Supervisory Board evaluation - a question of style or an EU joke?
H.L. HENNER KLEIN, LABBÉ & CIE.*
After Sarbanes-Oxley in the US, the Combined Code on Corporate Governance in the UK and recently the German Corporate Governance Code in Germany, the EU too (no surprise) has now again set about laying down more, and more closely defined, rules in terms of integrated business management. Already in 2005 the Commission had recommended that supervisory boards of listed companies each year undertake a self-assessment. Not only their composition, organization and functioning as a group should be assessed, but also the competence and performance of individual members and of the committees. Overall performance should also be rated against the performance targets. The regular use of an external "facilitator" could also improve assessment of the board, by providing an objective point of view and sharing good practices of other companies. In its recent Green Paper, the EU put the icing on the cake by suggesting that regular external assessment be prescribed as a requirement. Jubilation broke out, at least in the consulting industry, with many self-proclaimed experts scenting a new lucrative business field, before the compliance bureaucracy has reached its peak.
To immediately proceed to one conclusion: a periodic review of the quality of the work of the Supervisory Board and Advisory Board is actually so self-evident that one wonders why business and industry are not addressing this much more actively, rather than letting more paternalism of government regulation and bureaucratic requirements be imposed on them. The effect of any corporate-governance system is first and foremost a question of effectiveness and efficiency of the managerial bodies acting, i.e. of, respectively, the Board, Management and Supervisory Board, and Advisory Board if any. But all the governing bodies display more complex leadership mechanisms than commonly supposed. The Institute of Directors (UK) rightly notes: to gather a group of competent people of goodwill around a conference table does not guarantee an efficient nor an effective job. Here qualitative conditions - often denoted by the term culture - play the really decisive role. Formal structures, processes and regulations are undoubtedly important, and promote efficiency. But a discussion culture characterized by mutual respect, trust, openness and joint commitment to the good of the company will remain the sufficient condition for real effectiveness.
Therefore, the question of the evaluation of supervisory bodies is not really an if, but a how: internal or external evaluation? Formal or more informal? Regularly or rather when needed? One conclusion is certain: a standard solution that takes away the need for thought and discernment by managerial people is not going to happen. Government agencies must set conditions which make abuse difficult, and if it happens, provide a framework to better establish responsibility. This is to be honoured, and is in principle in the interests of shareholders, partners and employees. But the firm and its owners must be left sufficient freedom to shape the how in terms of their own corporate responsibility.
A responsible supervisory or advisory board (and much the same applies equally to board and management) should subject its own work regularly to critical review. A procedure internal to the bodies is recommended at the beginning, especially for smaller bodies, and is quite sufficient. Correctly, in a first step the more formal forms will in any case be to the fore. This can be by questionnaire or by direct discussions conducted by the supervisory-board or advisory-board chairman or - especially in family and other small businesses - by a non-participating partner. The integration of company-external support should at this scale be reserved for a second step, in order to take on a moderator role in full objectivity if follow-on steps are necessary. For larger and co-determined supervisory boards, external support appears basically sensible for various reasons and because of the overall more complex mixed situation. This may relate to specific vulnerabilities or be because of general lack of progress towards the elimination of discovered shortcomings. In any case, not knowledge but change is the challenge.
The involvement of a selected external expert is recommended mostly for the elimination of "climate" problems, but also for strategically relevant factual issues argued over for a long time without achieving substantial consensus. A clever approach to evaluating a supervisory board is to hold a board strategy meeting moderated by experienced consultants. In a two-day session the object here is to subject the company's strategy, its business model and the question of the actual value creation in each value chain to a consistent plausibility check, and at least scrutinize existing assumptions on the basis of foreseeable trends in the industry. Last but not least, the question of reasonable executive compensation can be taken only once the strategic parameters on the basis of which the success criteria for each Board position are defined have been understood and agreed to. Supervisory evaluation in this sense then reveals not only procedural potentials, but also content that describes the actual lever for efficient and effective supervisory work. As always, what is essential gains from conciseness.
* H.L. HENNER KLEIN is a shareholder and partner of LABBÉ & CIE. (www.labbe-cie.eu), a Leadership Boutique specializing in supervisory and advisory board services, as well as Top Executive Search & Advisory.