The Company
10.2 Board structures
10.2.1 The two-tier structure
The two-tier system, found in all German and Austrian companies, is also widespread in Denmark, Finland, the Netherlands, Norway, Poland and Switzerland. This system consists of a supervisory board of non-executive directors and a separate management board of executive directors.
Germany
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From the start, the German corporate governance model has been distinct from the Anglo-Saxon model discussed above. Historical, cultural and sociological reasons explain the German corporate governance approach.
First, German banks played a significant role in financing venture capi- talists and often were granted seats on companies they financed. Second, German corporations have accepted the ideas of reducing management discretion by allowing employees to partake in corporations’ major deci- sions. Third, German executives always align their compensation with their corporation’s performances.
The German corporate governance model is followed in countries such as Switzerland, Austria, and some eastern European countries. In these countries I refer to as ‘Germanic countries’, the corporate governance fol- lows almost the same pattern: high concentration of corporations capital in the hands of the very few (banks, wealthy families, cross-sharehold- ers). The Germanic corporate governance model is also known as a ‘stake- holder’ approach. That is, the maximization is not the appanage of the sole shareholders, but all related stakeholders, including employees, sup- pliers, customers, and the environment.
German corporations have a two-tier structure: (i) a board of directors, and (ii) a board of supervisors. The CEO, presides over the board of direc- tors, whereas, the chairman is responsible for the supervisory board.
(i) The board of directors (Vorstand)
The board of directors also called the management board. The manage- ment board is made of executive directors. It is in charge of the daily management of the firm, and is independent of the supervisory board, and conversely. The management board is responsible for independ- ently managing the enterprise in the interests of the enterprise, taking into account the interests of the shareholders, its employees and other stakeholders, with the objective of sustainable creation of value. The
management board develops the enterprise’s strategy, coordinates it with the supervisory board and ensures its implementation. It ensures appro- priate risk management and risk control in the enterprise. A manager can- not simultaneously serve on the board of directors and the supervisory board. The total compensation of the individual members of the manage- ment board is determined by the full supervisory board at an appropriate amount based on a performance assessment, taking into consideration any payments by group companies. Criteria for determining the appro- priateness of compensation are the tasks of the individual member of the management board, his personal performance, the economic situation, the performance and outlook of the enterprise, the common level of the compensation taking into account peer companies and the compensation structure in place in other areas of the company.
(ii) The supervisory board (Aufsichsrat)
The supervisory board advises regularly and supervises the manage- ment board in the management of the enterprise. It must be involved in decisions of fundamental importance to the enterprise. The supervisory board appoints and dismisses the members of the management board.
The chairman of the supervisory board coordinates work within the supervisory board and chairs its meetings and attends to the affairs of the supervisory board externally. The chairman of the supervisory board shall regularly maintain contact with the management board, in particu- lar, with the chairman or spokesman of the management board and con- sult with him on strategy, business development and risk management of the enterprise. The supervisory board consists of non-executive direc- tors who represent various stakeholders, with co-determination between employees and shareholders. Employee co-determination allows their representatives to get access to information regarding the company’s eco- nomic and financial situation. The supervisory board has limited ability to appoint or dismiss the management board. It cannot usurp executive powers of the board of directors, but under certain circumstances, can veto the board’ far-reaching decisions. The supervisory board shall set up an audit committee which, in particular, handles issues of account- ing, risk management and compliance, the necessary independence required of the auditor, the issuing of the audit mandate to the auditor, the determination of auditing focal points and the fee agreement. The compensation of the members of the supervisory board is specified by resolution of the general meeting or in the articles of association. It takes into account the responsibilities and scope of tasks of the members of the supervisory board as well as the economic situation and performance of the enterprise. 1
The overall corporate governance structure seeks to entrench manage- ment and protect it from shareholder influence in order for the man- agement to take into consideration not only the short-term interest of shareholders but the long-term interest of all stakeholders. In a case where a company holds the majority of voting shares in another com- pany, German corporate law provides a system to ensure that the domi- nant company does not interfere with the management of the controlled entity.
