Proxy Advisors’ role and impact in the German market

While Glass Lewis and IVOX Glass Lewis share the same ownership, each is a separate entity with distinct guidelines. For example, IVOX adheres to those that have been drawn up by the Bundesverband Investment and Asset Management (“BVI”).

It is useful to remember that the “institutions” in question are the actual clients of the three proxy advisory firms active in the German market. Ultimately, in broad terms, their policies reflect the desires of their clients, i.e., asset managers invested in Deutschland AG.

The proxy advisory firms update their guidelines annually. These updates serve to reflect legislative changes, as well as any themes that have emerged from engagement with institutions and issuers that may be more stringent than what German and/or European legislation allows for. The engagement between the proxy advisors and institutional shareholders comes in the form of surveys in the Autumn of each year. This article will detail the major changes that the proxy advisors’ guidelines have experienced ahead of the proxy season in 2025.

There are several reasons why institutions subscribe to reports from a proxy advisor. For most, it is used as an extra layer of analysis and as a flagging system for potentially contentious items regarding the corporate governance of a company. For some institutions that subscribe to the proxy advisor reports, there is no established stewardship or governance team. Therefore, the voting of these institutions can be very closely aligned with a particular policy from their proxy advisor.

ISS and Glass Lewis operate a ‘for’, ‘against’ and ‘abstain’ system for their recommendations, whilst IVOX use ‘green’, ‘red’ and ‘blue’. Blue highlights to the subscriber that the particular item does not conform to the guidelines; however, it is not necessarily severe enough for a ‘red’ recommendation.

Virtual Meetings

The guideline update that appears to be having the biggest impact on the 2025 proxy season so far is ISS’ approach to virtual meeting authorisations. It is notable that ISS have only supported issuers proposals at this early stage in proxy season where the issuer has either committed to hold an in-person meeting during the duration of the authority being requested or has held an in-person meeting since the pandemic. Due to the respective articles of association at Siemens and TUI requiring 75% of shareholders to approve the resolution rather than a simple majority, the virtual meeting authority items failed at these two companies due to insufficient support from their shareholders.

The opposition was, in part, due to the negative recommendation that Siemens and TUI received from ISS on this item. While Glass Lewis continue to be supportive of virtual meetings, they do now state that companies should engage with shareholders and provide reasons for choosing meeting formats without in-person attendance. Glass Lewis also may recommend voting against the re-election of directors when a company board is perceived to have ignored shareholder concerns on the meeting format. IVOX continue to recommend a ‘red’ vote for virtual meetings authorities longer than two years and a ‘blue’ recommendation if there is no facility for shareholders to ask questions live at the meeting.

Focus on the Auditor

Since the Wirecard scandal in 2020, there has been a focus from the proxy advisors and institutional shareholders that the necessary checks and balances are in place to mitigate the risk of this happening again. Even though the EU regulation came into effect in 2014, ISS has now sought to align the approach from companies in both EU and non-EU countries and will recommend a vote against if the auditors have been engaged for more than ten years without a public tender or for more than 20 years (24 years in case of a joint audit) following a public tender after ten years. Glass Lewis had already updated their guidelines to reflect this regulation in past policies. IVOX are more stringent and expect the lead auditor to be rotated every five years; otherwise, a ‘red’ recommendation will be necessary.

In 2024, several German issuers pre-emptively took the step to appoint an auditor for sustainability reporting to comply with EU regulation. In most cases, the auditor for sustainability reporting was the same as the financial auditor due to not only how intrinsically linked the auditing of the financial and non-financial aspects of a company are, but the limited available suppliers for such specific audit services. For example, in some cases only the current financial auditor responded to the non-financial audit tender. For Glass Lewis to support the appointment of the auditor responsible for sustainability, the key information regarding the auditor’s identity, fees, independence, and performance must be disclosed.

Conditional Capital

Glass Lewis have adjusted their guidelines on Conditional Capital to reflect the adoption of the Future Financing Act (“Zukunftsfinanzierungsgesetz”). As has occurred in neighbouring states, the limit for share issuances without pre-emptive rights against cash contributions has increased from 10% to 20% of a company’s issued share capital, while the limit for share increases through conditional capital pools has increased from 50% to 60% of issued share capital. ISS continue to allow for 10% of a company’s issued share capital to be issued without pre-emptive rights and 50% with pre-emptive rights. BVI continue to apply a limit of 10% of the issued share capital when the issuance may exclude pre-emption rights. Under their 2021 policy, BVI will accept a proposed capital issuance with pre-emptive rights (authorised or conditional) if it does not exceed 20%. BVI will also allow the cumulative requested amount from all authorities if they do not exceed 40%.

Supervisory Board

IVOX have strengthened their view on several topics that affect a company’s supervisory board, detailing that those with six or more members should establish compensation and nomination committees and that succession planning at both executive and supervisory board levels should be strongly considered. Effective succession planning at both levels is viewed as vital to ensure continuity in the company.

