored. However, several shifts are expected for the upcoming year, including at the upper echelons, with SAP and BASF planning to use the virtual format for the first time after two years of in-person meetings.

Navigating Virtual Authorization Renewals

When requesting a new authorization next year, companies should keep a few things in mind:

1. Some investors and proxy advisors, like the German Fund Association BVI, may speak out against authorizations longer than two years.
2. They demand detailed explanations for future usage.
3. They require the supervisory board to be involved, meaning that the authorization of the management board requires the approval of the supervisory board in the articles of association.

While these points aren't insurmountable obstacles, another factor is more noteworthy: some investors, including foreign ones, perceive the excessive use of virtual meetings by German issuers as mismatched to their recent practices abroad. As a result, companies asking to extend their current authorization could face resistance.

The Issue of Executive Remuneration

Furthermore, many listed companies are gearing up for the "Say on Pay" vote. This procedure involves confirming the remuneration system for board members and the determination or approval of supervisory board remuneration by resolution of the general meeting. Due to the Second EU Shareholder Rights Directive, shareholders must vote on this at least every four years. The first round took place in 2020 for some, while the majority occurred in 2021. For most companies, the cycle ends in 2025.

However, this isn't the case for all companies. Thirteen out of 40 DAX companies will need to revisit the system of board remuneration due to the cycle alone, and only ten companies need to resubmit their supervisory board remuneration. But significantly more companies will be affected below the first league.

So, what does this mean for companies? Supervisory boards are tasked with checking the appropriateness of existing remuneration systems, which is likely to find broad investor support. While the legal framework for remuneration has remained unchanged, investor and advisor expectations, particularly regarding regulatory density, performance targets, peer groups, and discretionary scope, have likely increased significantly.

Additional Focus on ESG Targets

This boosted focus on ESG extends to the integration of ESG targets in variable board remuneration. Previously, a moderate consideration may have been sufficient. Yet today, many investors, particularly European shareholders, expect ESG to carry more weight. It's crucial to link ESG targets in the remuneration system with those the company highlights as material in its new CSRD sustainability report, as investors will pay special attention to this.

Moreover, companies can gain valuable insights from the annual vote on their remuneration report. In the 2024 DAX season, approval rates for the remuneration report were remarkably high: 31 out of 40 DAX companies achieved values above 90%, and a further seven were above the "magic threshold" of 80%. Nevertheless, investors, advisors, and shareholder representatives regularly discuss their voting behavior or engage in dialogue with companies. Even a positive vote can offer valuable suggestions for further development of the system.

In a heterogeneous investor group, one's wishes may be another's disfavor, even regarding ESG. This gap might deepen following the outcome of the 2024 elections in the U.S.

The Potential of a "Say on Climate"

It remains uncertain whether the season 2025 will also introduce another "Say on Climate." In 2023, Alzchem Group initiated a voluntary consultative vote on its “climate roadmap,” with the GEA Group following suit in 2024. Should Bayer adopt a "Say on Climate" for the 2025 AGM season, this move at the highest DAX level would have a substantial impact and might trigger a trend among other companies.

Climate policy will be a top priority for companies as they prepare to report on sustainability to a greater extent following the implementation of the CSRD, leading to further debates.

*) Dr. Klaus von der Linden is a partner in the Corporate/M&A department of Linklaters in Düsseldorf.

Enrichment Data:

Here's a glimpse into the 2025 AGM season's executive compensation and shareholder meeting trends:

Executive Remuneration Shifts

• Pay structure evolutions: A rise in long-term incentive plan (LTIP) adoption, mirroring U.S. practices with larger equity grants, has been observed, particularly in Canada[1].
• Performance linkage: The median CEO pay increased 7.5% (S&P 500) due to stock/option awards, outpacing 2.7% base salary growth[2].
• Innovation trade-offs: Studies suggest that value-based pay models may weaken innovation incentives, even in well-governed firms[3].

Shareholder Meeting Developments

Although specific virtual format details aren't detailed in sources, pay-for-performance scrutiny, ESG integration, and market-responsive pay could be key factors influencing AGMs:

• Pay-for-performance scrutiny: ISS data indicates that investors are increasingly focused on aligning compensation with actual market results amid economic uncertainties[2].
• ESG integration: The maturation of ESG metrics in incentive plans is a growing trend, as exemplified by CIBC's Business Performance Factor adjustments[1].

Emerging Voting Trends

"Say on Climate" considerations" aren't explicitly covered but relate to:

• ESG metric standardization: Increased pressure for measurable environmental targets in compensation structures[1][5].
• Risk-adjusted incentives: Market volatility drives demand for revised performance periods and clawback provisions[2][5].

| Trend | Examples | Impact || --- | --- | --- || LTIP Expansion | Rogers' 200% PRSU maximum payout vs historical 100%[1] | Strengthens pay-performance alignment || Relative Metrics | Canadian National's customer sentiment index replacement[1] | Focuses on competitive positioning || Market-Responsive Pay | ISS-reported shift to stock-heavy compensation[2] | Links rewards to shareholder returns |

1. By 2025, finance businesses may need to reevaluate their executive remuneration systems, as many listed companies will be approaching the end of their four-year cycle for "Say on Pay" votes.
2. Companies seeking authorization renewals should be aware of investor concerns, such as limited authorizations beyond two years and the need for detailed explanations about future usage.
3. As global reigns of power shift, heterogeneous investor groups could become more discordant, potentially deepening disagreements on ESG matters.
4. The 2025 AGM season could witness a heterogeneous finance business landscape, with some companies pursuing takeovers, spin-offs, or expansions, requiring unique financial strategies and adaptations to meet various requirements.

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