February 7, 2003

Heike Ottemann, Allianz AG

Sarbanes-Oxley Act of 2002

Independence of Audit Committee Members and German Codetermination Law
in particular: executives ("leitende Angestellte")


The Securities and Exchange Commission suggested in its proposed rules relating to Section 301 of the Sarbanes Oxley Act of 2002 (Release No. 34-47137) an exemption from the independence requirement concerning non-management employees who are elected to the "board of directors" (= supervisory board) or audit committee of foreign issuers.

The question arose if "leitende Angestellte" are also covered by this proposed exemption. They have been claimed to have "management functions" or "executive roles".

Main Message

All employee representatives who are elected or named to the supervisory board of a German stock corporation should be exempted from the independence requirement. A "Leitender Angestellter" is not disqualified. He should be treated as other employees.

Facts and Arguments

  • The term "leitende Angestellte" derives from labor law. Based on German Works Council Constitution Act Leitende Angestellte are employees who have authority to employ or hire employees in their field of responsibility (e.g. their department) or whose activities do require specific knowledge and are not under "permanent supervision" but may decide with some discretion for their department. Some (but not all) Leitende Angestellte have title to sign for the company. They do not have policy making functions for the company as a whole. This right is reserved to the members of the Management Board. The term is hardly to be translated. While standard dictionnaries sometimes translate the terms as "officers" or "executives" under more precise analysis the term should be translated "superior employees".

  • Executive officers as defined in Exchange Act Rule 3b-7 are limited to persons who exercise a policy making function, which in other context has typically been limited to members of the Management Board.

  • According to § 15 section 2 sentence 2 of the German Codetermination Law it is mandatory that Leitende Angestellte are also among those that can be elected into the supervisory board. Therefore, as fundamental idea of the German Codetermination Law, the Leitende Angestellten must be represented at the supervisory board.

  • The German law draws a clear distinction between Leitende Angestellte and members of the management board.

  • Companies with several thousands of employees, like most of those German companies that are registered with the SEC, have several hundreds, if not even thousands of Leitende Angestellte. If those were disqualified for the audit committee, particularly educated and experienced employees were hindered to serve as a member of the audit committee.
  • Suggested solution:

    Clearify by express provision in final rules or in the release adopting final rules that the term "executive officer" as used in proposed Exchange Act Rule 10A-3 (b) (1)(iv)(C) has the same meaning as in Exchange Act Rule 3b-7.