The German Supervisory Board
Germany has a two-tier board system. This system separates the board into a management board and a supervisory board. The function of the latter is primarily the supervision and control of the management board. The basis for fulfilling this function is the right of the supervisory board to appoint and, under certain conditions, dismiss members of the management board and fix their remuneration. The separation between both boards is mandatory. The major advantage of the two-tier board system is this clear separation between the management function and the control function, a separation that in Germany is bolstered by strict incompatibility. The traditional Rhineland capitalism (‘Germany Inc’) in which industry and banks closely cooperated on the supervisory boards of major companies by interlocking directorates is quickly fading away. Yet in many corporations the supervisory board is still very powerful, certainly in family-controlled corporations, but sometimes also in other major corporations, in particular if they are in financial difficulties or face an important reorientation, such as the Deutsche Bank.
Internationally, the one-tier board system prevails, for example in the United States, the United Kingdom, Switzerland and other countries. The two-tier board system exists in Germany, Poland, France, Italy, the Netherlands and some other countries. The emergence of either one, the one-tier or the two-tier board system, had historical reasons. The major advantage of the one-tier board is that all members of the board have easy access to information about the company and its management. At the same time the control function is exercised primarily by independent directors who are full members of the same unitary board. Yet contrary to the widespread opinion under each of the two systems, comparative law and experience do not show a clear superiority of one of the two models; instead, apart from certain path dependencies, there is a certain functional convergence of both systems.
The international trend is clearly towards giving shareholders a choice between the one-tier and the two-tier systems. For example, this is the case in France, the Netherlands, Belgium, Luxembourg, Finland and most recently Denmark, as well as in some other non-European countries. Some other jurisdictions, including Italy and Portugal, even allow choosing between more than two models. The European Union as well has provided a choice between the one-tier and the two-tier systems in the European Company (Societas Europaea, SE).
Germany has long experience with the two-tier board system. This experience concerns inter alia the internal structure of the board; its relation to the management board, in particular control also ex ante and co-decision in fundamental affairs; the tasks, rights and duties of the supervisory board; and the liability of the board members. A path-dependent particularity of the German supervisory board is the very far-reaching labor codetermination in major corporations. About 280 stock corporations and altogether 700 companies are subject to quasi-parity labor codetermination. The consequences of labor codetermination on the corporation and on the economy are very much disputed. The empirical studies are for the most part contradictory, and there is a complete disagreement between the evaluation by most economists on the one side and the sociologists on the other side.
The German liability regime for directors, both management and supervisory board members, is rather far-reaching and strict when one looks solely at the Stock Corporation Act. But traditionally there has been little enforcement. Yet the ARAG/Garmenbeck decision of the German Federal Court of Appeals (Bundesgerichtshof) 1997 and the financial crisis have led to an important change; following the former, the supervisory board is required to bring an action against a management board member who has violated his duties, and the financial crisis has evidenced gross management mistakes with enormously high damages. So now more cases are being brought, both under civil law and criminal law.
The experience gained with the control of the supervisory board over the management board is more or less satisfactory. Deficiencies shown in the context of the Wirecard failure in 2020 led to extensive reform in 2021. It pertains to the management board, the supervisory board, the auditors and the supervisory agency (BaFin).
Apart from internal corporate governance, the markets exercise external corporate governance . Markets that are relevant for disciplining management are the product market, the labor market (as a market for corporate directors) and the market for corporate control. While M & A is also blossoming in Germany, the actual market for corporate control, ie via public takeover, has traditionally been underdeveloped, hostile takeovers being very rare. One reason for this is that German shareholding is for the most part not dispersed, with families and groups of companies most frequently in control, though for listed companies institutional shareholding is growing rapidly. Another reason is that German law has not adopted the British-style anti-frustration rule but rather allows management to take defensive actions without asking the general assembly for its consent. Under the German Takeover Act it is sufficient if the supervisory board agrees to defensive measures.
Klaus J. Hopt is an Emeritus Director of the Max Planck Institute for Comparative and Private International Law in Hamburg and an emeritus professor of law.
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