Also, the remuneration of the members of boards is regulated within the German Code of Corporate Governance.
The Netherlands
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Like Germany, the Netherlands follows a two-tier structure system in which a separate supervisory board coexists alongside a management board. However, since 2008, the Netherlands has introduced a bill con- taining rules for cases in which executive and non-executive directors coexist within a single board. The Netherlands has adopted a corporate governance code, which follows the ‘complain or explain’ approach. 2 The code is based on the principle accepted in the Netherlands that a com- pany is a long-term alliance between the various parties involved in the company. The code is not seen as an isolated set of rules, rather part of a larger system, which includes the Dutch and EU legislation and case law on corporate governance. The Code applies to all companies whose registered offices are in the Netherlands and whose shares or depositary receipts for shares have been admitted to listing on a stock exchange, and to all large companies whose registered offices are in the Netherlands.
The code contains general rules of conduct designed to ensure the careful handling of the processes involving: (i) the management board, (ii) the supervisory board, (iii) the shareholders’ rights, (iv) the audit and finan- cial reporting, and (v) the remuneration.
(i) The management board
The management board is in charge of the daily management of the company. That is, it is responsible for achieving the company’s aims, the strategy and associated risk profile, the development of results and corporate social responsibility issues that are relevant to the enterprise.
The management board is accountable to the supervisory board and the general shareholders’ meeting. 3 In discharging its role, the management board shall be guided by the interests of the company and its affiliated enterprise, taking into consideration the interests of the company’s stake- holders. It is also responsible for complying with all relevant primary and
secondary legislation, for managing the risks associated with the com- pany activities and for financing the company.
(ii) The supervisory board
The supervisory board monitors the policies of the management board and the general affairs of the company and its affiliated enterprise, as well as assisting the management board by providing advice. The supervisory board performs under its own chairman. The supervisory board is responsible for the quality of its own performance. Members of the supervisory board should be able to act critically and independ- ently of one another, the management board and any particular inter- ests. The supervisory board shall aim for a diverse composition in terms of such factors as gender and age. Any supervisory board made of more than four members shall appoint from its members an audit com- mittee, a remuneration committee and a selection and appointment committee. 4
(iii) The shareholders’ rights
Shareholders enjoy voting rights. Proxy vote is allowed. Shareholders exert their powers and influence within the general assembly. Management board resolutions on a major change in the identity or character of the company or the enterprise shall be subject to the approval of the general meeting. The management board or the supervisory board shall provide all shareholders and other parties in the financial markets with equal and simultaneous information about matters that may influence the share price. The management board and the supervisory board shall provide the general meeting in good time with all the information that requires the exercise of its powers. 5 Shareholders shall act in relation to the com- pany, the organs of the company and their fellow shareholders in keeping with the principle of reasonableness and fairness.
(iv) The audit and financial reporting
The management board is responsible for the quality and completeness of publicly-disclosed financial reports. The supervisory board shall ensure that the management board fulfills its responsibility regarding financial statements. The external auditor of the company shall be appointed by the shareholders and its remuneration be approved by the supervisory board. The external auditor shall, in any event, attend the meeting of the supervisory board at which the financial statements are to be approved.
The external auditor shall report his findings in relation to the audit of
the financial statements to both the management and the supervisory boards.
(v) The remuneration
The Dutch Corporate Governance Code provides specific rules pursu- ant to the remuneration of the management board and the supervisory board.
Management board remuneration
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The remuneration structure, including severance pay, shall be simple and transparent. It shall promote the interests of the company in the medium- and long-term. The supervisory board monitors the board of management level of remuneration. The level and structure of the remuneration shall be determined by reference to, inter alia, the results achieved, the share price performance and non-financial indicators that are relevant to the company’s long-term value creation.
Supervisory board remuneration
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The remuneration of the supervisory board’s members is determined by the shareholders, and is not dependent on the results of the company.