We spoke with Ms. Korsch and Mr. Merkens about #FutureGoodGovernance.
Chairman of the Supervisory Board of Aareal Bank
Mr. J. Merkens
Chairman of the Management Board of Aareal Bank
A ship needs a captain. There is much talk about new management concepts, about participation and freedom. How much leadership will a company still need in the future and how much agility can it tolerate? How do you envisage corporate management in the future?
Mrs. Korsch: A ship without a captain sails around aimlessly, similarly it is with companies. In the future, too, “good corporate governance” will be needed to stay on course. However, the way leadership is to be understood is changing, because the general conditions are changing at an incredible speed. The best example of this is the current Corona pandemic. It is true that the world has always been subject to change. But much faster than before, we have to deal with these changes and adapt to them. In order to give employees, but also customers and investors orientation in these times, which are often perceived as uncertain for them, the company management must make the so-called “purpose” transparent. In dealing with the large number of changes, it serves as an orientation for all stakeholders. When new challenges arise, employees may not immediately know the solution. However, once they have understood the company’s purpose, they at least know what goal they are supposed to achieve with their work.
Mr. Merkens: Agility means the willingness and ability to adapt to change. Change becomes a permanent part of working life. Many people find themselves under massive pressure as a result. It is precisely in these circumstances that employees need management that creates the right conditions and enables them to learn how to deal with them thanks to targeted support. As Mrs. Korsch says, it is important that employees know the reasons and the goals of the company to which they can orient themselves.
The world’s greetings have also drawn attention to companies and their fields of action. What challenges do you expect in terms of social responsibility and thus sustainability in the company?
Mrs. Korsch: The real estate sector offers a lot of potential to contribute to the achievement of climate protection goals. For example, innovative building types and neighbourhood concepts for new properties, but also energy-related renovation measures for existing properties, can significantly reduce energy consumption and the CO2 emissions caused by this. Against this background, the demands of a wide range of stakeholders on the contribution to be made by the real estate industry to climate protection are increasing. We, as the Supervisory Board, have also been interested in how Aareal Bank meets its corporate responsibility, and not only since the latest regulatory developments. Since 2016, we have been addressing sustainability issues in at least two to three meetings per year in the plenary session of the Supervisory Board and in various committee meetings. Both the Supervisory Board and the Management Board are aware of the importance of this topic. It is therefore not surprising that Aareal Bank has taken specific ESG targets into account in the variable remuneration of the Management Board since 2016.
Mr. Merkens: Transparency is a basic prerequisite for determining and reporting on our corporate contribution to sustainable economic development. That is why we have been collecting consumption and emission data at company level for many years and calculating our “ecological footprint”. However, this transparency is even more relevant in our core business. For example, we are working on the standardised recording of energy efficiency and green building certifications at property level in order to be able to make statements for the entire property financing portfolio. In addition to our ecological footprint, we also have the effects of different degrees of global warming on our business model calculated. In our view, this is part of appropriate and effective ESG risk management. And allow me to make a comment with regard to “Future Good Governance”: I am responsible for Aareal Bank Group’s sustainability management, as well as for the development and implementation of the business strategy, in which we have incorporated our sustainability approach.
Trust is good, control is better. Today it is still primarily about numbers and compliance. However, artificial intelligence is changing perspective and thinking here as well. How can you imagine a future system for monitoring the board of directors? Will there still be a supervisory board watching over the management or will the ‘monitoring’ be replaced by a technically highly equipped external service provider?
