Challenges of Supervisory Boards

Results of BCG’s 2018 Survey of German and Austrian Supervisory Boards Foreword Agenda /01 Who did we survey? Rethinking supervisory board activities

Technological changes and their economic implications are bringing about dynamic changes in industries and markets. This presents new challenges not only for management but also for supervisory board members. How do the new conditions impact the focus and setup of the supervisory board’s work?

We surveyed 120 supervisory board members in Germany and Austria to find out. This report provides an overview of the results. /02 The results show that today’s supervisory boards want not only to Which activities do supervisory boards focus on? monitor, but also to actively shape the change. The focus is increas- ingly on strategic activities.

But the setup of supervisory board work also has to change. The ­survey clearly shows that new competencies are needed. The board has to work more intensively in committees and focus its agenda and formats more consistently on strategic topics. Faced with an already heavy workload, the board must discuss its setup systematically in order to develop it further and increase its effectiveness. /03 How do supervisory boards work? /04 How satisfied are supervisory board members?

2 Who did we survey?

Largest survey of supervisory board members to date

For our study, we wrote to 339 supervisory board members in ­Germany and Austria; 120 of them responded to us. To prepare, we first­interviewed more than 20 successful and experienced ­supervisory board chairs from large German firms.

The companies involved come from various different industries and size categories. Around one in three of them are family owned. Most of the surveyed supervisory board members have been on their board for some time and thus have significant experience. Around two- /01 thirds of the respondents are the chair of their board or of one of its ­committees.

Some findings apply only to a two-tiered system, where the­supervisory board and the executive board are strictly separated. Also, in the case of large German companies, the supervisory board may include ­workers’ representatives (“codetermination”).

3 WHO DID WE SURVEY? Largest survey among German and Austrian Mostly long-term shareholder orientation supervisory board members to date

Company revenues Strong shareholder influence Complexity of the portfolio

18% > €10B 69% 18% Diversified 120 8% €5B–€10B responses 21% Balanced 33% €1B–€5B Share of family-owned businesses

61% Focused 41% €500M–€1B

34%

Industries Shareholder orientation Type of codetermination

Parity codetermination 63% Long-term 36%

29% 15% 12% 12% 9% 2% 1% 20% Simple 29% codetermination

Industrial Banks, Consumer Technology, Health Energy Public Other goods insurers goods media care sector 33% Mixed No 34% codetermination

3% Short-term 4 WHO DID WE SURVEY? Stable performance today— but nearly all expect significant disruption

Carsten Kratz Situation of companies

“Almost all supervisory % 92 Very good/stable current financial performance boards predict that their company will face significant

% change sooner or later. Many 72 Positive long-term expected performance of the supervisory board members we spoke to are % currently actively thinking 69 Moderate level of company risks about what that means for

% their work.” 88 Market disruption expected % Disruption in 24 the short term

5 WHO DID WE SURVEY? Wealth of experience among the surveyed supervisory board members Shareholder Supervisory board or Former employment representative committee chairmanship in the company

Experience as a supervisory board member (in years)

74 % 62 % 26 %

24% 29% 16% 19% 12%

≤ 5 6–10 11–15 16–20 ≥ 21

Term of office of the chairman Confidence in the of the management board management board

Number of supervisory board mandates

< 2 2 y

e to

17% a 5 r s y e a

r 25% 20% 19% 13% 23% s 46% Very high 42%

1 2 3 4 ≥ 5

ars ye 40% High 5 >

14% Satisfactory Exercise of the mandate (in years) 42%

39% 41% 20%

≤ 4 5–10 > 10

Yes, Very good Moder- Posi- short-term ate tive 6 Which activities do supervisory boards focus on?

Moving beyond monitoring—shaping as a core task

Monitoring, shaping, and advising—in a two-tiered system, these are the core tasks of the supervisory board. While the focus used to be on monitoring, we ­identified a new focus: Actively shaping the direction of the company is becoming increasingly important in light of the expected far-reaching economic disruption. Many ­supervisory board ­members believe that participation in ­strategy /02 development and deeper strategic monitoring are needed.

