WHAT IS THE RIGHT ROLE FOR YOUR SUPERVISORY BOARD? By Ulrich Pidun, Alexander Roos, and Sebastian Stange
he demands on supervisory boards their work in a number of very differ- Tare increasing.1 The COVID-19 ent ways. There is no single recipe for pandemic is just another item on the list success. of complex challenges that companies are facing, such as digital transformation, So, what role should the supervisory board climate change, protectionism, and play? Which board activities create the activist investors. Therefore, many most value? Which areas should the super- supervisory boards want to go beyond visory board prioritize? Where does it get monitoring—they want to actively shape more deeply involved and where does it change and adapt their role to the new give management plenty of rope? How circumstances. exactly should the board’s work be struc- tured? And which factors affect these At the same time, supervisory boards con- decisions? front a growing number of legal require- ments and best practices. It is more and To answer these questions, we statistically more difficult to meet these within the analyzed data from our survey of 120 time available. Supervisory boards there- German and Austrian supervisory boards. fore need to rethink their role in order to In practice, supervisory boards in two- focus on the right and most important tiered governance systems can choose tasks. from four roles, which differ greatly in their focus of activity: HR centric, strategic, Unfortunately, stock corporation law monitoring, and supporting. Each of the and Corporate Governance Codices offer four can be successful, but the role needs only minimum standards and thus pro- to be appropriate for the company’s indi- vide little guidance. Our discussions with vidual situation, and the supervisory successful supervisory board members board’s work needs to be tailored specifi- show that these boards can structure cally to the role. The Activities of the Supervisory involvement in strategic direction, 28% on Board Are Shifting advising in key business decisions, and Supervisory board work comprises 12 25% on monitoring strategy. They also activities in the areas of monitoring, want to put more focus on appointing the shaping, and advising. (See Exhibit 1.) executive board (26%) and monitoring Almost all supervisory boards that we risk (27%). surveyed focus their efforts—beyond the legal requirements—on monitoring. More than 90% concentrate strongly on Supervisory Boards Can Take monitoring strategy and risk as well as on Four Different Roles assessing progress toward financial targets. In addition to these general observations Given that this ex post monitoring is not and trends, our survey showed clear sufficient, supervisory boards also play a and systematic differences between strong role in shaping a company’s supervisory boards. This became apparent strategic direction and are particularly in our discussions with successful involved in transactions that require supervisory board chairs, who are all approval. convinced that their own unique way of leading the board is optimal. Using a In times of great change, as we are now cluster analysis of our extensive survey experiencing, it is not surprising that data (see “Methodology” at the end of the strategic tasks are becoming increasingly article for details), we identified four board important. Of the boards in our survey, roles: HR centric, strategic, monitoring, and 35% want to place greater emphasis on supporting.
Exhibit 1 | The 12 Activities of German Supervisory Boards
Acti ities escri tion
Strategic monitoring onitoring ar et de elo ents and co etiti e osition rac ing the success o strategic initiati es
inancial monitoring Defining the audit process and approving financial accounts Tracking investments and financial measures
Risk monitoring onitoring the ris anage ent syste iscussing a or ris s and necessary easures onitoring
aluation o the executi e board Assessing target achie e ent, co etency, and integrity Defining management compensation
A ointments to the executi e board eciding on the a oint ent or dis issal o executi e board e bers Planning succession, ro oting young talent
Target setting or the executi e board Agreeing on targets ith the executi e board Defining the incentive and compensation system
Partici ating in decisions on ti e ra es, assu tions, and success etrics Sha ing n ol ement in strategic direction A ro ing the o erall strategy
ecisions on transactions re uiring a ro al Defining the approval requirements A ro ing the budget, in est ents, A, ca ital easures, and di idends
Ad ice on ke business decisions iscussing alternati es Contributing experience and knowledge, questioning assumptions
Pro ision o rele ant ex ertise Providing specific content expertise Su orting the i le entation o articularly rele ant issues
oaching o the executi e board Pro oting the ersonal de elo ent o executi e board e bers
Ad ising Acting as ersonal s arring artners and ad isors
Offering support with their professional network Re erring rele ant contacts iscussing select to ics ith third arties
Sources: Discussions with German supervisory board members; BCG analysis.