Mrs Korsch: However, every change changes the digital transformation to a particular degree, as it revolutionises business processes and the way we work together in a comprehensive, complex and profound way. Like every change, it offers opportunities and risks that companies and their supervisory boards have to deal with. We took up this issue as early as 2015 and established the Technology and Innovation Committee of the Supervisory Board. This committee deals with cyber and IT risks, as well as with the development of new digital products of Aareal Bank and its subsidiaries. For the Supervisory Board’s activities as such, we are now fully digitalised with our electronic data room. This has considerably simplified our work and made it more efficient. AI will certainly be increasingly used in the future monitoring of the company, for example for the evaluation of internal documentation. Support from AI in the evaluation of trends or other information is also likely. The management will therefore use AI more and more. However, I dare to doubt that AI will replace the activities of the supervisory board in the near future. Personally, I think that especially in times of change, the importance of debates and discussions between management and supervisory boards should not be underestimated. Entrepreneurial decisions must be made on the basis of appropriate information. However, they remain entrepreneurial decisions with sometimes considerable discretionary powers. For the time being, there can be no substitute for discussion between the Management Board and the Supervisory Board, i.e. a large number of highly qualified individuals who contribute a wide variety of backgrounds and perspectives and thus arrive at the best possible decision.
Companies are subject to a constant process of change. What challenges do you expect for your company in the next 10 years? How will they change your company? What will change for the employment and qualification of employees?
Mr Merkens: Almost all companies have to question proven business models and working methods due to digitalization, rethink or – if the start-ups have their way – completely disrupt them. The need for internal company changes is increasingly driven by the external willingness of many customers to change. In the case of banks, for example, customers increasingly want to use digital solutions, processes and applications for their financial transactions. Of course, fulfilling customer wishes is a basic requirement per se that must be met. But the speed with which this happens explains why banks are also struggling with the future. But I am not a fan of pessimism. On the one hand, as a specialist in real estate financing, this development affects us less quickly than it does pure retail banks. On the other hand, we have been digitising our processes and products for a long time now, and with Aareon, we are also an IT company within the Group, and we see ourselves as being well equipped for the future. But we too must take our employees along this path, involve them in the process at an early stage and provide them with orientation. No one can change corporate culture, attitudes and behaviour overnight. The further development of the corporate culture will only take place if it is exemplified – not least by the Executive Board. It is the result of an ongoing communication and persuasion process. I would like to emphasize one aspect at this point: For Diversity – not only in the sense of age-, gender- and culturally mixed teams, but also in the way we work, diversity is a decisive element – and a central prerequisite for the success of our digital transformation. Digitization demands new skills in both our everyday lives and at work. This means that we must ensure that we give our employees the freedom to develop their digital competence profiles in a targeted manner and convince digital natives that they can expect a future-oriented working environment from us.
Mrs. Korsch: Today, lived diversity is demonstrably an essential success factor for a digital transformation such as the one our company is currently undergoing. Diverse teams develop more ideas than individuals with the limitations of their respective backgrounds would be able to achieve. At the same time, a diverse composition of teams reduces the danger of unifying group thinking. Aareal Bank employs bankers and property experts as well as consultants and developers of digital services. They all work in different ways and face different challenges. For this reason alone, Aareal Bank’s culture is characterised by diversity and individuality.
There is much debate about centrality vs. decentralisation, agility and core competence in organisations. Will there still be companies in today’s sense of the term in 20 years’ time? What changes in terms of corporate organization and financing do you expect or would you like to see?
Mr Merkens: Digital disruption appears to be a threat to established business models. In fact, however, it is also a great opportunity if we succeed in adapting our business models to the new circumstances, expanding our range of products and services and opening up new areas of activity. This applies across all industries and sectors. In the future, this ability will determine success or failure within the banking industry. To achieve this, the speed and self-image of the banks, the market conditions and the competition must be adapted by Fintechs – and in our case by Proptechs. We have to face the challenge of an even stronger customer focus and the environment of shorter product life cycles and the resulting higher need for innovation.
Mrs Korsch: Banks can learn a lot from Fintechs, for example when it comes to their rigorous customer focus and willingness to innovate. Nevertheless, it is undeniable that the development of start-ups and new (digital) businesses also depends largely on smoothly functioning banks, capital markets and investors. Digital innovations are not an end in themselves: they must serve the strategic orientation of companies and become a core element of customer relations. Only then will we be in a position to create new business opportunities and thus new earnings potential with new digital offerings, but also to become much more efficient ourselves.
