Is that it for the independence of supervisory boards?

Aareal Bank, Software AG, ThyssenKrupp: Is that it for the independence of supervisory boards?

Dear readers of GermanBoardNews,

what do you remember about the 2021 AGM season? My impression is: there is no significant reverberation. In the public perception, the shareholders’ meetings have been largely silent – also due to Corona and the Bundestag election campaign.

And to date, the vast majority of the players seem deeply relaxed: After all, a lot of money is being earned – also thanks to short-time working allowances – and a lot is being distributed. Stock market prices are on a record hunt. I therefore fear that there will be no broad-based corporate governance debate in business and politics in the coming months.

Yet there is plenty to discuss, and one topic in particular concerns me at the turn of the year: the influence of activist investors on our economy and our governance principles

Three Aareal Supervisory Board members must go

Do you remember the uproar when financial investor Cevian persuaded first CEO Heinrich Hiesinger and then Supervisory Board Chairman Ulrich Lehner to resign at ThyssenKrupp? We were shocked and outraged (“The end of Rhenish capitalism,” we headlined at the time).

But in the meantime we seem to have become accustomed to such things. In any case, there was no public outcry when the activist investor Petrus Advisors succeeded in removing three supervisory board members from Aareal Bank at the beginning of December. Now the complete takeover by another financial investor is probably imminent.

Consequences in the negative sense are not really to be feared by activists. So why not give it a try? No, activists are not ‘evil’ per se; they just want to play and make money – fast and lots of it – in the process.

“Fixated on maximizing profits”

I fear that the partial success at Aareal Bank will attract imitators. In the new year, we will therefore take a closer look at how activists and financial investors work on German supervisory boards. Take Software AG, for example.

The US investor Silver Lake is now entering the company through the back door (by means of a convertible bond). That, too, is nothing bad per se. But what makes you sit up and take notice: Silver Lake – according to the FAZ “fixated on profit maximization and known for its determined and also shirt-sleeved approach ” – is to take over the chairmanship of the supervisory board.

This once again raises the question of where the ‘independence’ of a supervisory board begins and ends. In fact, a major investor and future major shareholder should not sit on the supervisory board – at least not according to German corporate governance standards. This is because investors inevitably pursue their own, often short-term interests.

Connecting links between board members and shareholders

A good supervisory board, i.e. one that is independent and committed only to the good of the company, is precisely the link between shareholders and the management board. If you don’t like that, you shouldn’t invest in a German share, should you?

The critics and opponents of this proven system argue differently, namely in an Anglo-American way: Where my money is, I want to have something to say. And I simply ignore a system that does not provide for that. I’m not going to let it ruin my business.

Granted, that was a bit of an exaggeration… But I wanted to make the point very clear. And before the letters start pouring in..: I am aware that shareholders must be able to exercise ownership rights – but via the general meeting and not via the supervisory board (at least as long as they do not have an absolute majority).

Strengthening the independence of supervisory boards

The core issue here is what it is worth to us in Germany to have, maintain and enforce high corporate governance standards in the spirit of the social market economy. We should therefore not simply stand by while activists and financial investors undermine them.

I have therefore repeatedly proposed making the independence of supervisory boards a condition for listing. However, it remains to be seen whether Deutsche Börse will ever muster the power for a strong set of rules.

The so-called German Corporate Governance Code (DCGK) and the section 161 of the German Stock Corporation Act that legitimizes it also need to be put to the test: “I would like to see a ‘facelift’ of stock corporation and capital market law that preserves, strengthens and modernizes our system. My hopes now rest on the new government, especially the departments of Finance & Justice. There is much to be done, let’s get on with it!

But first of all, I wish you and your families a relaxing and reflective Christmas and a good start to the New Year. We will be back with GermanBoardNews with new energy after the Christmas break.

With pre-Christmas greetings

H. Dehnen