CORPORATE GOVERNANCE REPORT
Corporate Governance Report FY 2010/2011
Compliance with the rules of good corporate governance is of great importance to Kabel Deutschland. Our Company sees this as an important component of good corporate governance and the foundation for the company’s success.
Declaration of compliance in accordance with Section 161 German Stock Corporation Act (AktG)
Under section 161 of the German Stock Corporation Act (AktG), the Management Board and Supervisory Board of a listed stock corporation are required to declare every year that the Company has complied and is complying with the recommendations of the "Government Commission for the German Corporate Governance Code", as published in the official part of the electronic Federal Ga-zette (“elektronischer Bundesanzeiger”) by the Federal Ministry of Justice (the “Code”), or, alterna-tively, are to declare which recommendations the company has not followed or does not follow and why not. The declaration shall be published permanently on the company’s web page.
For the period of up to July 2, 2010, the following declaration refers to the version of the Code of June 18, 2009, published on August 5, 2009. For the subsequent and future corporate governance practice of Kabel Deutschland Holding AG, the following declaration refers to the Code as amended on May 26, 2010 and published on July 2, 2010.
The Management Board and the Supervisory Board in May 2011 filed a declaration pursuant to section 161 German Stock Corporation Act (AktG) that Kabel Deutschland Holding AG since the last declaration of compliance on May 19, 2010 has complied and will continue to comply with the recommendations of the Government Commission German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette (“elektronischer Bundesanzeiger”) with the following exceptions:
- Deviating from the recommendation in section 3.8 of the Code, the members of the Supervi-sory Board are covered by a directors’ and officers liability insurance policy that does not in-clude the deductible recommended in section 3.8 of the Code. The directors’ and officers li-ability insurance policy is actually a group insurance policy for a large number of individuals in Germany and abroad. Internationally, a deductible is unusual.
- Diversity is taken into account when executive positions are filled within the Company. How-ever, the focus is on the expert qualifications offered by – female and male – candidates (de-viation from section 4.1.5 of the Code).
- At the beginning of the fiscal year 2010/2011, the compensation of the members of the Man-agement Board did not comply with the recommendation laid down in section 4.2.3 of the Code. The Management Board remuneration system of Kabel Deutschland Holding AG was revised in the fiscal year 2010/2011, following the IPO in March 2010. For a transitional pe-riod, the members of the Management Board received their remuneration from Kabel Deutsch-land GmbH, which was compensated for paying the remuneration of the Management Board of Kabel Deutschland Holding AG via intercompany clearing. On May 19, 2010, the Supervisory Board of the Company passed a resolution on a new remuneration structure that meets all requirements of section 87 of the German Stock Corporation Act and of the German Corpo-rate Governance Code and was implemented on the basis of new management service agreements concluded with the members of the Management Board. Please refer to the Compensation Report for further details.
- The General Assembly exercised the option laid down in section 4.2.4 of the Code to deviate by virtue of a shareholder resolution from the individualized disclosure of the remuneration and promises made or amended in the fiscal year for the early or regular termination of the contract of a Management Board membr.
- According to section 5.1.2 of the Code the Supervisory Board shall, together with the Man-agement Board, ensure that there is a long-term succession planning. In addition, an age limit for members of the Management Board shall be specified. These items have not been imple-mented yet following the conversion into a stock corporation and the IPO. The Supervisory Board and the Management Board are going to address these issues in the future.
- Pursuant to section 5.4.1 paragraphs 2 and 3 of the Code, the Supervisory Board shall specify concrete objectives regarding its composition and take these into account in its recommenda-tions. The objectives of the Supervisory Board and the status of implementation shall be pub-lished in the Corporate Governance Report. These recommendations are deviated from. The composition of the Supervisory Board of Kabel Deutschland Holding AG is oriented toward the Company's interest and has to ensure the effective monitoring and counseling of the Man-agement Board. As far as the composition of the Supervisory Board is concerned, great im-portance is therefore attached to the knowledge, capabilities and expert experience required from the individual Board members in order to complete their tasks properly. In addition to these selection criteria, we regard the aspects mentioned in section 5.4.1 paragraph 2 of the Code as being worthwhile to be taken into account, and the Supervisory Board will do so at the time when recommendations are made, taking into consideration the respective company-specific situation. Specific objectives relating to the composition of the Supervisory Board are currently not defined. Accordingly, there is no publication of any such objectives.
