Managing Director, Munich
Munich (June 15, 2020) – In the first half of 2020, almost the entire world felt the full force of the Covid-19 pandemic. In fact, for many sectors the economic environment had already become more unstable in the previous year – because of Brexit and tensions in global trade for example – and the first signs of crisis had emerged. Crises place special demands on expertise and working methods in the management circles of companies – not only in the operative managing board, but also in the supervisory board.
As a result, experienced crisis managers are in great demand for positions on supervisory boards. In 2019, more than half of all newly appointed supervisory boards in the most important German and Austrian companies operating in an economically unstable environment had significant restructuring experience (an average of 55% – DAX: 47%; MDAX: 50%; ATX: 83%). In addition, there was more intense cooperation within the supervisory boards and with management. In companies faced with tense situations, supervisory boards met on 7.9 occasions in 2019 on average. This is 2.2 sessions more than in comparable profitable, high-growth companies.
In the annual “AlixPartners Supervisory Board Study” the measured maturity of the composition and activities of supervisory boards in all sectors has continually improved in the past. In 2020, however, lower values emerged in four of the five dimensions of the study for the first time.
Whereas in the last almost ten years of economic upswing, a large proportion of the supervisory boards surveyed felt that they were still well or very well positioned, there is increasing doubt as to how effectively supervisory boards can act in crisis situations. In the current highly relevant dimensions of ‘risk management’ and ‘cooperation and communication’, the figures are significantly lower at 64% (2019: 70%) and 72% (2019: 75%) respectively.
The assessment of the composition of supervisory boards, on the other hand, remains stable at 66%, as in the previous year. This has to be balanced in terms of international perspective, functionality, industry experience, gender, digital know-how and, last but not least, (crisis) experience.
Supporting and monitoring the work of the managing board, promoting the company as a forward-looking strategist in the background, and at the same time avoiding organizational surprises – supervisory boards have to do all this under the increasingly critical gaze of the public. In economically critical phases, expectations of actively participating in rescuing a company are rising even more. In some cases even beyond the mandate of the supervisory board.
Supervisory boards become critical and constructive sparring partners of managing boards, but also get involved directly. They have to be available to offer strategic advice and take responsibility if overwhelming developments threaten to put management in a state of shock.
“This leads to a shift in control and supervision toward a more active role for the supervisory board”, said Andreas Rüter, co-author of the study and Country Head Germany at AlixPartners. “What sounds like value creation is in fact a massive power and balancing act. The more intensively the supervisory board itself contributes to critical phases, the greater the tensions it has to endure – in relation to its given role as a monitoring body in the background, its specific involvement, and the long-term implications of its actions.”
The supervisory boards surveyed by AlixPartners unanimously highlighted the fact that their level of cooperation within the board and especially with the managing board has intensified significantly in recent years. “De facto, supervisory boards at companies in trouble take more responsibility for economic success or failure. In doing so, they can be exposed to both personal reputational and legal liability risks,” said Dr. Jan Kantowsky, co-author of the study and Managing Director at AlixPartners. “Anyone who has ever mastered a restructuring process can improve the capabilities of the entire board and gain a reputation as a mover and shaker. ‘Storm-tested navigators’ are worth their weight in gold on a supervisory board.”
However, since the composition of the supervisory board can hardly be changed in the short term, it is all the more important to carry out a systematic, forward-looking and professional selection process during the good times. This process has to take into account that crisis experience today may be demanded sooner than can be predicted. The need for improvement is indicated by the fact that maturity in the ‘selection process’ dimension is rated lower in this year’s analysis at 69% than before in a more stable environment (2019: 75%).
The intensive work of the supervisory board in crisis situations not only shows where risks before and during the crisis should be better identified and addressed but also asks questions about the individual willingness to take on personal responsibility and risks. In this environment, the 2020 respondents rate the maturity of risk management and governance processes significantly lower at 64% compared to 70% in the more stable previous year. On all boards the time required for risk, governance and compliance issues is increasing considerably.
However, some of the supervisory boards interviewed by AlixPartners warn against ‘mismanagement’ through excessively formal and extensive reports and documentation with the aim of having considered all the uncertainties. “Supervisory boards have to ensure maximum transparency together with the managing board. A solid database and a view from outside help to identify critical areas of action and reduce risks – for the supervisory boards themselves as well as for the companies,” said Jan Kantowsky. “The right focus on the key financial aspects is essential.”
Doubts become even more apparent in times of crisis as to whether the increased personal exposure, intensity and increasing time required by supervisory boards – over and above naturally essential intrinsic motivation – will be adequately compensated. The rating in the ’compensation’ dimension is low at 47% (previous year: 60%). An upward adjustment, while the company itself is in a difficult economic state, would send the wrong signal internally and externally. Consideration should be given, however, to ways in which better mechanisms can be found to objectively recognize and appreciate high levels of commitment, especially in times of intense crisis.
The dualistic German governance system, with its operative managing board and its monitoring supervisory board, is recognized by many respondents as a guarantor of stable checks and balances in corporate management. However, it is also recognized that a monistic body, in which leadership and supervision are not institutionally separated, especially in the Anglo-Saxon area, is in itself a leaner structure. This can ensure greater flexibility, especially in critical situations, and can often lead to quicker and more decisive action in view of the much closer involvement of non-executive members.
Andreas Rüter concludes: “Regardless of the formal arrangement of corporate governance, it is the competence, closeness to the company, flexibility, entrepreneurial decisiveness, foresight, constructive cooperation and decision-making of supervisory boards that are crucial for successful crisis management. Coincidentally, Covid-19 demonstrates the central importance of digital literacy on supervisory boards.”
From November 2019 to March 2020, AlixPartners interviewed selected members of the supervisory boards of DAX, MDAX, ATX and family-owned companies using a structured interview technique. The fundamental question was how should a supervisory board prepare and act against the background of an emerging crisis in order to deal as competently as possible with the resulting business challenges. The focus on restructuring experience and handling of critical situations in the supervisory board’s work was then assessed on the basis of the five dimensions covered by the AlixPartners Supervisory Board Study to measure the maturity of the supervisory board in those individual dimensions, namely:
The interviews were flanked by quantitative analyses of various aspects relating to the work of supervisory boards. Among other things, the analyses covered the composition of supervisory boards, the number of supervisory board meetings and the frequency of mentions in newspapers based on various sources and databases.
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.