Corporate / M&A

Austria: Second Stability Act 2012 Improves Corporate Governance

The Second Stability Act 2012 (2. Stabilitätsgesetz 2012) improved corporate governance. It also amended the Austrian Stock Corporation Act (Aktiengesetz) and the Austrian Commercial Code (Unternehmensgesetzbuch). The changes entered into force on 1 July 2012. The most important amendments follow.

Remuneration of managing directors

Accord­ing to the old ver­sion of Art 78 para 1 of the Aus­tri­an Stock Cor­po­ra­tion Act, the super­vi­so­ry board must ensure that the ben­e­fits pro­vid­ed to the mem­bers of the man­age­ment board are pro­por­tion­ate to the tasks of the indi­vid­ual board mem­ber and the company’s sit­u­a­tion.

The Sec­ond Sta­bil­i­ty Act 2012 intro­duced fur­ther cri­te­ria for the appro­pri­ate­ness of man­ag­ing direc­tors’ remu­ner­a­tion. First, super­vi­so­ry board must also con­sid­er the per­for­mance of the man­ag­ing direc­tors. Sec­ond, the super­vi­so­ry board must look at the prac­tice in com­pa­ra­ble com­pa­nies, as well as the pay struc­ture in the com­pa­ny itself. Final­ly, the super­vi­so­ry board must pro­vide incen­tives to man­ag­ing direc­tors to fos­ter the long-term well-being of the firm.

All these aspects had to be observed by a dili­gent mem­ber of the super­vi­so­ry board even before the act, so the men­tioned amend­ments are not expect­ed to sig­nif­i­cant­ly change the cur­rent prac­tice on man­ag­ing direc­tors’ remu­ner­a­tion.

Anoth­er change in this field has caused some stir in the busi­ness com­mu­ni­ty. Under the new law, remu­ner­a­tion of each man­age­ment board mem­ber, and the remu­ner­a­tion pol­i­cy, must be fea­tured in the company’s cor­po­rate gov­er­nance report that must be issued by list­ed and cap­i­tal mar­ket-ori­ent­ed stock cor­po­ra­tions. Pre­vi­ous­ly, such pro­vi­sion to indi­cate the remu­ner­a­tion of each mem­ber of the man­age­ment board sep­a­rate­ly could only be found in the option­al sec­tion of the Aus­tri­an Cor­po­rate Gov­er­nance Code (ÖCGK). So com­pa­nies had the choice to decide whether they want­ed to com­ply with this oblig­a­tion or explain why they refrained from doing so.

Cooling off period

The Sec­ond Sta­bil­i­ty Act 2012 also intro­duced a cool­ing off peri­od for the man­age­ment board mem­bers of list­ed com­pa­nies. For­mer mem­bers of a list­ed company’s man­age­ment board must wait at least two years after their depar­ture from the man­age­ment board before they can be elect­ed as mem­bers of the company’s super­vi­so­ry board. This rule does not, how­ev­er, apply if they are nom­i­nat­ed by share­hold­ers hold­ing more than 25% of the vot­ing rights. The super­vi­so­ry board may only have one mem­ber whose cool­ing off peri­od has not yet expired. In any case, the cool­ing off peri­od is manda­to­ry for the super­vi­so­ry board’s chair­per­son.

Composition of the supervisory board

The amend­ments also addressed the com­po­si­tion of the super­vi­so­ry board. Share­hold­ers must pay atten­tion to the pro­fes­sion­al and per­son­al qual­i­fi­ca­tions of the mem­bers of the super­vi­so­ry board. The super­vi­so­ry board should be well bal­anced with regard to the pro­fes­sions of its mem­bers and diver­si­fied in terms of its mem­bers’ gen­der and age. For list­ed com­pa­nies, the make-up of the super­vi­so­ry board should be inter­na­tion­al. Final­ly, per­sons who have been con­vict­ed for crimes that call into ques­tion their pro­fes­sion­al hon­esty can­not be elect­ed.

The new pro­vi­sions basi­cal­ly repro­duce the for­mer C-rule 52 of the Aus­tri­an Cor­po­rate Gov­er­nance Code and reflect the cur­rent dis­cus­sion about diver­si­ty on cor­po­rate boards. How­ev­er, the legal con­se­quences of infring­ing the pro­vi­sions gov­ern­ing the com­po­si­tion of the super­vi­so­ry board remain unclear.

Conclusion

The Sec­ond Sta­bil­i­ty Act 2012 has brought some improve­ments to the cor­po­rate gov­er­nance of (pub­lic) stock cor­po­ra­tions. But its ben­e­fits should not be over­stat­ed giv­en that most of the amend­ments are con­sis­tent with estab­lished busi­ness prac­tice.

The Second Stability Act 2012 also introduced a cooling off period for the management board members of listed companies. Former members of a listed company’s management board must wait at least two years after their departure from the management board before they can be elected as members of the company’s supervisory board.