The German Supervisory Board

The German Supervisory Board: A Practical Introduction for US Public Company Directors The German Supervisory Board: | A Practical Introduction for US Public Company Directors The German Supervisory Board: | A Practical Introduction for US Public Company Directors Contents Foreword Foreword 03 As the world’s economy globalizes, there is often an expectation that business practices will Executive Summary 04 harmonize along with it. This is an expectation The German Supervisory Board: Characteristics and Context 05 that we will see a kind of convergence of corporate The German Supervisory Board in Action: Regular Order, M&A, Crisis 14 governance forms and practices, where boards the world over resemble each other, perhaps Conclusion 15 with a large majority of independent directors, an Endnotes 17 audit committee, a separate chair and CEO, and so on. A lot of this reflects a certain familiarity Claus Buhleier with the Anglo-Saxon board model among Partner, Center for Corporate institutional investors in London and New York. Governance Deloitte Germany [email protected] The reality, however, is quite different. Despite real advances in globalization in other areas, differences in what boards look like and how they work in practice persist across countries. This publication brings to light the differences between the predominant Anglo Saxon, one-tier corporate governance model on the one hand, and the still influential Germanic two-tier-model on the other. The authors, Yvonne Schlaeppi and Michael Marquardt, both experienced corporate directors Kai Bruehl who have served on European company boards, Director, Risk Advisory Deloitte highlight the main characteristics of the German Germany [email protected] supervisory board model and how it demands accountability from its members, despite looking rather different than the combined board model. 02 03 The German Supervisory Board: | A Practical Introduction for US Public Company Directors The German Supervisory Board: | A Practical Introduction for US Public Company Directors The German Supervisory Board: Executive Summary Characteristics and Context This two-part article is a primer for US In the second part of this article, light is cast In sum, although at first blush the powers The Dual Board Structure Today Historical Evolution In 1976, Germany’s federal parliament public company directors on the German on the characteristics of the German AG's and authorities set out by the respective German corporate law and its corporate The roots of Germany’s two-tier corporate (Bundestag) passed the Co-Determination two-tier corporate governance model of Supervisory Board—e.g., during a M&A corporate laws seem to be similar (at governance code mandate a two-tier governance model date back to the middle Act, the “Mitbestimmungsgesetz” German publicly traded companies which transaction, a crisis and regular order— its most basic, the Supervisory Board board structure (Supervisory Board and of the 19th century, starting with the first (MitbestG). Although separate from are incorporated as Aktiengesellschaften again by way of contrast to the familiar supervising or controlling management Management Board) for the AG. There are Stock Corporation Act (AktG) in 1843. the country’s Company Act for Public (or “AG’s”).1 Having an understanding of the workings of the US public company board in the form of the Management Board), other German legal entities which have a Companies (Aktiengesetz), it specifies that German Supervisory Board is important at the same junctures. These illustrate how German laws, practice and custom, two-tier board, as well as the rarely used The two-tier system for boards of at most companies with more than 2,000 for US public company directors whose significant characteristics of the Supervisory as well as the presence of employee European stock corporation (Societas companies listed on a stock exchange employees, one half of the Supervisory companies are doing business with a Board, including its composition and scope representatives on larger German Europaea “SE”), which permits having either was initially instituted in Germany in 1861 Board members are to be elected by the German corporation controlled by a of authority, impact its work and function. Supervisory Boards, dictate significant a two-tier or a unitary board.4 In this article, after first having been introduced in the employees. For most companies with 500 to Supervisory Board, or who are considering differences in the German Supervisory however, for simplicity’s sake, we refer only Netherlands in the 17th century. It required 2,000 workers, one third of the Supervisory becoming a Supervisory Board member of a The distance of the German Supervisory Board’s working and function when to the AG when we address the German a Board of Management to run the daily Board members must be elected by German corporation. Board from the Management Board is compared with the US corporate board. two-tier board structure. affairs of the corporation and another, employees. This applies to all German greater than the US public company board There are advantages and disadvantages separate Board of Supervisors to hold corporations, whether publicly listed and The first part of this article sets out the from the CEO and his or her executive team to both systems of corporate governance. To place the two-tier board structure in management accountable and to protect privately held. most significant aspects of the German or “C-Suite.” US public company directors An adequate understanding of the basic a broader international context, quite a the interests of shareholders. AG’s Supervisory Board (Aufsichtsrat) are familiar with and strive to live by the distinctions is a necessity for a US public number of countries other than Germany In practice today German Supervisory and Management Board (also sometimes “Nose In/Fingers Out” dictum; to stay with company director engaged with a German mandate a two-tier board structure for their Employee representation on the Boards of AG’s with more than 2,000 translated into English as the Executive the metaphor, German Supervisory Board publicly traded, multinational AG. publicly listed companies or permit adoption Supervisory Board also has its origins in employees must have 12, 16 or 20 Board or Board of Management) (Vorstand). members may be a good nose length of a two-tier board.5 There are substantial the middle of the 19th century. In 1849, members, none of whom are members of The origins and current characteristics of further away from the CEO and the rest differences among the various national two- the Frankfurt Parliament passed a law the company’s executive management or the German dual-tier board are described of the Management Board. However, in tier board systems. However, additionally that attempted to set the boundaries of Management Board, but some of whom with comparisons to the unitary corporate US business circles and the US business to splitting management and oversight (a corporate power by instituting so called may well be employees serving in lower level board common in the US.2 press the distinctive aspects of the German goal shared with unitary board structures), a “works councils” to better represent management. In the event of a tied Supervisory Board is frequently glossed common goal of two- tier boards is to bring the interests of average workers in the vote between shareholders’ representatives over or ignored.3 representation of the various stakeholders management decision making process.8 and employees’ representatives, the vote of in the company (other than its shareholders) Reforms instituted after World War I the Chair of the Supervisory Board (who is into the company’s corporate governance. aimed at protecting the rights of authors, elected by the shareholders) counts twice. Those stakeholders include shareholders, inventors, and artists also led to ordinary employees, labor unions, business partners, employees nominating their first directors creditors and the public at large, and to Supervisory Boards and thus gaining potentially state ownership.6 a more equal footing with employers.9 Co-determination received its first legal By contrast, the unitary board of US definition in Germany’s Works Council Law companies gives primacy to corporate (Betriebsrätegesetz) in 1920. governance by and for the shareholders. This form of corporate governance has evolved to effectively allow the board to monitor the company on behalf of a widely dispersed shareholder base.7 04 05 The German Supervisory Board: | A Practical Introduction for US Public Company Directors The German Supervisory Board: | A Practical Introduction for US Public Company Directors The Role and Characteristics of the The Supervisory Board may only act It is important to recognize the distinctive The powers and procedures of any German Supervisory Board of an AG on behalf of the AG if prior approval legal obligation of each member of particular German AG’s Supervisory The German word for Supervisory Board, and authority is granted by the a German Supervisory Board to be Board are further delineated in its Articles Aufsichtsrat, makes it abundantly clear that Management Board. focused on the interests of the “corporate of Association and Bylaws (Satzung, the central mission of this body is to serve as enterprise” only, whether that Supervisory Geschäftsordnung and/or Statuten), the a “check” on management. In German, the In supervising and advising the Management Board member is elected by shareholders

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