Law, aspiration and reality in German supervisory boards
Deutsche Bank Chairman Paul Achleitner speaks at the 10th Frankfurt Supervisory Board Day
Ladies and Gentlemen,
Thank you for inviting me to speak to you today at the 10th Frankfurt Supervisory Board Day.
I gladly accepted, since - after more than 20 years as a supervisory board member at various DAX companies and, as someone calculated, more than 80 years of combined mandates - the topic is naturally very close to my heart.
You have asked me to shed light in particular on the role of supervisory board chairmen. I will therefore draw in particular on my experience as Chairman of the Supervisory Board of Deutsche Bank over the past 9 years. And here above all with regard to the sustainable professionalization of the Supervisory Board's work.
Sure, Deutsche Bank is a special case because a major international bank is regulated particularly closely. But much of what we have seen at Deutsche Bank over the past two decades we are now seeing at other companies:
- This starts with the number of meetings: whereas Deutsche Bank's supervisory board and its committees met 18 times in 2000, they met 63 times in 2020. At other companies I've worked for, there weren't quite as many - but the trend is always the same
- The number of Deutsche Bank supervisory board committees has also increased dramatically: at the turn of the millennium, there was only one regularly meeting Credit and Market Risk Committee and one Chairman's Committee, which was always convened on an ad hoc basis. Today, there are eight committees that meet regularly.
- And while a supervisory board meeting back then lasted on average around two and a half hours and there was hardly any extensive documentation, today it takes 10 hours - despite intensive preparation.
If we now look at the composition of the supervisory boards of German corporations, we see that they are also far more diverse: more women, more international shareholder representatives, more experts. The proportion of women on Dax supervisory boards on the shareholder side has, of course, also risen to around one third as a result of legal requirements. There has also been considerable progress in making boards more international. On the shareholder side, one in five supervisory board members is now from abroad. At Deutsche Bank, it is one in two.
There is no doubt: there has been a professionalization in the composition and the work - far more diverse teams do their job with far greater intensity. The difference is significant. I once jokingly said that meetings of German supervisory boards used to have something of a ritual rain dance about them. The supervisory board members believed that their activities actually had something to do with the result - that is, the success of the company. In fact, however, it was usually only about improving the dancing and not the weather.
However, not only has the work of supervisory boards improved, but the demands and expectations placed on supervisory boards have also increased considerably. And to such an extent that the question is justified as to whether supervisory boards can keep up with the increased demands and expectations at all, despite their greater commitment.
Where does this come from? At its core, this challenge stems from the fact that key stakeholders such as institutional investors, but also regulators, are predominantly shaped by the Anglo-Saxon one-tier governance system.
These stakeholders also make corresponding demands on German supervisory boards. The expectation on the supervisory board to answer questions as a representative of the shareholders' interests or, in regulatory terms, as the highest functional body, is constantly increasing. So-called "governance roadshows" are taken for granted. And the topics that are then addressed require a high degree of experience and steadfastness on the part of supervisory board chairmen today, so that they do not allow themselves to be drawn into issues that are a matter for the management board. The grey area of corporate strategy is a prominent example of this.
Regulators and supervisory authorities also have no tolerance when supervisory boards claim that their duty is only to review the company's control system. Instead, they expect detailed control measures, which German stock corporation law does not provide for at all. Incidentally, at least in the banking sector, individual members of the supervisory board are regularly summoned for discussions in addition to the chairman. And here it is of little help to refer to German corporate governance, because foreign supervisory authorities assign certain tasks to the ultimate control function, regardless of whether they are of an operational nature or not. And this ultimate control function in Germany is, after all, the supervisory board.
This discrepancy between the role as defined by German stock corporation law on the one hand and the demands and expectations on the other is also reflected in public opinion. The Anglo-Saxon world in particular is unfamiliar with the two-tier system of corporate management and supervision. And it is not only here that there is a tendency to overload the role of supervisory board chairmen. If things go badly, they are responsible for everything at some point. It hardly matters whether they can directly influence what is happening.
So much for the background.
I would now like to share with you seven personal observations on the role of the chairman of the supervisory board of a German company.
Observation number 1: Supervisory board chairmen manage the supervisory board - not the company
In the Anglo-Saxon system it is said: "The CEO runs the company, the Chair runs the board" - even if this division of responsibilities is then often cancelled out in the United States by the fact that both functions lie with the same person.
In contrast, our understanding of roles seems clear: the executive board is responsible for managing the company, while the supervisory board supervises and advises it. Operational responsibility lies with the management board, and supervision with the supervisory board. In addition, the supervisory board also has the task of appointing members of the management board, assessing their performance, remunerating them accordingly and approving important decisions, especially if these affect the company's equity.