7 Which activities do supervisory boards focus on? 12 activities of supervisory board members

Monitoring market developments and competitve position MONITORING Strategic monitoring MONITORING Tracking the success of strategic initiatives

Financial monitoring Defining the audit process and approving financial accounts Tracking investments and financial measures Monitoring the risk management system Risk monitoring Discussing major risks and necessary measures Assessing the target achievement, competency, and integrity Evaluation of the executive board Defining management compensation

Deciding on the appointment/dismissal of executive board members SHAPING Appointments to the executive board Planning succession, promoting young talent

Agreeing on targets with the executive board Target setting for the executive board Defining the incentive and compensation system Participating in decisions on time frames, assumptions, and success metrics Involvement in strategic direction Approving the overall strategy Defining the approval requirements Decisions on transactions requiring approval Approving the budget, investments, M&A, capital measures, and dividends

Discussing alternatives in the supervisory board Advice on key business decisions ADVISING Contributing experience and knowledge, questioning assumptions Providing specific content expertise Provision of relevant expertise Supporting the implementation of particularly relevant issues Promoting the personal development of executive board members Coaching of the executive board Acting as personal sparring partners and advisors Referring relevant contacts Support with professional network Discussing selected topics with third parties

Note: Perspective of German two-tiered board system only ACYIVITT8 Which activities do supervisory boards focus on? Focus of supervisory board activities

Supervisory boards today put equal emphasis on “Nowadays, supervisory boards are no longer content merely to monitor. They want to proactively shape the change. Before, there ­shaping and on monitoring. A particular focus is was a strong focus on monitoring and compliance. Today, the on strategic­ activities,­ in order to account for the ­situation is different.” Alexander Roos ­anticipated ­market disruption. Advisory activities, in contrast, are not given as high priority.

1% 4% 22% 46% 27% Strategic monitoring

MONITORING 3% 6% 16% 44% 31% Financial monitoring

1%2% 7% 25% 41% 23% 1% 2% 4% 32% 41% 21% Risk monitoring

Evaluation of the 1% 3% 15% 32% 35% 14% executive board

Appointments to the 1% 5% 13% 19% 32% 30% executive board

SHAPING Target setting for 3% 8% 7% 25% 39% 19% the executive board 1% 4% 8% 23% 35% 28% Involvement in 1% 2% 5% 22% 36% 34% strategic direction

Decisions on transactions 1% 3% 8% 25% 33% 30% requiring approval

Advice on key 1% 5% 10% 32% 32% 23% business decisions

ADVISING Provision of 2% 3% 15% 30% 38% 12% relevant expertise 2% 6% 16% 32% 29% 15% Coaching of the 3% 11% 20% 31% 23% 12% executive board

Support with 3% 9% 18% 33% 25% 13% professional network

Very low Low Somewhat low Somewhat high High Very high 9 Which activities do supervisory boards focus on? Importance of the activities

Monitoring and shaping are seen as similarly important­ today. Supervisory board members attach particular­ importance to appointments to the ­executive board, ­helping shape the strategic direction, and ­strategic ­monitoring. In contrast, they consider providing ­support through their network and professional expertise less ­important.

2% 23% 75% Strategic monitoring

MONITORING 9% 41% 50% Financial monitoring

9% 39% 52% 7% 45% 48% Risk monitoring

Evaluation of the 18% 48% 34% executive board

Appointments to the 6% 33% 61% executive board

SHAPING Target setting for 10% 53% 37% the executive board 4% 27% 69% 9% 42% 50% Involvement in strategic direction 14% 54% 32% Decisions on transactions requiring approval

Advice on key 4% 45% 51% business decisions

ADVISING Provision of 16% 56% 28% relevant expertise 18% 49% 33% Coaching of the 21% 47% 32% executive board

Support with 30% 49% 21% professional network

Necessary Important Very important 10 Which activities do supervisory boards focus on? Desired changes to the focus of activities Stronger focus on participating in strategic design

MONITORING Less More Irrelevant To be increased

Involvement in 3% 25% strategic direction Strategic monitoring 5% 9% Advice on key Financial monitoring business decisions Desire for change for Desire 3% 27% Risk Risk monitoring monitoring

3% 16% Appointments to the Strategic Evaluation of the executive board monitoring executive board Evaluation of the executive board Coaching of the executive board SHAPING Target setting for Provision of relevant the executive board expertise Appointments to the 4% 26% executive board Support with Financial 4% 14% professional network Target setting for monitoring the executive board Decisions on transactions 35% Involvement in requiring approval strategic direction Required Fulfilled 9% 8% Decisions on transactions requiring approval Importance

ADVISING

Advice on key 28% business decisions “Supervisory boards want to be more intensively involved in strategic Provision of 10% 19% ­activities. However, as one supervisory board chairman aptly pointed out relevant expertise to us, the role in shaping the company is limited by the fact that effective monitoring cannot be restricted.” 9% 18% Coaching of the Dr. Sebastian Stange executive board 6% 12% Support with professional network 11 How do supervisory boards work?