- Deviating from the recommendation in section 5.4.6 of the Code, the members of the Supervi-sory Board receive a fixed remuneration only. Kabel Deutschland Holding AG considers such fixed remuneration more suitable to secure in all respects the independent exercise of the Su-pervisory Board members’ controlling function.
- Furthermore, the Code recommends in section 5.4.6 paragraph 3 subpara 1 that the compen-sation of the members of the Supervisory Board shall be reported individually in the Corporate Governance Report, subdivided according to components. As the remuneration paid to the Supervisory Board is regulated by the rules of procedure, we do not consider an individualized disclosure to be necessary.
- Deviating from section 5.6 of the Code, the Supervisory Board, which in its current configura-tion has only existed since May 2010, has not examined the efficiency of its activities yet but will do so in the fiscal year 2011/2012.
- Deviating from the recommendation in section 7.1.2 of the Code, Kabel Deutschland Holding AG will not publish its preliminary reports within 45 days after the end of the respective report-ing period. The efforts required to be in compliance with such time limit do not result in a noteworthy increase in transparency.
Here is the wording of this declaration of compliance as well as the declaration from last year that is no longer applicable.
Transparency through communication
Transparency is an essential element of good corporate governance. Consequently Kabel Deutschland uses almost all available channels of communication to inform shareholders, prospective investors, and interested members of the public of the development of the Company's business and any special events or affairs on a regular basis. In particular the Company's website, www.kabeldeutschland.com, provides interested members of the public with a variety of information about the development of the Company's business in the past as well as prospects for the future. The Company’s key dates are published in a financial calendar on its homepage. We also give members of the public an opportunity to register and receive corporate news in the form of an online newsletter. All press releases, investor relations communications and the financial reports (in English and German) may be viewed online. Our Investor Relations team is in regular contact with the capital market partici-pants. When the quarterly reports are published, we hold telephone conference calls to inform inves-tors and analysts about the development of the Company’s business. Once a year we hold a Capital Markets Day. We also take part in regular roadshows and investor conferences. The comprehensive information offered to the public is complemented by pertinent press releases, regular interviews with analysts, and informational events.
Effective compliance to secure corporate governance
Creation of an effective compliance system is an indispensable tool for good corporate gov-ernance, in order to guarantee compliance with applicable laws and with corporate policies and val-ues. Compliance is a matter of top priority for Kabel Deutschland Holding AG, and is an essential part of the Management Board's managerial responsibilities.
Several years ago, Kabel Deutschland had already adopted a corporate Code of Conduct re-quiring all employees to abide by high legal and ethical standards.
Management staff of the Company likewise have agreed to follow the Code of Ethics and all ethical standards adopted by the Company.
To implement, manage and continue to develop the company-wide corporate compliance pro-gram at Kabel Deutschland, the Company appointed a Compliance Manager in fiscal year 2009/2010 already, who is primarily responsible for the main compliance tasks. The Compliance Manager informs employees on a regular basis of training sessions on relevant laws and corporate policies. The com-pliance management department is also available to answer and provide advice on specific compli-ance-related questions from employees and management staff.
The main tasks addressed in fiscal year 2010/2011 included the registering and evaluation of compliance risks, updating the compliance strategy, establishing and checking the material and legal situation in respect of notifications it received and reviewing the training concepts. At the compliance training sessions, the main focus is on those areas with potentially the greatest compliance risks. In other areas, compliance know-how is passed on by management staff to their employees through "train the trainer" measures. The training sessions attended by staff in person will in future be supple-mented by a Group-wide interactive online learning program. Each member of staff is trained to take an active part in implementing the compliance program in their area of responsibility.
A compliance policy is being developed as part of compliance management. In addition, the Company is taking far-reaching preventative measures to ensure compliance with capital market and anti-corruption laws. The Company plans to complement the compliance policy through various events raising awareness of compliance issues, as well as with informational publications, in order to explain the laws involved in more detail and to provide examples that will be clear to all employees.
More than three years ago, Kabel Deutschland introduced a so-called whistle blowing program as part of the development of its anti-fraud management. In order to enable employees to report mate-rial compliance violations, openly or anonymously, an independent accounting firm has been retained to serve as an ombudsman for this program. An external firm of accountants has been appointed with this task. The ombudsman can generally be reached at any time and at no charge. In addition, the Compliance Manager is available to any employees of the Group who wish to report potential viola-tions of applicable laws or policies.
