The reform project is still imperfect

Stock exchange trader in Frankfurt

Dax companies that have been unprofitable for several years in a row should be excluded from the index, says economist Volker Brühl.

(Photo: dpa)

The Wirecard scandal was a major trigger for the largest reform of the German stock index (Dax) since its introduction in 1988. The index was improved and adapted to international standards in several steps, the last one a year ago in September 2021. A year later, the question arises as to whether the reforms are sufficient.

In order to better reflect the German economy, the Dax was expanded from 30 to 40 values ​​as part of the reform. Although it accounts for a good three quarters of the stock market value of the companies listed on the Regulated Market of the Frankfurt Stock Exchange, the Dax 40 does not adequately reflect the German economic structure, which is strongly characterized by medium-sized companies.

Above all, the important mechanical and plant engineering sector and the automotive supply industry are underrepresented. An expansion of the Dax to 100 stocks should therefore be considered. Internationally, broad stock indices such as the US index S&P 500 or the British FTSE 100 are quite common.

After the reform, the only basis for inclusion in the Dax is the value of the freely tradable shares (free float). In addition, no single value may account for more than ten percent of the Dax. These measures have proven their worth.

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In order to improve the quality of the Dax, the criterion of profitability was introduced, according to which Dax candidates must have shown profits (before taxes and depreciation) in the last two annual financial statements. It would be desirable to make this criterion a subject of the regular Dax reviews and to exclude Dax companies that have been unprofitable for several years in a row from the index.

Dax companies should follow all recommendations of the Corporate Governance Code

The newly introduced admission criterion of minimum liquidity, according to which trading turnover in a company’s shares must reach a certain minimum level, should not only be used for the admission decision, but also for the Dax reviews.

The author

Volker Brühl is Professor of Finance and Managing Director at the Center for Financial Studies in Frankfurt am Main

(Photo: Private)

As early as March 2021, the reporting obligations for DAX companies were tightened in order to be able to sanction excessive delays in reporting through rapid exclusion. Even in the event of insolvency, it can now be ruled out more quickly. In addition, Dax members may no longer deviate from certain provisions of the German Corporate Governance Code that relate to the establishment of an audit committee in the supervisory board.

These changes are important consequences of the Wirecard scandal. However, one should expect from a Dax company that all other recommendations of the German Corporate Governance Code are also fulfilled.

Another criticism is that sustainability aspects play no role in the inclusion in the Dax.

More: One year Dax 40: Many bitter disappointments and no winner

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