This brings us to the often-discussed topic of corporate strategy: there is no doubt that under German law the management board is responsible for strategy development and that there is no formal requirement for the supervisory board to give its approval.
But how is a supervisory board supposed to assess the performance of a management board or - more importantly - approve any acquisitions if it does not support the underlying strategic course? If there is only one person in the plenum who does not agree - should he abstain, object or even resign? If there are several, do they all resign? If it is most, does the board resign? Since all of these options are unlikely to be in the interests of the company in most cases, any management board would be well advised to involve the supervisory board in the strategy considerations in an appropriate manner.
Traditionally, this meant the chairman of the supervisory board - but with increasingly expert boards, this will not be enough. In practice, this clearly shows how seriously the management board takes the supervisory board when it comes to expertise. Supervisory authorities as well as institutional investors expect supervisory board members to be able to provide information on strategy. That is why more and more companies are holding an annual strategy meeting for the supervisory board.
Observation number 2: The supervisory board must be a competent team
Not only in the area of "control", but also in the area of "advice", a supervisory board must have the necessary competencies to be taken seriously. It should be good governance for board members to seek advice from time to time from members of the supervisory board who have special experience or competencies. One of the primary duties of supervisory board chairmen and - if not identical - chairmen of the nomination committee is therefore to find persons who individually and collectively represent the entire range of competencies required to be able to adequately monitor the management board on the one hand, and to be accepted advisors on the other.
But that is not enough. Supervisory board chairmen must ensure that this competence is also brought to bear. In other words, there is also a need for division of labour and teamwork on the supervisory board. We are mostly familiar with this with regard to the audit committee, whose chairman should not be the chairman of the supervisory board, even according to German rules.
My personal experience is that committees are a very effective instrument for further professionalizing the work of the supervisory board. First of all, work can be done much more efficiently in smaller groups than in the plenary meetings, where usually far more than 30 people come together - in addition to the Supervisory Board, these are members of the Management Board, minute-takers, interpreters and possibly other speakers. In the committee, there is also more time for individual topics, and discussions can be more in-depth and sometimes more confidential.
After all, the chairmanship of a committee in particular involves the respective individuals much more intensively than the other members in the twenty-member overall body. At Deutsche Bank, the eight committees I mentioned are headed by six different chairmen, all of them very competent and strong leaders, half of them women. As a result, we have significantly enlarged the circle of people who are extremely committed and who contribute their special skills and ideas to the discussions with the management board. And the entire supervisory board benefits from this, as our work has more depth.
The prerequisite for this is that the chairmen of the supervisory board are prepared to relinquish power, share information at an early stage and delegate tasks. And that the feedback works, so that the information from the committees also flows back into the plenum as a whole. Today, being a good supervisory board chairman also means gaining the respect of colleagues through knowledge and social competence - and no longer through office, dominance and concentration of power.
Observation number 3: Diversity must be lived out
The issue of board diversity justifiably takes up a lot of space these days. One of the reasons why diversity is desirable is that a diverse team demonstrably makes better decisions. Different backgrounds, experiences and personalities prevent "group think" and allow for much more differentiated discussions.
Interestingly, German corporate governance with the Co-Determination Act has a kind of pioneering role here - after all, it automatically prevents an overly homogeneous supervisory board. However, in my opinion, a little more internationality would also be good for the employee side.
However, the best diversity is of no use to you if you do not succeed in giving the individual supervisory board members of the room to contribute. The committees already mentioned are certainly helpful for this, but they are not enough in themselves. The chairman of the supervisory board must succeed in creating a culture of discussion within the board as a whole, in which not only are the opinions of individual members accepted, but these can also influence decision-making. This requires early and open discussions
instead of just presenting yes / no decisions or inviting people to information sessions after the fact. If you're bringing together a group of high-calibre people who want to contribute to the company's success, don't reduce them to PowerPoint studies. Diversity without leveraging it is a source of counterproductive resentment.
And in my opinion, we should also get rid of the misconception in German supervisory boards that it is, in a sense, a defeat for the chairmen if decisions are not made unanimously. In my opinion, the strength of character to be able to disagree is also one of the selection criteria for supervisory board candidates.
And I might add one more thing: when putting together a diverse team, one should not forget that knowledge of the German corporate environment with all its peculiarities should also be an important part of the competence profile of a German supervisory board - if not for each individual, then at least collectively.