Boston Consulting Group | What Is the Right Role for Your Supervisory Board? 2 The four roles differ significantly in their To discuss HR topics, the employers’ side areas of focus. (See Exhibit 2.) Of all of HR-centric supervisory boards prealigns supervisory board members surveyed, 2.5 times more often than average before about a quarter have an HR-centric the full meeting. Naturally, HR-centric emphasis, a third play a strategic role, 40% boards also attach great importance to focus on monitoring activities, and one in good HR information. Supervisory board ten are assigned to a supporting role. As chairs tend to view themselves as the su- shown in the following descriptions, pervisor of management. This is reflected supervisory boards make design choices in in the setup of the board: the focus is on terms of structure, instruments, as well as formal, legally required activities, while working methods and culture, that are their industry expertise is below average. consistent with their role. (See Exhibit 3; an overview of the different design Strategic Supervisory Boards. A major dimensions can be found in Challenges of focus of these boards is to help shape the Supervisory Boards.) direction of the company by being actively involved in entrepreneurial decisions. HR-Centric Supervisory Boards. These These boards prioritize such strategic supervisory boards consider their core activities 8% more than the average. tasks to be appointing the executive “Strategy discussions should not be under- board members, setting their targets, and stood as control but as advisory,” explains evaluating them accordingly. HR-centric a supervisory board chair. Nevertheless, boards are 15% more involved in these these boards are also very active in strate- areas than the average. As the supervisory gic monitoring. They are more reticent board chair of a German blue-chip compa- about personnel activities, however. ny tells us: “The most important value lever of the supervisory board is choosing Successful strategic supervisory boards the management team. Supervisory boards have 6% higher competence scores and that have to get deeply involved in the 10% better information on strategically business have obviously done something relevant topics than the average. In order wrong.” to give the necessary attention to these
Exhibit 2 | The Four Roles Focus on Different Activities
R centric Strategic onitoring Su orting Acti ities o the su er isory board ocus relative to average
ppointments to the e ecutive board
Target setting for the e ecutive board
Evaluation of the e ecutive board
nvolvement in strategic direction
Strategic monitoring
dvice on ey business decisions
Decisions on transactions re uiring approval
inancial monitoring
Ris monitoring
rovision of relevant e pertise
Offering support with their professional network
Coaching of the e ecutive board
Monitoring Shaping dvising
Source: BCG Supervisory Board Study.
Boston Consulting Group | What Is the Right Role for Your Supervisory Board? 3 Exhibit 3 | The Roles Involve Very Different Design Choices
R TR STRAT
More information More regular More operational More restrictions More More special topics on HR topics reports topics on the agenda of board membership committees on the agenda
Design choices relative to the average T R SUPP RT
More meetings without More ris and More use of Higher More discussions Open trusting the e ecutive board compliance topics e ternal information competencies to reach decisions and constructive ways of wor ing
Source: BCG Supervisory Board Study.
complex issues, this type of supervisory emphasizes the supervisory board chair of board relies more heavily on committees, a large, global conglomerate. by having on average one additional sub- committee and ensuring that all members The chair of the supervisory board is actively participate in them. Special topics accordingly perceived as a controller of are frequently on the agenda. The chair of management. Successful boards with a the supervisory board is perceived primar- monitoring focus meet about 50% more ily as a sparring partner for management often without the participation of manage- and ensures constructive cooperation be- ment and rely more on external, indepen- tween the supervisory board and the exec- dent sources of information, such as utive board. Usually, management takes talking to customers, auditors, and consult- part in all supervisory board meetings. In ing firms. Their agenda addresses risk and more than 90% of cases, strategy-focused compliance questions 22% more frequently supervisory boards set the agenda togeth- and in comparatively formal formats such er with management—in other roles, this as regular reports and protocols. Strategic is about a third less common. tasks are left to management.
