For the first time, the German Corporate Governance Code of May 2019 proposes a new recommendation that the company should provide appropriate support to new members of the Supervisory Board when they take office. For financial institutions, there has been a statutory regulation on this since 2014, which has proven its worth in practice. The following article is intended to highlight the need for such induction courses for new supervisory board members and provide recommendations for practical implementation.
I. Initial situation
Until now, there has been a lack of both a statutory regulation for companies outside the financial industry and a specific recommendation in the Code (DCGK) on how newly elected members of the supervisory board can be inducted into their office as quickly as possible and in accordance with the specific requirements of the respective company. The German Stock Corporation Act also leaves it up to the companies to take action here. This is astonishing, as it is often very difficult for new supervisory board members to quickly catch up with the experience and knowledge of existing board members, especially in large companies that operate globally and therefore have a complex organisation. They often have a years-long head start from previous meetings and are very familiar not only with the meeting documents but also the discussions with the Management Board. Such a lack of information is often detrimental to the effective fulfilment of tasks.
It can often even be observed that new members are not granted access to the previous documents and meeting minutes of the Supervisory Board and its committees. Newly elected members to the Supervisory Board also lack a direct contact person in the company in addition to the Chairman of the Supervisory Board, who is not always on site.
Targeted familiarisation with company-specific topics and structures is important and necessary for all new Supervisory Board members if they have not previously attended meetings in another capacity as members of the Executive Board. This applies in particular when candidates take on a role on the Supervisory Board for the first time, cannot draw on their own experience from other Supervisory Board mandates or come from a different governance system due to the increasing internationalisation of Supervisory Board activities. In many areas, an audit committee does not correspond to an Anglo-Saxon audit committee. This shows how important it is to explain the special German two-tier board system and to draw attention to key differences and responsibilities.
Legislators have therefore rightly included a provision to this effect in the KWG, at least for financial institutions, in the 2014 EU CRD IV Directive. According to Section 25d (4) KWG, institutions, financial holding companies and mixed financial holding companies must deploy appropriate human and financial resources to facilitate the induction of members of the administrative or supervisory body into their office and to communicate the structure, business model, risk profile and governance regulations of the institution as well as the role of the members. The guidelines adopted in 2017 on the assessment of the suitability of members of the management body and key function holders of the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) even stipulate that supervisory board members must be available for sufficient time in addition to their actual duties. The workload must be recorded in writing. New members of the supervisory board should receive important information no later than one month after taking up their position and the induction should be completed within six months. The supervisory authorities should be informed of the successful completion of the induction.
In Section 5.4.5 para. 2, the Code previously recommended training and further education measures: “The members of the Supervisory Board shall take responsibility for the training and further education measures required for their duties. They should receive appropriate support from the company.” The relevant commentary on Section 25d KWG assumes that this also includes introductions to the office. As section 25d para. 4 KWG is intended to make it easier for members to take up office, further training measures must also be made possible in order to provide members with the minimum knowledge required for their supervisory activities. However, in the opinion of the author, this is a different issue. The induction of a new supervisory board member is not a training measure, but is company-specific. The induction cannot be carried out without company-specific knowledge.
II. Considerations on the implementation of the recommendation
Even if the explanatory notes to the new Code do not explain why such a recommendation has been included for the first time, the purpose is quickly apparent. In the past, new Supervisory Board members have repeatedly reported that they often need up to two years to understand the company and its specific characteristics in order to adequately fulfil their supervisory role vis-à-vis the Executive Board and to be able to provide constructive advice, particularly with regard to strategy.
Companies should therefore approach the candidates proposed by the Supervisory Board in consultation with the Chairman of the Supervisory Board at an early stage, preferably before the election by the Annual General Meeting, and define the exact requirements with them and draw up a corresponding timetable. The scope of the required “introduction” of new board members follows the principle of proportionality. Depending on the type, scope and complexity of the business conducted and the expertise required, the requirements for the induction of new board members also increase.
Firstly, it is important to provide the new members with an “induction pack” containing the articles of association, rules of procedure, the latest annual report and the most important company documents. They should also receive the latest audit reports from the auditor, the most important supervisory board documents and the minutes of the last meetings. It is also crucial to know which resolutions from the past have not yet been fully processed or have a major impact on the present and future of the company.
An internet-based electronic data room is ideal for making all documents available so that members do not have to travel to the meeting for this purpose. If the data room of the Supervisory Board is structured in such a way that not only the current meeting documents are available for the next meeting, but is also used as an archive for all members, new members are given direct access and can work through all important documents independently after a brief explanation of the structure and organisation of the data room.
In addition to written documents, individual discussions with the core functions in the company are useful. As a first step, they should – if they have not already done so – get to know all members of the Executive Board and meet them individually in person to discuss the Executive Board departments for which they are responsible and, in particular, current topics of relevance to the Supervisory Board that the existing Supervisory Board members are already familiar with. However, important key persons in the company, such as the heads of Internal Audit, the Compliance department and representatives of the auditor, should also be spoken to personally in consultation with the Management Board. The members of the Management Board should name other useful dialogue partners. In addition, an important part of the induction programme will always be discussions with other members of the Supervisory Board, in particular the committee chairmen and the deputy chairman of the Supervisory Board.
In practice, induction programmes are carried out on a very individual basis, as the new members have very different levels of prior knowledge and in some cases will also belong to different committees.
III Support from the Supervisory Board office
The employees in a well-organised corporate office or supervisory board office can provide active support with the tasks outlined above and efficiently set up the processes and manage their implementation. On the one hand, they are trusted representatives of the Supervisory Board members and, on the other hand, they are very familiar with the tasks, corporate governance and the course of the meetings as well as the meeting documents. This is because it is usually employees from these areas who prepare and agree the minutes of the meetings.
The Supervisory Board office can also provide efficient support in coordinating the timetable for the onboarding process. It can draw up the induction plan, coordinate appointments with the Management Board, other company representatives and the new members, explain the documents from previous meetings, answer questions and provide further information.
IV. Conclusion
The process of onboarding new supervisory board members has been little discussed to date. A best practice does not yet appear to have emerged. Against the background of further professionalisation of supervisory board activities, this is a necessary step. In particular, the aim of introductory training should be to achieve the same level of knowledge of the company’s specific issues as a well-informed supervisory board member who has been a member of the supervisory board for several years after as short a time as possible. This is not only in the interests of the new Supervisory Board members and the Supervisory Board, but also of the other stakeholders and the company itself.
Onboarding checklist
- Define precise requirements and draw up a corresponding schedule
- “Introduction” of new board members follows the principle of proportionality
- Organisational involvement of the Supervisory Board office
- Create an “induction folder” with
- the Articles of Association
- rules of procedure
- the latest annual report and
- the most important company documents
- the last audit reports of the auditor
- the most important Supervisory Board documents
- the minutes of the last meetings and
- the outstanding resolutions
- Individual discussions with the Supervisory Board and the core functions in the company:
- Chairman of the Supervisory Board or Deputy Chairman of the Supervisory Board
- Committee chairmen
- Members of the Executive Board individually
- Head of Internal Audit
- Head of the Compliance department and
- Representatives of the auditor
- If necessary, further dialogue partners after consultation with the Executive Board