Automobile manufacturers are becoming mobility service providers, food producers are becoming lifestyle providers, media companies are becoming data science companies. Where will your industry develop? Will industries – as we know them today – still exist in ten years’ time? What will happen then?
Mr. Merkens: The basis of all these mentioned business models is the targeted use of data. If banks think in this direction and develop services and products on this basis, then banks will continue to exist in the future, albeit in a different form than today. We have already embarked on our path in this direction: As a broad-based Group with special industry expertise, we no longer see ourselves as a pure specialist bank, but rather as a partner and competence hub that can work with our customers to address the challenges of digitization in a comprehensive range of services. Regardless of what payment transactions, means of payment and payment requirements will look like in the future – we as a Group want to meet precisely these requirements with our product diversity. And I believe that we are on the right track with this strategy.
Mrs. Korsch: I also see another aspect, the financing of our economic system. Banks will also be needed in the future. Banks take on risks and finance investments – and with them growth, progress and the future. From an economic point of view, that is their real raison d’être – and the banking sector will continue to meet all of these needs, even under the current challenging conditions.
Today, corporate leaders are being asked by various parties about the purpose of a company or the specific mission of the company. How do you meet this challenge? What positive or critical lessons have you learned from this? What advice do you give a CEO from another industry on how best to approach this topic?
Mrs Korsch: Larry Fink of Blackrock and many, many more CEOs of US companies have focused this year on the importance of the “purpose” of society. Accordingly, “purpose” is the link between long-term strategy and corporate culture. I can only agree with this. The corporate purpose provides the framework for the strategy. It can inspire confidence in the business, bind employees to the corporate strategy and promote customer loyalty. One must be aware of this. In other words, every day it is particularly about giving customers added value, investing in our own employees, dealing fairly and correctly with our suppliers and supporting the economic and cultural networks in which we work. I am convinced that this creates long-term added value for our shareholders.
The so-called stakeholders, in particular the (institutional) shareholders, are exercising their ownership rights and obligations much more strongly than just a few years ago. It has therefore long since ceased to be enough to tick off the requirements of a code (“comply-or-explain”). Internationally, the intensive and permanent communication/interaction of stakeholders with corporate management is gaining ground (“apply-and-explain”). What trends do you see here and how do you assess them?
Mrs Korsch: It is in line with modern good governance that the Chairman of the Management Board and the Chairman of the Supervisory Board enter into a dialogue with the shareholders in addition to the Chairman of the Management Board. For this reason, the suggestion for dialogue between investors and the Chairman of the Supervisory Board was also included in the German Corporate Governance Code in 2017. I fully support this. However, this dialogue may only cover topics that fall within the Supervisory Board’s area of responsibility, such as monitoring processes, the composition and compensation of the Board of Management and the Supervisory Board, or audit issues. In addition, the overall importance of transparency, not only in verbal but also in written communication, is increasing, including compensation issues.
#FutureGoodGovernance is currently still comparable to a crystal ball in many areas. Which future aspects of good governance are particularly important to you? What would you wish for if you had three wishes? Where do you see the political challenge? And what responsibilities will companies and their managers have in the future?
Mrs Korsch: My primary concern is good governance in the sense of good corporate management. What points are important to me in this respect? First of all, transparent and responsible corporate management and control, geared to long-term value creation. The Supervisory Board and Executive Board must be staffed with top-qualified people in order to make the right decisions for the company. The importance of independent members of the Supervisory Board should not be underestimated, who should monitor the Executive Board constructively but critically. We therefore make our understanding of independence transparent in the annual report. The purpose of corporate management should also not be confined to one perspective, but encompasses the large number of groups of people associated with the company within the company. In this interview, we have already pointed out that diversity is essential for making good decisions in the best interests of the company.
If I had one wish free, I would choose the following one: Especially in the case of regulation, I would wish for uniform, global standards, the implementation of which would be harmonized. Differences in the regulatory environment distort competition. But companies should all have the same opportunities.
Thank you very much for the interview!