We found one key feature of strategic Supporting Supervisory Boards. These boards particularly striking: they pay close boards act as a driver and coach for attention to adapting their competence management. Providing technical expertise profile to emerging requirements. Half of and offering support with their own them limit board members’ term in office; business network are clearly above average only one in five of the other supervisory and of high relevance. Supporting supervi- boards place similar restrictions. sory boards are particularly common in family businesses and startups. “Control is Monitoring Supervisory Boards. The a must, but the key value add of the majority of our survey respondents follow supervisory board lies in coaching,” is how the classic role of the monitoring supervi- a supervisory board member at a success- sory board. These boards attach great ful family business describes his under- importance to risk monitoring and show standing of the role. He says he is leading above-average involvement in tracking the management of the fast-growing global financial targets. “Distance from manage- market leader toward higher ambitions ment is essential for effective control,” and constant professionalization. He also
Boston Consulting Group | What Is the Right Role for Your Supervisory Board? 4 represents a counterweight to the owner’s study, we define successful boards as those family. “This is also expected of me,” he that effectively add value to the company says. Similarly, a supervisory board mem- and that are satisfied with their work. ber of an up-and-coming startup sees the (See “Methodology” at the end of the board in the role of “copilot” and stresses text.) the importance of “arriving at good deci- sions by consensus.” Nevertheless, certain roles are more suc- cessful than others. About two-thirds of Successful supporting supervisory board the HR-centric supervisory boards are suc- members have a particularly high and cessful; of the supporting ones, about half broad spectrum of expertise—especially are successful. In the case of strategic on current topics such as market trends, boards, the figure is only 38%, and it’s just digitization, and sustainability. At the com- 25% for supervisory boards with a moni- panies surveyed, the level of competence toring function. of these supervisory board members is almost 10% above average. They actively This does not mean that the HR-centric su- obtain information from external sources, pervisory board is the best model in every exchange knowledge among themselves, situation, however. Our analysis shows that and allow more time for intensive discus- different company situations require differ- sions on the agenda. The supervisory ent roles. The main determinants for decid- board chair acts as a driver and is pushy in ing on the optimal role are company size, a positive sense. Important elements of company situation (financial situation and this model are a particularly good, open, market disruption), and the experience of and trusting working culture in coopera- management. (See Exhibit 4.) tion with management. Company Size. The optimal role for a value-creating supervisory board depends The Right Role Depends on the on the size of the company. In large compa- Company Situation nies with annual sales of more than €10 bil- Which supervisory board role is most suc- lion, monitoring supervisory boards are cessful? In principle, all four roles can be, particularly successful. Although they are as our survey shows. All roles are repre- also common in midsize companies with sented among outstanding boards. In the sales of €1 billion to €10 billion (44% follow
Exhibit 4 | Different Situations Require Different Roles
o any situation R centric Strategic onitoring Su orting
billion Si e re enue billion
Stressed inancial situation Relaxed
Short ter ar et disru tion ong ter
years enure o the years
ess success ul No influence ore success ul
Source: BCG Supervisory Board Study.
