Supervisory Board AG – Supervisory boards of stock corporations: Company boards, cooperative boards and foundation boards all have a supervisory board. The following text explains the composition of the supervisory board, the requirements that supervisory board members must meet and the rights and obligations associated with this position.

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Supervisory Board AG – Definition

The composition of a supervisory board is partly prescribed by law, partly by the articles of association or the partnership agreement, depending on the situation.

It is made up of shareholders and – in the case of larger corporations – employees who are elected by the shareholders. As an advisory and controlling body, the Supervisory Board has the task of monitoring and, if necessary, controlling the Management Board.

Supervisory board in the AG – public limited company: general information

In German stock corporations whose shares are traded on the stock exchange, the Executive Board is the body responsible for the management of the company. A separate body is responsible for monitoring the actions of the Management Board, e.g. to prevent or uncover waste or self-serving behavior.

A supervisory body must be established to ensure the proper monitoring of the Management Board in this respect. In Germany, this is known as the supervisory board. In addition to the supervisory bodies mentioned above, advisory boards and shareholder committees can be set up on a voluntary basis, for example.

The monitoring of company management is also part of corporate governance.

However, in addition to its monitoring function, the supervisory board also advises and supports the management board. Instead of dealing with a company’s business development ex ante, supervisory boards deal with it ex post.

Historical development – Supervisory Board AG

The establishment of supervisory boards for stock corporations (AG) and partnerships limited by shares (KG a. A.) became mandatory in the North German Confederation and thus also in the German Reich with the General German Commercial Code in the version dated June 11, 1870.

Supervisory boards, on the other hand, already existed in stock corporations before this date.

Supervisory board of a stock corporation: remuneration

In most cases, supervisory board members are remunerated for their work. In the case of public limited companies, the amount of the dividend is decided by the shareholders at the annual general meeting. Directors of large companies often receive higher salaries than those of smaller companies.

The remuneration usually consists of a basic income and a variable incentive, such as the number of Supervisory Board meetings.

Even for large and listed companies in Germany, there is no legal obligation to publish the remuneration paid. Nevertheless, it is common practice in the context of corporate governance to disclose at least the total amount of remuneration paid.

For example, the annual remuneration of individual supervisory board members is now published in the annual report of most listed companies.

Most of the supervisory board remuneration goes to the Hans Böckler Foundation, which is close to the DGB trade unions. They are of the opinion that they are not delegated for themselves but for the employees and that the royalties should therefore be used to promote trade union work.

The members who pay statutory dues and agree to this publication are regularly listed. If elected officials keep their salaries, it can be determined whether or not they are financially supporting the union’s work. The employee representatives of other unions are not bound by the same rules.

Types of contracts

A supervisory board member may enter into supplementary contracts with the management board of a public limited company, as their remuneration is regulated by stock corporation law and only relates to actions that fall within the supervisory board’s statutory remit.

In most cases, these are consultancy agreements that are to be used in addition to the regular duties of the Supervisory Board member. The legislator places many obstacles in the way of a simple demarcation.

Due to an imprecise demarcation and thus a circumvention of Section 113 AktG, the concluded consultancy agreement is also unlawful in the absence of a resolution by the full supervisory board.

Supervisory Board AG – Laws in Germany

The activities of the Supervisory Board are regulated in Sections 95 to 116 of the German Stock Corporation Act (AktG). Companies limited by shares and partnerships limited by shares are now obliged to have a supervisory board. A supervisory board is also required for cooperatives that exceed a certain size.

In the case of a GmbH, a supervisory board can be set up voluntarily. Unless otherwise stipulated in the articles of association, the provisions of the AktG apply accordingly in accordance with Section 52 GmbHG. However, a supervisory board is also mandatory for a GmbH under certain circumstances.

This may be necessary for various reasons, e.g. for reasons of employee co-determination or due to increased public safety concerns. § Section 1 para. 1 no. 3 DrittelbG requires employee co-determination on the supervisory board if the GmbH has more than 500 employees.

A stronger co-determination right for employees may result from the MitbestG, MontanMitbestG or MitbestErgG. Investment firms in the legal form of a GmbH are required by law to have a supervisory board for reasons of public protection (Section 18 (2) KAGB).

In Germany, there is a dualistic system of corporate control with a separate Management Board and Supervisory Board.

In various countries, there are monistic systems in which management and control are combined in a single body. The “executive board” is the name for this group.

The Audit Reform Act (AReG) of 2016 made changes to the law. This law aligned stock corporation law with European standards (e.g. Section 95 AktG). As of June, the majority of Supervisory Board members must be non-employees of the company.

