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back to index backEUROtalk April,  2005

Corporate Governance: Why Germany's supervisory boards need reforming

Traditionally, supervisory board members consider themselves supervisors of corporate systems rather than overseers of corporate operations. Ninety percent or more of the responsibility for the company's success or failure is felt to lie with the Executive Board. When times get tough, however, mere oversight is not enough, and more and more supervisory board members are coming to consider a meticulous examination of corporate strategy part of their obligatory remit.

Co-determination ties the hands of supervisory boards
The case of the German retailer Karstadt, where the signs of crisis were ignored for years on end, can serve as a useful example for the German business sector. At many companies there is far too much emphasis on harmony within the supervisory board; everyone hastens to do their duty in line with good co-determination practice, and consensus between employer and employee representatives is pursued at all costs. What, one could ask, were the employee representatives at Karstadt doing before the crisis became acute? Why didn't they ask the Executive Board the right questions and insist on getting convincing and doubtless uncomfortable answers?

I am a keen supporter of employee participation in the operational sector. When there is something to be restructured, intensive employee involvement makes sense. But on a supervisory board, equal co-determination is entirely out of place. On the employee side we regularly witness an unhappy mingling of interests of the representatives and those they represent, with negative consequences for the entire system.

Reforming co-determination would be a half-hearted measure. It should be abandoned. I recommend switching to the Swiss model where an active supervisory body, the Verwaltungsrat, oversees the activities of listed companies – a body on which employees are not represented. Another acceptable model was put forward by the Berlin Center of Corporate Governance, which proposed a separate Consultation Council for corporate issues affecting employees.

Professional supervisory board composition
But this change of system is only the first step. Equally important is that the composition of the supervisory board should be placed in professional hands – and the proportion of German companies which currently engage in professional searches for supervisory board members is still very small indeed. All-too-often, seats on the supervisory board are allocated in line with considerations such as who-do-we-know?” and who-could-prove-useful?” Nine out of ten German supervisory board members are qualified, respectable figures but more generalists than specialists. This contrasts with the divergent work profile of the modern supervisory board which is handled to an increasing degree by specialist committees. What is needed here is a differentiated team with complementary expertise and mind-sets.

Any professional search, however, is predicated upon prior rational consideration of such questions as: Where are our weaknesses? What are our future needs? And, consequently, who do we need? The fact that these questions are seldom asked is no doubt attributable in part to the traditional lack of serious self-appraisal among German supervisory boards. In this country there is no established tradition of effective and objective appraisal of the work of the overseers, or in other words, no tradition of governance evaluation. Of course, any corporate body which is doing its job properly will question the need for appraisal. But who is to say whether or not that body really is doing its job properly? That is why we need objective, transparent minimum standards for the appointment and appraisal of supervisory board members; standards which everyone can and must apply as benchmarks for their performance.

Source: Egon Zehnder International - GAI

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Corporate Governance: Why Germany's supervisory boards need reforming
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