The evolution of the German supervisory board
IROs are the interface between the company and the capital market. They are responsible for consistent market communications and, at the same time, report market observations back to the company. The latest changes to the German Corporate Governance Code on supervisory board communication will expand this role even further in the future.
‘The supervisory board should, where appropriate, be prepared to discuss topics relevant to the supervisory board with investors,’ it reads. This sentence – from section 5.2 of the current German Corporate Governance Code – is hotly disputed.
Unclear legal framework
Communication between supervisory boards (as opposed to management boards) and investors is not clearly regulated in German law. Companies and their supervisory boards therefore interpret this very differently. Under the German two-tier board system, the management board is responsible for the operating business, which includes external communications. The supervisory board advises and supervises. Until now, most lawyers have interpreted this as a prohibition on the supervisory board intervening in operational matters and actively communicating with the market or the general public.
However, the implied powers – or annexkompetenz – of the supervisory board are something of a grey area. The supervisory board certainly becomes involved in operations when it comes to appointing the management board and setting its remuneration or assenting to certain strategic decisions. And in practice, a number of supervisory boards do in fact speak out publicly.
Investors demand dialogue
DAX companies that deal with international investors on a daily basis have long known that keeping the supervisory board out of external communications is virtually impossible. Investors, in particular from Anglo-Saxon countries, who are unfamiliar with the two-tier German system, often approach the supervisory board directly with their concerns. In this way, dialogue between the supervisory board and investors is currently common practice at many companies.
The Developing Shareholder Communication (DSC) initiative, which was established in December 2015, is a response to this reality. It aims to promote informed discussion about dialogue between the supervisory board and investors and to create a framework for this. Alongside the lead working group, which comprised representatives from companies, investors and academia, the initiative was also advised by a stakeholder group that included representatives from regulatory bodies as well as selected associations and organisations such as Dirk.
In July 2016, the initiative published eight principles for dialogue between investors and supervisory boards. These expressly support direct communication by the supervisory board but also lay down strict limits. For instance, whether to engage in dialogue with investors is at the discretion of the chairperson of the supervisory board only. Furthermore, this dialogue should only relate to topics that fall directly within the supervisory board’s area of responsibility. This does not include strategy development and implementation, for example, unless it is about the supervisory role or an assessment of strategy implementation.
The initiative recommends that the supervisory and management boards clarify which powers or tasks the supervisory board may or should take on with respect to IR. The German Corporate Governance Code did, in essence, adopt the requirements and suggestions of the initiative, though it does not explicitly mention these or refer to the principles.
Dirk recommends clear internal guidelines
Dirk has been promoting increased dialogue between the supervisory board and investors for many years. We believe that it makes sense for the German Corporate Governance Code to now lay down a framework for IR practice. The principles developed by the initiative can help implement the code’s suggestion.
Current best practice shows that it is extremely important to clearly establish the responsibilities and communication powers of the supervisory board and to define the communication function of its chairperson. A clear policy protects the company and the supervisory board against communication breaches and gives them the ability to not respond to persistent investors (or journalists) in certain situations without giving rise to speculation. It is important that the supervisory board’s responsibilities and limits with respect to IR are well defined – before the company finds itself in a critical situation. IROs, whose day-to-day work involves communicating with investors, can and should drive this forward and act as intermediaries between the management board and the supervisory board.
IR as an intermediary and coordinator
To prevent contradictory information – in other words to ensure a ‘one voice’ policy – it is essential to have clear agreements on who may say what about which topics, and when. IROs must be included in talks between the chairperson of the supervisory board and investors and offer to support the chairperson, who may be less experienced in IR. Communicating with the capital market is, after all, still the core function of IR.
Kay Bommer is managing director of Dirk, the German IR association