For the sake of simplicity, the Supervisory Board of an AG is referred to below to designate each individual member. The explanations apply in the same way to the other legal forms described above.

Supervisory Board – duties and powers

The task of the Supervisory Board is to monitor the management of the company, i.e. the Management Board. To this end, the Supervisory Board has the authority to make management measures dependent on its approval. It also has reporting and auditing duties (in particular with regard to the company’s consolidated and annual financial statements, Section 111 para. 2 sentence 3 AktG).

§ Section 112 AktG stipulates that the Supervisory Board represents the company vis-à-vis the Management Board.

The members of the Management Board are appointed and dismissed by the Supervisory Board. Members of the Management Board can be appointed for a second term of office if the first expires (Section 84 (1) sentences 1 and 2 AktG). Appointments may be revoked by the Supervisory Board for good cause (Section 84 para. 3 sentence 1 AktG).

The Supervisory Board consists of three members who are not subject to co-determination. A higher number can be specified in the articles of association or the partnership agreement.

Until December 31, 2015, the number of Supervisory Board members had to be divisible by three, but this is no longer required since the 2016 amendment to the German Stock Corporation Act, but only if the co-determination requirements are met.

In relation to the company’s total share capital, no more than 21 members may be appointed to the Supervisory Board.

The Supervisory Board is made up of shareholder representatives and, in Germany, employee representatives in co-determined companies (Section 96 AktG) and, if applicable, other members (co-determined Supervisory Board).

Responsibilities of the Supervisory Board

The articles of association of the respective stock corporation regulate the activities of the Supervisory Board. In addition, practically every supervisory board has its own rules of procedure. These rules of procedure generally regulate the cooperation between the Management Board and the Supervisory Board.

The Audit Committee and the Executive or Personnel Committee are two common committees on the boards of directors of companies that deal with specific matters. The Supervisory Board determines the composition of a committee, which must consist of at least three members.

In the case of listed companies, the Supervisory Board must meet at least twice every half calendar year; in the case of non-listed companies, the Supervisory Board may meet only once every half calendar year.

Work of the Supervisory Board

The task of the Supervisory Board is to monitor and evaluate the work of the organization and to intervene if necessary

The Supervisory Board keeps an eye on the management of the company, but where do you even start? This is all laid down in the German Stock Corporation Act. We have listed the most important tasks for you.

Section 111 para. 1 of the German Stock Corporation Act states: “The Supervisory Board shall supervise the management of the company.” §§ Sections 111 (1) and 84 of the German Stock Corporation Act give the Supervisory Board responsibility for appointing the members of the Management Board, as does Section 172 of the German Stock Corporation Act, which requires the annual financial statements to be adopted.

In the case of a GmbH, both processes are the responsibility of the shareholders in accordance with Section 46 GmbHG. A special regulation applies in accordance with § 32 MitbestG if the GmbH has more than 2,000 employees and is therefore subject to the Co-Determination Act. Even in this situation, the supervisory board of the – large – GmbH appoints the managing directors.

The most important task of the supervisory board is to select the members of the management body. The supervisory board must do its best to select the best candidates to fill these positions.

The Supervisory Board must pay attention to gender diversity in management and take women’s issues into account, as stipulated in Section 5.1.2 of the German Corporate Governance Code. As a rule, the Management Board makes recommendations to the Supervisory Board as to who should be considered for open positions on the Management Board.

The Supervisory Board has the authority to monitor the allocation of tasks within the management bodies on the basis of the professional expertise of its members. In this situation, the Supervisory Board must delegate individual decision-making powers to a member of the management body.

Nevertheless, the management board remains a single management body despite the separation of duties.

Supervisory Board AG Liability – shared responsibility

The separation of powers stipulates that the company’s management board (executive committee) is solely responsible for the company’s business. This group must take the lead on new initiatives. However, the board of directors/managing director could break through the concept of exclusive responsibility.

This can be achieved by requiring the board of directors to approve all transactions of critical importance to the company.

Only once the supervisory board has approved such an important decision can the management body implement it. Changes to the company’s objectives, the sale of major shareholdings or a significant reduction in staff are just a few examples.

A catalog of transactions requiring approval must be defined in the articles of association or by the Supervisory Board in accordance with Section 111 (4) AktG. This is intended to prevent a ready-made transaction from being presented to the Management Board. The Management Board and Supervisory Board must always agree on important company decisions.

Information and reports from the Supervisory Board

The Supervisory Board not only advises and monitors the management body, but also provides advice. The reports of the management body and the topics listed in Section 90 AktG serve as the basis for monitoring. Due to § 1 DrittelbG and § 25 MitbestG, § 90 para. 1 AktG also applies to stock corporations.