Observation number 4: Trust is essential
"Trust is good, control is better" may be an old adage, but it only applies to a limited extent to the cooperation between the chairman of the supervisory board and the chairman of the management board. The quality of the relationship between these two office holders is the most decisive criterion for effective corporate governance in our dual system. Of course, a proper understanding of roles initially requires room for critical distance. Supervisory board chairmen must not allow themselves to be taken over in such a way that they no longer fulfil their critical control function. Nevertheless, the basis of cooperation must be mutual trust. If this trust is permanently disturbed, a change of personnel is required.
Ideally, a CEO should be able to use the chairman of the supervisory board at least as a sounding board and sometimes also as a mentor in order to discuss many important individual considerations at an early stage. CEOs are often lonely because their environment always has a vested interest, especially in personnel and organisational matters. An experienced supervisory board chairman can help here without losing their decision-making authority.
These ideal conditions are not always given. This depends not only on the personal relationship between the two, but also on the situation of the company. In difficult times, this relationship will be shaped not only by substantive challenges, but also by formal and legal necessities. "You have to be able to handle a crisis" is true for supervisory board members as well as for CEOs. But it is precisely then that "trust is essential, control indispensable".
It should be mentioned only in passing that trust must of course also exist among the members of the supervisory board themselves. Discussions among each other must not only remain confidential, but also be characterised by mutual trust and respect. In my opinion, regular joint training measures can play just as important a role as an openly constructive approach to the often underestimated efficiency review of the supervisory board, which should actually be called an effectiveness review.
Observation number 5: Leading through questions
According to German understanding, the supervisory board as a whole and also the chairman can only give instructions to the management board in a few special situations. Nevertheless, as already discussed, it is seen by many stakeholders as the highest governing body of a company.
How can this be solved? I call it "leading through questions".
Questions posed to the management board by the supervisory board chairman, committee chairmen, but also individual members of the supervisory board often also have a suggestive effect. In any case, however, they lead to board members and the employees responsible dealing with the issue (once again) more thoroughly - and also from a different perspective. Questions often trigger corresponding dialogues: "How was that meant? Why do you ask?" Et cetera.
For this approach to work, trust between the parties is needed so that legions of legal scholars do not have to be called in for every answer. In addition, there needs to be a presumption of competence so that the management board does not dismiss the supervisory board's questions as a burdensome duty but sees them as an opportunity to work through individual issues once again.
In this context, it is also important how the respective agendas for the supervisory board meetings and committees are drawn up. In my opinion, the chairmen of the committees can and should play an active role here and not simply work through the topics compiled by the management board. In this context, as elsewhere, appropriate "togetherness" should be practiced.
It should be mentioned here that, at least at Deutsche Bank, each committee has a responsible member of the management board who maintains a close exchange with the respective committee chairmen. This also provides the opportunity to seek or give uncomplicated advice.
Observation number 6: People, people, people
The most banal management wisdom says: "it's all about people". As already noted, without a competent supervisory board, the best supervisory board chairman is of no use, and without a competent management board, even the best supervisory board is of no use.
The continuous search for suitable personnel is one of the core tasks of supervisory board chairmen in cooperation with the nomination committee. In this respect, high standards must be set for the selection and decision-making process. It is particularly challenging to maintain an ongoing overview of internal talents in order to include them in the management board succession planning in good time.
Here, the demarcation from the undisputed personnel responsibility of the management board is particularly delicate. On the one hand, the supervisory board must not send the wrong signals. On the other hand, the board would hardly do justice to its task if it were to restrict itself exclusively with the proposals of the chairman of the management board in important personnel decisions without being able to contribute its own opinions on management board candidates.
There can be advantages and disadvantages if the chairman of the supervisory board does not come from within the company itself. This means that there is far less detailed knowledge of individual junior staff - but he or she can perhaps be more unbiased.
In addition, other members can compensate for this deficit through the nominating committee. And here, too, committees in which employees from the second and third management levels also regularly present are helpful in getting to know these potential candidates better.
A special situation naturally arises when there is a change at the top of the supervisory board itself. Here, too, much has changed. The days are gone when the chairman of the management board moved to the top of the supervisory board as a matter of course.
This automatic promotion has been replaced by a professional process. This begins with the incumbent chairman of the supervisory board not selecting his successor, which is the job of the nomination committee. And at such a stage, this committee should not be chaired by the chairman of the supervisory board, but by a qualified member who is free of conflicts of interest. The chairperson of the nomination committee is, of course, supported by professional advisors. This is also part of a good search process, as is a detailed competence or requirements profile. Anything else would not be accepted by international investors.
