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Moving on up

When is a CEO’s ‘move up’ to chair the supervisory board in the interest of shareholders? Corporate governance dogmatism versus pragmatism in Germany                                                                                                                                                         

Home / Hermes EOS Blog / Moving on up

In Germany, the CEO (Vorstandsvorsitzender), who chairs the management board (Vorstand), leads and manages the company, while the chair of the supervisory board (Aufsichtsrat) oversees, controls and advises the management board. Shareholders only have the right to elect members of the supervisory board, whereas the CEO and other members of the management board are appointed by said board.

For many years, controversy has surrounded the issue of whether a CEO becoming chair of the supervisory board on completion of his or her tenure as the leading executive can be in the interest of a company and its shareholders. Ahead of the annual general meeting of BMW on 13 May 2015, where this is proposed, the arguments for and against such a move have been revisited.

Hermes EOS’ approach
We have consistently argued that such a move should be made on a case-by-case basis. The assessment should take into account the company’s situation, the composition of the supervisory board and, of course, the CEO’s track record as an executive and his or her personality. (see Hermes EOS Corporate Governance Principles Germany)

German law
We therefore publicly raised concerns about the introduction of a law in 2009, which for most companies meant that even successful and suitable CEOs could only become chair of the supervisory board after a two-year cooling-off period (see Financial Times, Hermes calls for end to ban on ‘moving upstairs’, 26 August 2009). We continue to believe that this law harms German companies, as well as investors, as it means highly valuable experience and relevant knowledge is lost for at least a couple of years.

Arguments for and against moving up
It used to be common practice in Germany that the CEO would become chair of the supervisory board after retiring from day-to-day management of the company. There can, of course, be good arguments for appointing a successful and suitable former CEO to the supervisory board, not least that he or she has in-depth knowledge of the company. However, in the German two-tier board structure, the roles of chair of the supervisory board and CEO, as well as the competencies, knowledge and experience required for these posts differ substantially. Therefore, in addition to the significant conflicts of interest that may arise on decisions taken during a CEO’s tenure, which could require their review and possibly reversal, the two roles demand different personalities or at least mindsets. For this reason, a CEO moving up to chair the supervisory board should not be common practice. If such a move is on the cards, its merits need to be explained to the company’s shareholders.

However, we do not view a general, legally binding waiting period of two years for individuals – not just the CEO – moving from the management to the supervisory board as helpful. At present, this can only be circumvented, if 25% of the shareholders support a proposal. We believe that the mandatory waiting period leads to a loss of valuable experience and relevant knowledge from the supervisory board, resulting in weakening its efficiency rather than its strengthening. The financial crisis has shown that company-specific knowledge and sector experience play a vital role in the overall efficiency of supervisory boards. We are therefore willing to support proposals for the election of suitable and successful CEOs to the supervisory board where appropriate. However, this ought to be the exception and needs to be fully explained to shareholders well ahead of the shareholder meeting at which approval is sought.

The proposed election of BMW’s CEO to the  supervisory board
As CEO, Norbert Reithofer has led a highly successful period at BMW and has an in-depth knowledge of the company. In addition to his excellent management track record, he understands the key challenges facing BMW. Significantly, we believe that he has the personality and mindset that would make him an effective supervisory board chair.

During our assessment of Reithofer’s election, we also took into account the impact of employee representation on German supervisory boards, which makes detailed company and sector knowledge among the shareholder representatives even more critical. Furthermore, we looked at other changes to the supervisory board of BMW, such as the departure of a seemingly over-boarded non-executive director. Overall, we are comfortable with the company’s nominations for election to the supervisory board at the annual general meeting on 13 May and will support Reithofer’s direct move up.

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Hans-Christoph Hirt Dr Hans-Christoph Hirt is an executive director and board member at Hermes EOS and as Co-Head of the organisation responsible for the sustainable success of the business. He leads and oversees the global engagement programme and the quality of the services Hermes EOS provides to its clients around the world. Hans also leads some high-profile stewardship activities, including priority engagements with major companies in Asia and Germany, as well as interactions with key regulators and organisations. rnrnPrior to joining Hermes EOS, Hans worked with international law firm Ashurst. He is the author of numerous publications on corporate governance and law, responsible investment and stewardship. Currently, he is a member of the Steering Committee of the UN PRI Investor Engagement Clearinghouse and the Shareholder Responsibilities Committee of the International Corporate Governance Network. In 2015, he joined the Institutional Investor Council in Malaysia. Hans is a UK-qualified lawyer, holds degrees in Business Administration from universities in Germany and the UK, the ACCA qualification and a PhD from the London School of Economics (LSE). He continues to be involved in academia as a Corporate Governance Fellow at the LSE’s Financial Markets Group and a Teaching Fellow at University College London. Hans speaks French, German and Mandarin.
Read all articles by Hans-Christoph Hirt

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