Continuous improvement

Supervisory boards must systematically rethink the way they structure their work in order to meet the challenges facing their companies. This concerns the structure (composition and ­responsibilities) and instruments (agenda, information, and work processes) of the supervisory board, as well as the ways of working and the culture (focus of the chairman of the super- visory board, cooperation in committees, and cooperation with management).

/03 Where are structural changes needed? Are the agenda, ­information level, and work processes still appropriate? How should the collaboration be changed? The work of the ­supervisory board can be developed further only by enabling open discussion­ and questioning across all dimensions.

12 How do supervisory boards work? Setup to be actively rethought in eight dimensions

Structure 1 COMPOSITION 2 RESPONSIBILITIES

Structural limitations (size, tenure/rotation, age) Scope of transactions requiring approval Competencies (independence, expertise, etc.) Roles of individual members and diversity (nationalities and gender) Committees and committee participation Succession planning and staffing process

Instruments 3 AGENDA 4 INFORMATION 5 WORK PROCESSES

Meeting frequency Type (scope, medium, quality, deadlines, Time commitment and resources Content focus and priorities contact with second-level management,­ Meetings without the executive board Meeting procedure onsite visits, and external advisors) Pretalks Training Decision-making processes and key procedures Effectiveness evaluation Involvement of workers’ representatives

Ways of working and culture 6 FOCUS OF THE SUPERVISORY 7 COLLABORATION WITHIN THE 8 COLLABORATION WITH THE BOARD CHAIRMAN SUPERVISORY BOARD EXECUTIVE BOARD

Role and tasks Atmosphere and group dynamics Atmosphere and relationship with the executive board Bearing and behavior Participation of all members Ways of working (communication style, conflict Frequency of contact with the executive board Ways of working (culture of discussion, ­resolution, transparency, trust) O conflict resolution, transparency, trust) W DIMLELI13 How do supervisory boards work?

1 COMPOSITION Large supervisory boards Need to catch up on competencies in strategic content

Size of the supervisory board Available competencies on the supervisory board

≤ 6 7–10 11–14 15–18 > 18 1% 5% 42% 53% Finance

8% 45 % 46% Strategy

1% 10% 53% 36% Avg. 10 members Business expertise

Codeterminated 30 % 23 % 23 % 11% 14 % Market expertise 1% 25% 48% 25%

Not codeterminated % % % % % 68 32 0 0 0 Internationality 7% 23% 37% 33%

Avg. 6 members Digitization 14% 47 % 28% 11%

Maximum tenure Age limit for supervisory board members

Low Somewhat low Somewhat high High

84% 61%

In practice, it often proves difficult to change the ­composition of the supervisory board. Known ­instru- ments such as the introduction of an age threshold­ or a limitation on tenure are not yet systematically­ used. Such changes would be in-line with the new proposals Few have limitations of the German Corporate Governance Code. 14 How do supervisory boards work?

2 RESPONSIBILITIES 3 AGENDA Committees are essential

Share of supervisory board Number of regular meetings per year activities in committees Number of committees GRAFIK PHILIPP Avg. 3

23% 21% 25% 18% 13% Significant or Avg. 4.7 % dominant 63 0–1 2 3 4 ≥ 5 7% 52% 19% 22%

0–3 4 5 ≥ 6

“The board as a whole is often unable to manage the significant change Definition of the agenda and growing complexity. We therefore expect committee work to continue to increase. But this also makes it important for all members to be active in committees so that their competence can be applied there.” 2% Dr. Ulrich Pidun Executive board only

Mostly the management board 13%

Jointly 72% All supervisory board members are active in committees Mostly the supervisory board 12%

Supervisory board only 2% 61%

A significant share of the supervisory board’s work ­already happens in committees. However, on ­man­y ­supervisory boards, not all members are active in Not all boards involve ­committees. As a result, their individual experience The agenda is not always their members broadly and skills are not systematically leveraged. jointly defined 15 How do supervisory boards work?