Incidentally, this also means that you don't end the process when you have the feeling that you have found the first suitable candidate - and that the candidate has already indicated that he or she wants to take on the task. Because I can assure you of one thing: no candidate will be able to fully meet all the criteria. So it's a matter of finding the person who comes as close as possible to the target skillset - and that's an iterative process.
That's the theory. Any parallels to real companies or processes are of course purely coincidental.
Observation number 7: Lived experience counts
The German two-tier system is better than its reputation. Therefore, we should focus on improving the lived experience instead of demanding an adaptation to the Anglo-Saxon one-tier system or even the Swiss board of directors.
To achieve this, however, we will not be able to avoid legal improvements. One example of the need for action is the unrealistic requirement that all communication between the supervisory board and the management board should go through the chairman of the supervisory board and the chairman of the management board. Or the German ad hoc regulations, which are unique in the world and which, for example, force de facto live announcements before the formal decision in the case of important personnel decisions even at weekends - i.e. when markets are closed - and thus often prejudice the plenary session of the supervisory board.
And the ultimately highest body of an AG, the Annual General Meeting, could also be better integrated if we were to question our extensive practice of contesting resolutions. For example, it would be possible to limit it to core issues, following the example of Swiss case law.
Good governance in practice requires simple, realistic and needs-based rules and should not depend on the willingness of individuals to move in legal grey areas. But until this happens, those responsible must make the best of the existing system.
Ladies and gentlemen,
Today, I have tried to describe how a modern supervisory board should be set up and work, and what the relationship with the management board should look like. However, it should also have become clear that there is a need for reform. The law and reality are not in harmony.
As already indicated: I would not shake the cornerstones of the German corporate order with its two-tier system and co-determination. I consider both to be more of a blessing than a curse, and I find the deprecations of the German system misplaced. Yes, it's a bit formalistic and ponderous but the clearly defined responsibilities and the focus on committees rather than individuals are important advantages over the one-tier Anglo-Saxon system - especially in times of crisis.
Let's not fool ourselves: when something goes wrong, rifts between executives and non-executives quickly emerge, even in the Anglo-Saxon system. In reality, the one-tier system turns into a two-tier system during a crisis. This alone shows the justification and meaningfulness of the German model.
At the same time, I talked about what changes would be needed to make German supervisory boards work better. If I had to sum this up in three wishes, they would be these:
At the top of my list is to reduce the size of German supervisory boards. As already mentioned, the legal requirements for co-determined companies lead to a board size that makes meaningful discussions and quick decision-making processes difficult. Shifting parts of the work to committees may mitigate the problem, but it won't solve it.
Second, I would like to see German stock corporation law adapted to the practical requirements in companies. The unrealistic requirement that most communication between the supervisory board and the management board should only take place via the chairmen is just one obvious example. I would also like to emphasise once again that practicable and competitive ad hoc rules are needed and that the excessive possibilities for contesting German general meetings should be limited.
My third wish is not for politicians, but for companies: They should continue to invest in the professionalization of their supervisory boards. Since the turn of the millennium, we have undoubtedly made progress in appointing board members - we need to build on this in order to meet the increasingly high expectations of investors and regulators.
These are my wishes, which would not be so difficult to implement, but which would considerably improve the work of German supervisory boards. Because that's what I wanted to show you today: a lot has been done in terms of the quality of our supervisory bodies. But there is still some room for improvement.
And because this topic is so important, I would like to conclude with another wish:
Corporate governance must not be left to third parties.
I would like to put the onus not only on our legislators, but on all of us: while the German business community has already achieved a great deal with the Corporate Governance Commission since the first publication of our Code in 2002 until the last update in December 2019, we are increasingly seeing that the commitment from the German side is dwindling - at national, but also at international level. And this is not just a recent development.
I still remember very well how difficult it was to find a successor when I resigned from the Corporate Governance Commission in 2009. That shocked me even then. Ladies and gentlemen, I ask you: how can we complain that our corporate governance needs improvement if we don't take action ourselves? Instead of taking matters into our own hands, we leave it to third parties to improve our governance - even if it is by having international asset management firms tell us what good corporate governance should be.
Effective corporate governance and thus effective supervisory board work, ladies and gentlemen, can only work if we are committed to it and live it - every day and not just in times of crisis. It is in the good times that we need to lay the foundation for having resilient and well-managed companies when things turn bad. Or, to end on a positive note, that they remain competitive and future-oriented.
Conferences like this can be an important forum for the exchange of thoughts and ideas. That is why I am particularly grateful for the opportunity to speak here today.