Boston Consulting Group | What Is the Right Role for Your Supervisory Board? 5 the monitoring role), HR-centric boards sets clear targets, and then places trust in work best here. the newly appointed executive. Superviso- ry boards that allow the new CEO a high Supporting supervisory boards, however, are degree of freedom are more likely to effective only in smaller companies with a create value. Strategic and supporting turnover of less than €5 billion. One reason supervisory boards, which interfere more could be that in larger organizations, all the with the responsibilities of management, relevant competencies must be available are less effective. within the company itself—the supervisory board can therefore retreat to a less active CEOs with longer terms of office generally role—while in smaller companies, the com- know the company well, and cooperation petencies and experience of supervisory with the supervisory board is well estab- boards can be particularly helpful. lished. Nevertheless, they can benefit especially from supporting supervisory Company Situation. When the company’s boards—for example, through selective financial situation is under stress and there coaching. These boards can also provide are performance problems, monitoring important impetus for startups with less supervisory boards are especially effective. experienced management, especially if the If the company is exposed to major risks, board members have an extensive network however, control alone is often not enough. of contacts as well as relevant expertise. Here, a strategy-focused supervisory board can assist in setting the right course. A strategy-focused role is also appropriate Supervisory Boards Should when it comes to helping shape the compa- Proactively Discuss the Right ny’s response to short-term disruption in Role its market and solving problems in collabo- A clear definition of the supervisory ration with management. board’s role is by far the most statistically significant success factor. It increases the If the disruptions are of a long-term nature, probability of the board being outstanding it is more important to select a suitable by a factor of 7.2. Our analysis has shown management team with relevant experi- that successful supervisory boards can ence and set appropriate goals. Therefore, assume different roles. The supervisory in such situations, HR-centric supervisory board chair should moderate a structured boards are more successful than average. discussion so that the board consciously chooses its role. The work should then be In the case of positive business develop- structured accordingly—for example, ments, the supervisory board can grant decisions should be made regarding the management greater freedom. Here, an required competencies of the board, the HR-centric role contributes particularly frequency of meetings, and the number of often to the success of the company, too. committees. The board formulates goals for manage- ment and keeps them on track—but the The supervisory board can create value definition of the strategy and its execution only if the board’s role fits the situation of remain completely in the hands of the the company. Personal preferences of the management team. supervisory board members and experi- ence in other companies should be critical- Tenure of the CEO. The length of time in ly examined as arguments for choosing the the position and thus the experience of right role. Major changes in the company’s the CEO also have a major influence on situation may make it necessary to adjust the success of a particular supervisory the role. Therefore, a regular review of the board role. For new CEOs with a tenure of role and its design is recommended. less than two years, the support of an HR-centric supervisory board is helpful. The deliberate choice of the role of a su- The supervisory board selects the CEO, pervisory board lays the foundation for the
Boston Consulting Group | What Is the Right Role for Your Supervisory Board? 6 METHODOLOGY
This study is based on the largest survey More BCG reports in this series: of supervisory boards in Germany and Austria to date. A total of 120 superviso- •• Learning from the Best Supervisory ry board members took part in the Boards’ Recipes for Success by Board survey. We applied different statistical Chairs of German DAX Companies methods to identify the importance and summarizes the different perspec- the success criteria of the role of these tives of supervisory board chairs of boards. large German companies.
Success is measured on the basis of the •• Challenges of Supervisory Boards— respondents’ view on effectiveness and Results of the BCG Supervisory Board satisfaction with their work. Supervisory Survey provides a systematic overview boards with a success measure above and statistical analysis of survey data. the median were classified as “success- ful.” We used a factor analysis to •• From Monitoring to Actively Shaping: determine the correlation between the How Supervisory Boards Must Evolve various supervisory board activities and describes the current status of aggregated them into activity focus supervisory board work and outlines areas. Using a cluster analysis, we challenges and possible solutions. calculated the activity profiles of the boards and assigned them to the •• What Successful Supervisory Boards respective activity areas; this resulted Do Differently offers a statistically in the four supervisory board roles based analysis of the success factors described above. of supervisory board work.
successful and value-creating work of the Note board. The results of our study provide 1. The insights from this report apply mainly to two-tiered governance systems where the non- some thought-provoking insights and the executive supervisory board is clearly separated from opportunity to make this important deci- the executive board. sion in a structured way and on the basis of the right arguments.
About the Authors Ulrich Pidun is a partner and director in the Frankfurt office of Boston Consulting Group and a global expert in corporate strategy and corporate governance. You may contact him by email at [email protected].
Alexander Roos is a managing director and senior partner in the firm’s Berlin office. He is an expert in corporate strategy and heads the German Corporate Governance practice. You may contact him by email at [email protected].
Sebastian Stange is a partner and associate director in BCG’s Munich office and a global expert in cor- porate strategy and corporate governance. You may contact him by email at [email protected].
Acknowledgments We would like to thank all our discussion partners and the participants in our survey for their time and effort. Special recognition goes to Philipp Ego from BCG’s ValueScience Center as well as Prof. Dr. Michael Wolff from the Georg-August-University of Göttingen, who made a significant contribution to this study series—thank you very much!
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