3 AGENDA 4 INFORMATION

Too little time for strategic Information available to the supervisory board formats and topics

8% 36% 56% Finance Topics of supervisory board meetings

TOO LITTLE 2% 15% 54% 29% Digitization Operational 68% Personnel 46% 1% 16% 53% 30% Compliance Strategy 36% 1% 18% 59% 22% Market and Sustainability/CSR competition 34%

1% 18% 43% 33% TOO MUCH Strategy Operational 20%

Formalities 26% 46% 28% 13% Risk Finance 13% 5% 25% 44% 26% Market and competition

4% 34% 46% 17% Formats in supervisory board meetings Personnel

37% TOO LITTLE 7% 50% 32% 11% Informal exchange Digitization

20% Reports on special topics Dissatisfied Somewhat dissatisfied Somewhat satisfied Satisfied 19% Discussion for decision-making

TOO MUCH The growing change requires the board to focus the 7% Regular reports agenda more strongly on strategic issues. To meet Supervisory boards feel they’re 3% this need, topics, ­formats, and information have to be Meeting minutes ­actively adapted. ­Digitization in particular has to be not informed enough about ­reflected ­comprehensively as an urgent challenge. ­strategic and HR topics 16 How do supervisory boards work?

4 INFORMATION Independent, external Use of internal information sources information sources Regular management 2% 5% 32% 49% 13% board reports are used too rarely. Oral management board 1% 8% 42% 30% explanations

Ad hoc management 1% 10% 9% 29% 38% 14% board reports

Talks with the management board 7% 15% 23% 32% 23%32% outside the meeting

Use of external information sources

11% 20% 23% 29% 13% 4% Analyst reports

Press reports 6% 27% 28% 32% 22% 10% 8%

Third-party market studies 5% 27% 31%32% 7%22% 14% 1%

Customer interviews 20% 31% 20% 21% 8%

7% External advisors 17% 31% 33% 14%7% 5% 1%

Not available Low Somewhat low Somewhat high High Very high 17 How do supervisory boards work?

4 INFORMATION 5 WORK PROCESSES Lack of systematic onboarding High workload of 34 days per year on average and training programs

Available onboarding support Supervisory board workload (days per year)

Briefing package 34% > 100 7%

Talks with managers 25% in the company

50–99 9% Training on core monitoring 16% competencies

40–50 Supervisory board Avg. 13% 8% 46 chairmen

30–40 All respondents 19% Avg. 34 Training offerings

Training program Ordinary supervisory 24% 20–30 32% Avg. 25 board members

Training materials 15% < 20 26% Budget for self-organized The competencies of the existing members have to be 10% training used effectively and developed further. ­Unfortunately, little onboarding support is available to new ­members, and training programs are not widespread either. 53% 18 How do supervisory boards work?

5 WORK PROCESSES Potential obstacles to effectiveness Only a few supervisory boards have sufficient resources for their work

Administrative 46% secretarial support

Professional support 23% “Supervisory boards have to further professionalize to meet ­existing from assistants ­challenges and to use their limited time more effectively. The ­setup should therefore be reflected regularly and systematically among ­members.” Budget at own 17% disposal Dr. Michael Wolff

No resources for 30% the work

No meeting without the executive board 55%

“It is surprising that high-caliber members of the highest body in the ­company, who often have to do these activities in addition to their regular work, receive so little support. Is this an effective use of their valuable time?”

Dr. Sebastian Stange No coordination before the meetings 28%

No (regular) discussion of the setup 64 %

No systematic review of effectiveness 49% 19 How do supervisory boards work?

6 FOCUS OF THE SUPERVISORY BOARD CHAIRMAN Chairmen of supervisory boards could do more to encourage member participation Sparring partner 3% 15% 44% 39% Supervisory board chairmen play an important role on the board. They maintain a good relationship with the executive team, but could do more to ­encourage ­members to actively participate. Chairmen­ see their role more positively than the other members do. Monitor 3% 34% 45% 19%

Has a personal relationship with the Coach chairman of the executive board 1% 5% 34% 60% 15% 24% 38% 23%

Coordinates with the executive board between meetings 2% 6% 34% 59% Driver 14% 39% 29% 18%

Encourages controversial but constructive discussion 4% 13% 47% 36% Supervisor 15% 43% 22% 20%

Actively looks for different perspectives 3% 15% 52% 30%

Not applicable Not very applicable Somewhat applicable Applicable

Encourages members to actively participate 6% 21% 48% 25%

Does not dominate discussions Supervisory board chairmen are seen mainly 7% 44% 37% 13% as sparring partners and coaches. 20 How do supervisory boards work?