On the topic of gender diversity, for those companies in which the supervisory board has four or fewer members, IVOX will be critical if there is no representative of the underrepresented gender on the supervisory board. At companies in which the supervisory board has more than four members, IVOX expect a gender diversity level of 30% on the supervisory board. This diversity stance fully aligns with the expectations from ISS and Glass Lewis. There has already been demand from a small group of investors for a gender diversity level of 40% at supervisory board level, ahead of the implementation of new EU regulation demanding such requirements which will become effective in 2026.

IVOX have noted in recent years that the number of external mandates that supervisory board members have does not always align with the expectations of the proxy advisors or shareholder base. The number of external commitments that a board member has is closely monitored by the proxy advisors and institutional shareholders as this determines whether they have enough time, especially in a time of crisis. Supervisory board members will now be considered overboarded by IVOX if they hold more than three mandates in total for an executive member or five mandates in total for a non-executive member who does not hold an executive position in any company. Due to the increased time commitment, IVOX count the position of Chair of the Supervisory Board as two mandates. IVOX counts both public and private companies towards the number of mandates.

ISS’ position is unchanged and their policy states that any board member who holds more than five mandates at listed companies will be classified as overboarded. To calculate this limit, being a supervisory board member counts as one mandate, being chair of a supervisory board counts as two mandates, and the role of an executive members is three mandates. For a member who is an executive member at one company and chair of the supervisory board at another company, this member will be classified as overboarded.

In recent years, the importance of improved digital competency at board level has been raised by the proxy advisors and institutional shareholders. This is due to the risk of cyber-attacks that can cause huge financial and reputational damage to any company as well as the prospect of integrating Artificial Intelligence (“AI”) into a company’s strategy. Therefore, Glass Lewis now detail that companies using or developing AI should have strong internal frameworks, including ethical considerations and effective oversight. Clear disclosure on how boards manage AI and enhance their expertise is valuable to shareholders. If poor oversight of AI leads to shareholder harm, Glass Lewis may recommend voting against the re-election of responsible directors or other shareholder matters. In contrast, ISS and IVOX have not set expectations on the topic of AI in their respective policies.

Remuneration

Remuneration remains annually a key topic for the proxy advisors and institutional shareholders alike with the remuneration report and, if applicable, the policy, a.k.a. the remuneration system, being central to voting at an annual general meeting. For the Chief Executive Officer (“CEO”) pay ratio, Glass Lewis have clarified the policy on the formats in which German companies disclose the five-year development of CEO pay and average employee pay, as mandated by EU SRD II. In order for Glass Lewis to analyse the pay ratio in a holistic manner, disclosure in the format of ratio or monetary amounts is considered more meaningful for shareholders than disclosure in terms of year-on-year percentage changes in the respective values.

ISS continue to set out that they expect detailed information on the average pay across the workforce, so that this can be compared to executive remuneration. IVOX expect fixed remuneration to increase by no more than 10% without sufficient rationale.

Glass Lewis have clarified how they evaluate a company’s decision to remove or reduce performance conditions from long-term incentive plans, shifting to a restricted share or ‚hybrid‘ plan. While generally sceptical of reducing performance-based awards, Glass Lewis assess each case individually, considering the board’s rationale, structural elements aligning executives‘ interests with long-term company performance, and an appropriate reduction in target opportunity to reflect the plan’s lower risk profile. Similarly, ISS remain vigilant about how a supervisory board may interpret the remuneration system in the following year’s remuneration report. They are weary of attempts to modify either targets or criteria that would permit either “compensation” between various criteria or render the variable award as quasi-guaranteed given the base performance criteria assumptions. Indeed, ISS tend to recommend against remuneration awards where they are unable to determine independently the degree of difficulty or where the alignment with shareholder interest appears insufficient. For IVOX, share options given to executive members continue to be critically viewed.

The section detailing Glass Lewis’ views on the remuneration that supervisory boards receive has been expanded to clarify that Glass Lewis may recommend shareholders to oppose substantial increases to fees for non-executive directors when compelling rationale has not been provided, particularly in cases where the current or proposed fees exceed those paid to market peers. ISS and IVOX, who have not updated their remuneration guidelines in 2025, share Glass Lewis’ view on this topic.

Conclusion

The updated guidelines of the proxy advisors ISS, Glass Lewis and IVOX have broadly aligned their clients’ expectations with the legal framework, trends within the market and future-proofing companies. In this regard, Glass Lewis expect companies to strive for better digital expertise to better protect the company’s financial integrity from cyber-attacks.

The 2025 guideline change which is and will continue to have the biggest impact on the German market is ISS’ stance on virtual meetings, which goes beyond the legal framework. The first shareholders’ meetings in 2025 have been test cases for how ISS would implement the new guideline and will change how companies with meetings later in 2025 draft their meeting agenda. For those companies where 75% support is necessary for such an item to pass and who have a large free float percentage, this will be the most pressing issue.

Looking forward to 2026, the change in the EU regulation stipulating for 40% gender diversity at supervisory board level will be the next big topic on the horizon. Gender diversity policies related to board member composition have existed in certain EU-member countries since 2011. Therefore, the supply of qualified candidates is limited, and the most experienced individuals are often not available. Increased gender diversity and the potential conflict on overboarding will need to be at the forefront of succession planning in 2025 to mitigate any concerns from the proxy advisors and institutional shareholders in 2026.