Due to the nature of the system, the Supervisory Board’s monitoring activities are dependent on information from the reports of the management body. This is due to the fact that it also includes people who are not employed by the company. As a result, the Supervisory Board’s reports to the management body may overemphasize positive developments.

When it comes to temporary trends, the media tends to focus on the bad ones. The employee representatives on the supervisory board can fill this knowledge gap with their own expertise. Pursuant to Section 90 (3) AktG, only they can use the knowledge they have gained from their work on the works council and the economic committee, for example, to make targeted requests for additional information to the management body.

Influence of the management board on personnel policy

§ Section 90 para. 1 no. 1 AktG stipulates that the Supervisory Board must be informed of personnel policy by the management body in the form of personnel planning. Examples of this are personnel requirements planning and personnel development planning, both of which are dealt with in cooperation with the works council in accordance with the Fraud Act.

The Supervisory Board must initially only examine the truthfulness of the information contained in the reports. Among other things, the legality, appropriateness and economic efficiency of the plans must be taken into account. The employee representatives on the Supervisory Board are very interested in how new initiatives will affect the workforce.

The remuneration of Management Board members and managing directors is also determined by the Supervisory Board of a stock corporation or a limited liability company with more than 2,000 employees. This is regulated in sections 4.2.2 to 4.2.5 of the German Corporate Governance Code.

Remuneration that is attractive in terms of amount, structure and design helps to attract and retain the best managers by encouraging them to achieve results.

In doing so, the Supervisory Board must pay attention to the appropriateness of the expenses and at the same time consider economic efficiency as a key element of the decision-making process

Section 5.4.5 of the German Corporate Governance Code is useful with regard to the tasks and duties of the Supervisory Board. The representatives of the Supervisory Board have the task of monitoring the training and further training measures for their respective office. The company will provide them with the necessary support.

Supervisory Board – composition

The Aktiengesellschaft and KGaA elect their supervisory board members, who represent the shareholders of the company, at their general meeting (GmbH).

There are three types of employee representatives: salaried employees (in Germany there is no longer a distinction between salaried employees and workers since the BetrVG reform in 2001) and trade union representatives.

As long as a member of the Supervisory Board needs to be replaced or extended and no extraordinary general meeting is convened, the registration court can appoint a new Supervisory Board member at the request of the Management Board, the management (GmbH) or a shareholder.

For companies that are subject to the German Co-Determination Act, a Supervisory Board consisting of half employee representatives and half shareholder representatives is required. The choice of a company’s legal form under the Co-Determination Act is the responsibility of the management board/management.

If this obligation is neglected, a supervisory board with equal representation can be enforced by the employees or trade unions. According to the MitbestG, the Chairman of the Supervisory Board is generally elected by the shareholder representatives. In the election, he requires 2/3 of the total votes cast.

If the election fails, the shareholder representatives elect the chairman and the employee representatives elect the deputy chairman (in both cases, a majority of the votes cast is sufficient).

In the event of a tie vote on the Supervisory Board, the Chairman of the Supervisory Board has two votes. The Deputy Chairman of the Supervisory Board does not have this power (see Section 29 MitbestG).

Judicial nomination of a Supervisory Board member

A court may nominate a member to fill a vacancy on the Supervisory Board in accordance with Section 104 AktG. The court can only consider one application. The applicant can be a member of the management board, the management or another party.

Make sure that the person you are considering has no conflicts of interest with the company. The court decides solely on the basis of its own free conviction.

Supervisory boards made up of self-appointed supervisors

Supervisory boards can be set up on a voluntary basis by associations or other organizations. There are cases where the articles of association regulate the tasks, functions, membership and election of the organization.

Requirements for the members of the supervisory board

The members of the supervisory board of a stock corporation must be natural persons with unlimited legal capacity within the meaning of Section 100 (1) AktG.

In Germany, management and control functions are legally separated, as the Supervisory Board is responsible for supervising the company. Members of the Management Board may not be members of the company’s Supervisory Board at the same time, as is the case in the UK and Switzerland.

The AktG stipulates that a person cannot be a member of the Supervisory Board if they are the legal representative of a dependent company (Section 17 AktG) (natural organizational unit in a group) or another corporation whose Supervisory Board includes a member of the company’s Management Board (cross-involvement).

§ Section 100 para. 2 AktG limits the possibility of a person being active in more than ten listed companies with legally regulated supervisory boards. The German Stock Corporation Act or the One-Third Participation Act do not force companies to form a supervisory board, so that even if they do so voluntarily, they are not taken into account.