7 COLLABORATION WITHIN THE SUPERVISORY BOARD 8 COLLABORATION WITH THE EXECUTIVE BOARD Trust-based discussion, but individual members’ roles are often unclear

Collaboration within the supervisory board Collaboration with the executive board

The discussions are objective 1% 1% 40% 58% Constructive and appreciative discussion with the executive board 7% 34% 59%

The relationship is based on trust Trust-based relationship between 1% 7% 41% 51% the supervisory board and the executive board 9% 43% 49% Discussions are usually open 12% 37% 51% Open and transparent discussion with the executive board Expertise and experience are 2% 9% 40% 50% sufficiently used 2% 11% 49% 39% Good personal relationships between supervisory board and executive board members Decision-making processes are always transparent and comprehensible 2% 18% 58% 23% 1% 12% 48% 39% Controversial discussion with the executive board Members have a clear understanding of the focus areas 4% 13% 54% 30% 16% 57% 28% 3%

Hierarchy does not play a role in the supervisory board 5% 12% 35% 49%

Not applicable Not very applicable Somewhat applicable Applicable Personal relationships are good 3% 16% 49% 32%

Everyone has a clear role and a clear contribution 5% 22% 48% 25%

There is precoordination in a small group 13% 26% 43% 18% Discussions with the executive board are constructive but often not controversial 21 How satisfied are supervisory board members?

Focus on effectiveness

Overall, most supervisory board members are highly ­satisfied with their current work. However, in light of the challenges ahead, both efficiency and effectiveness need to be further ­increased. ­Information and work processes are topics that can be ­developed most strongly on supervisory boards. The composition of many /04 supervisory boards also has to be adapted to new requirements.

22 How satisfied are the supervisory board members? Where supervisory boards stand as a whole Room for improvement on work processes, information, and composition

48% 28% COLLABORATION WITH THE EXECUTIVE BOARD 51%

High or very high value contributed by the supervisory board COLLABORATION WITHIN THE 48% 27% SUPERVISORY BOARD

AGENDA 56% 18%

FOCUS OF THE SUPERVISORY 41% 31% BOARD CHAIRMAN 57% Low or medium time commitment relative to the value contribution

46% 14% RESPONSIBILITIES

45% 13% COMPOSITION

34% 17% INFORMATION 73% High or very high satisfaction with supervisory board work

34% 12% WORK PROCESSES

Satisfied Very satisfied 23 Other BCG publications Authors

Carsten Kratz Alexander Roos

From Monitoring to Carsten Kratz is a Senior Alexander Roos is a Senior Actively Shaping Partner in the Frankfurt office Partner in the Berlin office of of Boston Consulting Group Boston Consulting Group, and Managing Director for Dr. Ulrich Pidun an expert on corporate How Supervisory Boards Must Evolve Learning from the Best Germany and Austria. ­development, and the leader https://www.bcg.com/de-de/ Dr. Ulrich Pidun is a Supervisory Boards You may contact him at of the German corporate perspectives/211649 Director in the Frankfurt [email protected] governance topic. office of Boston Consulting Recipes for Success by Board Chairs of You may contact him at Group and a global expert [email protected] German DAX Companies on corporate strategy and https://www.bcg.com/publications/2018/ corporate governance. learning-best-supervisory-boards-suc- You may contact him at cess-chairs-german-dax-companies.aspx [email protected]

How Nordic Boards Create Dr. Sebastian Stange Exceptional Value Dr. Sebastian Stange is A BCG Study of Top Nordic Value Creators a ­Associate Director in https://www.bcg.com/publications/2016/ ­corporate strategy and strategy-value-creation-strategy-how-nor- corporate governance in Dr. Michael Wolff dic-boards-create-exceptional-value.aspx Looking for Smoke Under the Munich office of Boston the Door Consulting Group. Dr. Michael Wolff holds the You may contact him at chair of business administration [email protected] with a focus on management The Case for an Actively Engaged Board and controlling at the https://www.bcg.com/publications/2016/ University of Göttingen. people-organization-leadership- You may contact him at talent-looking-smoke-under-door.aspx [email protected]

Value-Focused Corporate Governance

How to Engage Boards and Enhance Decision Making We would like to thank all our interviewees and survey respondents once again for their time and effort. https://www.bcg.com/publications/ In addition, we would like to express our sincere thanks to Daniel Matteo, Torben Schmidt, Dirk Schilder, 2012/­leadership-strategic-planning-valu Philipp Ego, and Vera Heckmann, without whom this study would not have been possible. e-focused-corporate-governance.aspx 24