Focus on strategy
Bad supervisory boards consist of “yes men” who agree with whatever management says. Ideally, both sides have a critical, open and trusting relationship and use meetings as opportunities to bounce ideas off one another – whether about new markets to enter or new businesses to acquire.
Strategy talks are an essential part of the supervisory board’s work and, in my experience, separate meetings to discuss strategy are a good way to focus on these issues without short-term distractions such as quarterly reports.
I’m aware that this trusting relationship between management and supervisory boards doesn’t always exist. In Germany, the supervisory board appoints the management board, which can lead to power struggles. A trusting relationship is something both sides have to work at.
Enforcement is important
Every year, the Financial Reporting Enforcement Panel (FREP), which I’m the President of, checks the annual reports of around 100 listed German companies on a sample basis.
I like to think our work has made a positive impact on financial reporting in Germany. Our institution was founded in 2005 and has an unusual structure. In most European countries, it’s up to the authorities to control the companies’ reports, but in Germany we have a two-tier system. There’s the FREP and then there’s the Federal Financial Advisory Authority (BaFin), which is a government agency. If we find a fundamental mistake in a report, we get in touch with the company and ask it to publish a correction. But if the company disagrees, we hand the case over to the BaFin, which looks at the books again and makes its own assessment.
For me, the advantage of this procedure is that it gives a window into the company from two different angles. Whereas the BaFin deals with a company’s books from a legal, administrative perspective, we try to read them like an economist would. Accounting isn’t an exact science and there are a wide range of interpretations. That’s why it’s important to have that second approach, and that’s what we provide.
Statistics show that we have made a positive impact. When we started, we found significant mistakes in 25% of the reports we checked; today it’s only 13%. Ultimately, our work increases the trust in Germany’s capital markets.
Being a board member takes commitment
In recent years, independent directors and supervisory board members have had to deal with a stream of regulatory changes. Some colleagues complain about that, and it’s true that it means more work for everyone. But I also think it’s an inevitable part of the professionalization of our job. The days are long gone when it was enough for supervisory board members to show up at a few meetings every year and get paid handsomely just for doing that.
Today, being a board member requires constantly keeping up to date with the company’s news and the regulatory environment, preparing for the next meeting or working on new reports. And that’s a good thing, because it helps us to do our job.