Mercedes-Benz has secured a place on the winners' podium in Union Investment's latest Corporate Governance ranking. The automotive giant has made significant progress, climbing seven spots and emerging as the Dax's standout performer. Last year's top performer, Deutsche Börse, closely follows in second place, while RWE, previously alongside the Börse at the top, now occupies fourth place. Porsche AG and Porsche Automobil Holding remain at the bottom of the rankings, as they did last year.

According to Union Investment's ranking, there have been significant shifts in positions. Alongside Mercedes, Henkel has also made notable progress. Both companies have been commended for incorporating sustainability criteria into their long-term incentive plans for executive compensation. Mercedes has also scored higher due to better results in shareholder meeting resolutions. Henkel has appointed an independent member to chair its audit committee.

The biggest losers in the Dax are Adidas (down 9 spots to 17th place), Vonovia (down 8 spots to 13th), Deutsche Telekom, and Deutsche Bank (each 7 spots lower to 11th and 12th, respectively). These companies also received deductions for insufficient female representation in executive positions and/or the two levels below.

Union Investment criticized Adidas for several reasons, including controversies surrounding rapper Kanye West and deviations from the governance code regarding the premature departure of former HR executive Amanda Rajkumar. Adidas paid the manager both short- and long-term variable compensation components in cash at a fixed amount and relieved her of the obligation to invest long-term compensation in Adidas shares. Union Investment also faulted Adidas for accumulation of offices in the supervisory board.

In the MDax, Thyssenkrupp is top of the class, having ranked second last year. The biggest climber in this group is Delivery Hero, ascending 14 spots. The online delivery service has made improvements in the independence of its audit committee chairman and the transparency of its ESG expertise within the board.

Union Investment has examined Dax corporate governance for the sixth time and MDax for the fourth. The analysis is purely quantitative, based on publicly available company data.

In the latest ranking, Union Investment has raised the bar in response to the evolving market practice where basic criteria for assessing governance quality are now standard. „We have raised our standards because many basics should now be taken for granted, such as the publication of meaningful resumes for executives and board members. There are no more bonus points for that“, explains Vanda Rothacker, ESG strategist with a focus on corporate governance at the asset manager. „We are focusing on criteria where we see room for improvement.“

The analysis places a stronger emphasis on ESG transparency. „This is important to us because we want to highlight the integration of environmental and social components with governance. E and S only work when they are integrated into governance“, says Rothacker. Therefore, Union Investment examines diversity strategies, requests a lobbying report, and investigates the extent to which ESG expertise is embedded in the executive board and supervisory board.

The asset manager demands clear evidence of ESG qualifications. „Responsibilities for sustainability issues are often stated but are frequently not traceable“, criticizes Rothacker. „Competence must be evident from professional experience or elsewhere in the resume.“

The average score in the Dax in the 2023/24 ranking has deteriorated from 2.2 to 2.7, which Rothacker attributes primarily to increased requirements. „The stricter scrutiny is not based on new, utopian requirements because some companies have also improved within the changed framework“, emphasizes Rothacker. „Persistent issues regarding governance deficits include the independence of supervisory boards and board member overcommitment.“

Independence is a crucial criterion for good governance from the asset manager's perspective because the supervisory board should primarily represent shareholder interests on the shareholder bench. According to Union Investment, independence is not guaranteed, for example, if the board member previously served on the same company's executive board, if the term exceeds ten years, if the board member has a business or personal relationship with the company creating a conflict of interest, or if the board member is a shareholder with more than ten percent of voting rights. „It's not inherently bad for former executives to join the supervisory board, as they bring a lot of expertise and knowledge. However, it's important to us that there is a counterbalance, with at least half of the shareholder bench being independently filled“, stresses Rothacker and adds: „The ratio must be right.“

Union Investment uses the ranking as a basis for discussions with companies, especially in dialogue with chairpersons of the supervisory boards, and for engagement at shareholder meetings. „Ultimately, the goal is to raise awareness of the issue, initiate a continuous improvement process, and use the capital market as a driver for good corporate governance“, summarizes Carola Schroeder, who heads Union Investment's portfolio management.

„Sustainability is not a passing trend for us“, emphasizes Schroeder. The asset manager had already focused on it 30 years ago, at a time when ESG was not yet mandatory. The church banks were the first clients demanding exclusion criteria for sustainable investments and an active role from their asset manager. Thus, Union Investment has extensive experience in investing in „credible transformation“. „We are looking for companies that set ambitious goals and pursue them reliably. In close collaboration with the companies, we support the transformation of the economy“, says Schroeder.

Union Investment takes a clear position on shareholder activists. Schroeder describes the nomination of activist US investor Jeffrey Ubben to Bayer's supervisory board as a „clear warning signal because shareholder interests were not adequately considered here.“ With Ubben's nomination, the interests of investors are now in the foreground. „But we would have preferred if Bayer had not let it come to the point where an activist joins the supervisory board“, notes Schroeder.

In Bayer's case, at least, there is no activist at work who only aims to make a quick profit. Ubben's goal is to make the company successful again. Therefore, Union Investment will vote for Ubben's election at the annual general meeting.

Schroeder criticizes SAP's surprising reversal in appointing a new chairman of the supervisory board as a „negative example of professional succession planning.“ After years of back and forth, Hasso Plattner is succeeded by his long-time confidant Pekka Ala-Pietilä, who is seen as a „transitional candidate.“

With regard to the professionalization of supervisory boards, the asset manager considers the representation of the competencies of board members in competency profiles to be fundamentally effective. „The competency profiles are helpful in our discussions with supervisory boards because they provide transparency and focus on substantive discussion“, says Rothacker. „It's no longer about how someone came onto the supervisory board through a network.“ The nomination process is also becoming more transparent.

As per Rothacker, the self-assessment of the supervisory boards regarding the competencies present in the committees in the form of a matrix is in need of improvement, as too many ticks are often placed there: „Less is more. Not everyone needs to be able to do everything. We want to know where deep expertise in relevant topics exists.“

The fact that the Code Commission, under new leadership, has not yet proposed any adjustments in current governance issues is accepted by the fund representatives. „The new commission is now in working mode“, says Schroeder. The commission has initiated practical implementation with the guideline for conducting general meetings efficiently. Nonetheless, the body has not commented on the format of shareholder meetings, whether virtual, hybrid, or in person, is preferred. „The shareholders' right to participate must be strengthened rather than weakened. A code recommendation on Say on Climate would be just as helpful as a recommendation for the hybrid general meeting as the gold standard“, Schroeder hopes.