Buhlmann's Corner

Supervisory Board or Honorary Board?

“Europe’s banks are gasping for air,” said an acerbic Warren Buffet in Omaha at the weekend. Not only in Europe, and not just at the banks, the Financial Times sees “a new mood of militancy,” and the Wall Street Journal a “veritable revolution.”

It started in March with Banco Santander (elections to the Supervisory Board), followed the next month by a defeat for Citibank in Dallas (SoP), then Barclays (SoP), Aviva (SoP) and UBS (golden welcome), with Société Générale (corporate governance) and Deutsche Bank (non-discharge of the Supervisory Board) pending. Except in the financial services industry, even the family business with State participation (Volkswagen) came up with the idea that the most expensive German Supervisory Board (the chairman’s per diem is €3,900, plus expenses) cannot afford what it pays the Board...

What is the issue at Deutsche Bank? Germany has a dual-board system - the shareholders elect a body (the Supervisory Board) that appoints and advises the other one (the Board). Discharge does not regulate liability and does not have legal consequences - it is a general policy statement of “well done” which the shareholders can give the Supervisory Board - or not.

What must a Supervisory Board do, and how?

* the institution is in principle responsible as a body - without naming names

* the Supervisory Board must set an example, show leadership and make and implement personnel decisions on the board

* the shareholders’ transmission belt and also the ‘head’ of the company is the Supervisory Board - it must set ethics, strategy, business model and policy principles, and exemplify them.

At Deutsche Bank much came together;

Over 2/5 of the shareholders rejected the remuneration model at the 2010 AGM, but the Supervisory Board was not able to face the consequences, nor look the 2011 no vote from proxy advisors Glass Lewis in the eye.

Repeatedly, Executive Board personnel questions were disputed publicly, something only conceivable with broken confidentiality of “interested parties”. The years of stalemate culminated in the regulator’s rejection of the board candidates that “had become” public.

The Supervisory Board’s guidelines - if there were any - led to a report on lawsuits from everyday business, page 309-315 in the German report and 137-141 plus F122-F128 in the American 20-F report.

So much dispute in principle creates reputational risk, and sets acceptance by stakeholders and the sustainability of the business model in general at risk. Instead of bothering about it, the Supervisory Board “accompanied” a change of leadership at the globally oriented bank that changed the heads in both bodies simultaneously - without ensuring any continuity. One looks in vain for any sign that the Supervisory Board was the leader, the driver, of this management change - if compromise is to be found in a vacuum, then shareholders should confirm that with non-consent - or go and vote with their feet, as did the managers themselves.

Whether and by whom trust was negligently broken is secondary, if the leadership failed. To grant discharge at the Annual Meeting with a YES vote means considering all the acts, or the vast majority, to be good. Abstaining can only mean either that the shareholder cannot carry the responsibility (which he has, inseparably from the stock) - he must know that in German law abstention counts the same as absence. It is not a “little criticism” to abstain from voting - it’s just looking away and leaving.

The fee for a Deutsche Bank Supervisory Board member is not just to be picked up as an honour. The supervision must also be provided. A NO to discharge to the Supervisory Board will both give targeted expression to criticisms acccumulated over the years, and lay a clearer, more distinct mandate for a better future upon the shoulders of the new Supervisory Board chairman to be elected that day by the shareholders!

Warren Buffet was right when he exclaimed, “We will not leave the leadership of the company to someone with a degree in art history.” The litmus test of independence will be: how will the DWS (Europe’s largest fund company, as a subsidiary in the millstones of the Deutsche Bank) argue, discuss and then vote?

Vote NO to discharge for the old Supervisory Board - that will make the new Supervisory Board stronger in the leadership of the bank. And that is the bounden duty of sustainably responsible shareholders ..........