Insider trading laws will shortly be supplemented by an insider trading policy giving information on the law applicable to, and the procedures for, the monitoring of insider trading. Individuals who must have access to insider information in order to perform their duties and responsibilities at Kabel Deutschland will be included in an insider register.
Adequate Control and Risk Management System
Risk Management The risk management system is an integral component of all processes of Kabel Deutschland Holding AG. It is designed to assist in identifying unplanned developments early so they can be ac-tively controlled by management.
Our risk environment can change quickly and unexpectedly as a result of various events and influences. It is therefore necessary to be able to use the tools implemented to react quickly to try to ensure that no situation can cause substantial damage to continued existence or have long-term im-pact on assets, financial position and earnings.
In general, the operating units are responsible for decisions relating to the identification and the taking of risks. Therefore, all managers perform an additional task as risk managers. The system is supplemented by the central risk management unit which carries out risk controlling. The separation of functions is thus ensured.
Risk controlling has process responsibility and produces the quarterly reports for the Man-agement Board who, in turn, inform the Supervisory Board. These enable detailed assessment and full transparency of the risk situation. In addition to the regular standard reporting, immediate reporting is put in place if the early warning system shows a certain risk measure to exceed a critical value or if special circumstances demand investigations. Furthermore, risk controlling is responsible for the con-tinuous development of the risk management system and for setting Group-wide standards. Risks which overlap departments are also monitored here.
Identified risks are closely monitored as part of the Group’s risk management system so that countermeasures can be implemented if and when necessary.
Internal Control System The Company uses an internal control system to ensure correct accounting. This guarantees prompt, standardized, correct and complete accounting and processing of business processes and transactions as well as the adherence to legal standards. Changes to accounting regulations are con-tinually checked for relevance to, and effects upon, the financial reports of the Company and, where necessary, the internal policies and systems are amended accordingly. The organization of the inter-nal control system includes organizational and technical measures e.g. agreement processes, auto-matic plausibility checks, separation of functions as well as the adherence to policies and regulations.
The internal control system is based on the COSO framework (Committee of the Sponsoring Organisations of the Treadway Commission) and the COBIT framework (Control Objectives for Infor-mation and Related Technology). All control-relevant business processes at Kabel Deutschland are part of a transparent central IT system. In addition, regular checks are made on those responsible for controls and processes.
Furthermore, the Internal Audit department is an important organ within the Kabel Deutsch-land control system. As part of its risk-oriented audits it also examines, among others, accounting-relevant processes and reports its findings.
Compensation of Management Board and Supervisory Board
Under Section 4.2.4 of the German Corporate Governance Code, the total compensation paid to each individual member of the Management Board, including any settlement payable in the event of termination as a member of the Management Board, need not be disclosed, if non-disclosure is re-solved by a three-quarter majority of the Shareholders' Meeting. The Shareholders' Meeting of Kabel Deutschland Holding AG has exercised this option. The total compensation paid to each individual member of the Management Board is therefore not disclosed. The compensation of the Supervisory Board was determined by the Shareholders' Meeting and is governed by Article 12 of the Articles of Association of Kabel Deutschland Holding AG.
The basic components for the compensation of members of the Management Board and Su-pervisory Board are presented extensively in the Compensation Report. It forms part of the Corporate Governance Report.
Directors' dealings, shareholdings of members of the Management Board and Supervisory Board
Under Section 15a German Securities Trading Act (WpHG) any individuals performing mana-gerial responsibilities at Kabel Deutschland, as well as any close associates of such individuals, are required to report within five business days any transactions involving stock of Kabel Deutschland or any derivative financial instruments based on stock of Kabel Deutschland.
In fiscal year 2010/2011, the following transactions were reported to the Company:
Beyond this legal reporting obligation Section 6.6 of the Code provides that the ownership of shares in the company or related financial instruments by Management Board and Supervisory Board members shall be reported if these directly or indirectly exceed 1% of the shares issued by the com-pany. Collectively, all members of the Supervisory Board and the Management Board of Kabel Deutschland Holding AG directly or indirectly hold less than 1% of the shares of the Company. The foregoing information is valid as of the cut-off date of 31 March 2011.
Stock option plans; securities-based incentive systems
Effective from fiscal year 2010/2011 onwards a new compensation structure for the Management Board of Kabel Deutschland Holding AG was introduced, which includes a new long-term, success-oriented variable part of the compensation comprising virtual performance shares and a one-time grant of virtual stock options. For details see the Compensation Report.