On the Supervisory Board of an AG, each chair counts twice (Section 100 para. 2 sentence 3 AktG). However, up to five mandates on supervisory boards of group companies are excluded from the calculation.

The German Corporate Governance Code stipulates that members of the Supervisory Board must have certain qualifications and be committed to the company in order to qualify. The duty of loyalty and due diligence of a Supervisory Board member is defined in Section 93 (1) of the German Stock Corporation Act, namely the Business Judgement Rule.

The mandate expires immediately if the personal requirements are no longer met after appointment and acceptance of the mandate, i.e. within the term of office.

The Institute of Directors (IoD) is the leading organization for company boards in the Anglo-American region. The “German Institute of Directors” (German IoD) exists in German-speaking countries. The German Institute of Directors qualifies natural persons as Certified Directors and follows the criteria of the German Corporate Governance Code for supervisory boards.

Exceptions apply

The Supervisory Board of a partnership limited by shares (KGaA) cannot make management decisions dependent on its approval in accordance with Section 111 (4) sentence 2 AktG, as the Supervisory Board lacks the necessary personnel competence.

In plain language: Under German law, co-determination also applies to the KGaA. However, due to its small size and limited powers, it is also referred to as a “privilege” of co-determination law.

Supervisory boards have additional tasks in the highly regulated banking business. The German Banking Act (KWG) was tightened up by the legislator in summer 2009. (KWG). For example, since August 2009, new Supervisory Board members have required the approval of BaFin (Section 32 (1) KWG). CVs serve as proof of a person’s expertise.

The KWG requires that employees must be able to identify and analyze the risks associated with the bank’s business operations. Supervisory Board members who prove to be incompetent or unsuitable can be dismissed by BaFin.

Supervisory Board AG: Proportion of women in Germany

A study conducted by the DIW in 2006 revealed that only 7.8% of supervisory board members in the 200 companies with the highest turnover in Germany were women. More than half of these members came from employee representative bodies. The proportion of women on the supervisory boards of public limited companies in this category increased with the size of the company and was highest among the ten companies with the highest turnover at 11.8%.

In June of this year, around 20 percent of the supervisory board members of the 30 largest DAX companies were women.

Since 2008, the Nuremberg Resolution has been campaigning at a political level for greater representation of women on supervisory boards and in management positions.

In August of the same year, the Federal Ministry of Labor, in cooperation with the Association of German Women Entrepreneurs, created a database of potential female supervisory board members.

German Association of Women Lawyers

From 2009 to 2013, the project “Aktionärinnen fordern Gleichberechtigung” (“Shareholders demand equal rights”) by the German Association of Women Lawyers surveyed the management and supervisory boards of 75 HDAX companies on their appointment procedures during general meetings. The results of these surveys were reviewed and published in various specialist journals.

The DAX 30 companies today have a higher proportion of female shareholders than a few years ago. Nevertheless, the report notes that the targets set by companies under the German Corporate Governance Code for more women on their supervisory boards are largely unambitious.

The “Act on Equal Participation of Women and Men in Leadership Positions in the Private and Public Sector” established a women’s quota for supervisory boards.

Since 2016, 30 percent of supervisory board positions in 108 listed companies subject to co-determination must be held by women. If the proportion of women on the supervisory board is lower than this or the seat remains vacant, a woman must take over the position.

Board members of public companies no longer have the option of suspending their mandate in the event of prolonged absence, such as the birth of a child, prolonged illness or a family carer.

The only way to avoid responsibility during this time is to resign from office.

Since 2020, the #stayonboard movement has been calling on supervisory board members to resign temporarily. Verena Pausder and a number of other supporters, including Minister of State Dorothee Bär, Dieter Zetsche and Tina Müller, have spearheaded the movement. Since 2021, there has been a change in legislation.

Provisions of the Second Management Positions Act

In future, a woman must be appointed to the Management Board of all listed companies with co-determination on a parity basis (minimum participation requirement). There are currently no women on the boards of 24 of the 66 companies that would be affected by this regulation.

Companies that decide not to have women on their boards will have to justify their decision in future.

Companies that do not disclose a target or provide justification for setting a zero quota risk harsher sanctions. There will no longer be any room for error.

The federal government also wants to set a good example and create equal promotion and management opportunities for men and women.

This is why federally owned companies are exempt from applying the fixed gender quota of 30 percent under FüPoG II. This means that the supervisory board quota has also applied to 94 federally owned companies since January 2021.

At least one woman must then sit on the supervisory boards of companies in which the federal government holds a majority stake.

The Federal Employment Agency, health insurance funds, pension and accident insurance providers and other public companies must have at least one woman on their supervisory boards.

Supervisory board AG – Lawyer for corporate law

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