Evaluation Is Key To Good Governance - Ernst & …

1 Board Leadership | Board Evaluation Daniela Mattheus corporate Governance Board Services Leader at EY Germany Evaluation Is Key To good Governance A critical view to the board's work should sit at the 2009 and in other public codes installed by German federal states or municipalities. Codes heart of a company's approach to Governance for family-owned businesses and sectoral specifics have evolved. Although board Evaluation is not a legal M. onitoring board effectiveness company, up to a third or a half of the members requirement but only a recommendation for good has been a recognised being employee representatives in accordance corporate Governance following the comply-or- component of good corporate with the German law on co-determination for explain-mechanism, it is already well accepted Governance at German companies with over 500 employees. practice today. The rate of compliance among companies for many years, DAX30 blue-chip stock index companies is 100.

2 Not only for listed entities but The German regulation per cent and per cent for all listed companies also for publicly-owned or family-run The German corporate Governance Code (Berlin Center of corporate Governance , corporate operations. For supervisory boards, (GCGC) specifies and complements German Governance Report 2014). good corporate Governance involves an corporate law requirements comprising best Compared to the f igures from 2005 that assessment of the board's organisation, practice guidelines of good corporate Governance disclose a compliance rate across all listed composition and function as a whole, (sof t law). Under the terms of the GCGC, companies of 87 per cent (Berlin Center of as well as its committees and members. management and supervisory boards have to corporate Governance , Kodex Report 2005), German law stipulates an institutional declare annually whether the Code has been and acceptance is obviously increasing.

3 These separation of management and supervision for is being observed and which of the Code's empirical findings show that board Evaluation listed companies (two-tier system). Executive recommendations have been or are not being has become a proven tool in corporate practice boards (management boards) generally have more applied and why a comply-or-explain-principle. to ensure targeted analysis and optimisation of than one member and these individuals are Regular Evaluation of the supervisory board's supervisory board activities and is now a de facto collectively responsible for managing the company. work is recommended in section of the GCGC, seal of quality for good corporate oversight. The supervisory board is responsible for which was introduced in 2002. But t here i s more t o c ome : si nc e t he overseeing the work of the management board by In fact, although the GCGC addresses mainly amendments to the Capital Requirements monitoring and supervising the legality, propriety listed companies it has significant spillover effects Directive (CRD IV) of the European Union came and expediency of the management.

4 Supervisory for other companies. Thus similar rules can also into force on 1 January 2014, there is now a legal boards are composed of mandatory non-executive be found in the Public corporate Governance obligation to conduct an annual Evaluation of the members with, depending on the size of the Code for the Federation (PCGC) introduced in activity and the members of the supervisory body Ethical Boardroom | Winter Edition 2014. Board Evaluation | Board Leadership and the management body in Germany. This law exactly alike. This is why both the process and applies to credit and financial services institutions, the content of the Evaluation of board operations Board Evaluation should financial holding companies, mixed financial shou ld be t a i lored to t he boa rd 's need s holding companies and mixed companies, as well considering aspects specific to the company and consider aspects specific as financial companies (financial institutes).

5 The industry it operates in as well as the wider to the company, the What does a board environment. The actual design of both aspects is then decided by the supervisory body itself. industry it operates in and Evaluation involve? The process can be summed up in the following the wider environment The required board Evaluation is generally five phases: performed as a self- Evaluation by the supervisory 1 Design: determination of Evaluation content, board and is increasingly being performed at time frame and methodology regular intervals (banks are required to perform 2 Valuation: preparation and performance of the Added value from the statutory evaluations on a yearly basis). Evaluation using questionnaires and /or interviews external facilitators It a i m s t o a s se s s fa c t or s such a s t he 3 Analysis: IT-enabled statistical, and verbal During the Evaluation process the supervisory effectiveness and efficiency of supervisory analysis, as well as interpretation of the findings board can be supported by external consultants.

6 Board work in terms of both organisation and 4 Reporting: preparation and explanation of As the EU-Green Book European corporate content. At the same time, the Evaluation serves speci f ic f i nd i ngs a s wel l a s i l lu st rat i ng Governance Framework (2011) states: Regular to review compliance with legal requirements as recommendations for action on the basis of good use of an external facilitator [ ] could improve well as code recommendations and suggestions practice standards and benchmarking board evaluations by bringing an objective (for example, GCGC) relating to supervisory 5 Implementation: realisation of agreed perspective [ ]. An external perspective is useful boards (compliance). Additionally, jointly measures and follow-up of implementation as benchmarking and best practice experiences ref lecting on one's own work provides the are made available and allow the board to make supervisory board with an opportunity to In practice, company-specific questionnaires compa r isons to t he operat ions of ot her improve its processes and structures for the long are often used.

7 Their advantages lie in the coverage companies' bodies. term, as well as to strengthen the sense of of a wide range of subjects and the individual Such experts can offer added value in the form community and motivation within the body. perception of each individual board member which ofa dd it iona l i nsig hts f rom t he i n- dept h In addition to topics relating to supervisory proves to be an efficient approach due to the highly consideration of selected topics, the opportunity board organisation, such as composition, bylaws standardised and computer-based execution and to confidentially address individual topics beyond and committees, and its activities - communication the objectified comparability of findings within the Evaluation form and additional reliability with the management board or between the the supervisory board or in comparison to peers through verbal validation. plenum and the committees of the supervisory because of the scalable results.

8 It is essential to understand that the external board, as well as preparation and execution of In addition, individual in-depth interviews are facilitator will not usually express their own supervisory board meetings - the Evaluation should part of the established repertoire, especially when opinion of the board's effectiveness, but compares include core elements of the supervisory board's they complement the prior (written) questionnaires. the self-perception of the board members to the work, such as management board remuneration, Furthermore, board operations can also be self-perception that members of other similar corporate strategy and planning, financial evaluated using open panel debates of the full supervisory bodies have of themselves naturally reporting and corporate control systems. super v isor y board and audit committees keeping any information strictly anonymous and The Evaluation should be based on a structured respectively.

9 Depending on the size and desired conf idential in the process. Integrity and process that takes into account current demands extent of the Evaluation , different methods, or confidentiality are two of the most important on supervisory boards and supervisory board some combination thereof, will be found to be criteria for selecting the right advisor. best practice. No two supervisory boards are the best choice. Challenges for board Evaluation AT A GLANCE: REGULATION LANDSCAPE IN GERMANY Because of the fact that board evaluations are not generally required by law and are the The Supervisory Board shall examine the efficiency responsibility of each super v isor y board, Public listed German corporate of its activities on a regular basis.. companies Governance Code empirical evidence is still relatively rare. No. GCGC as last amended on June 24, 2014. In an extensive study conducted in 2013, Rapp/. At regular intervals, the supervisory body and its Wolff confirm the high acceptance rates of the Publicly- Public corporate committees shall review the quality and efficiency of recommendation of the GCGC for the largest owned by the Governance Code their activities.

10 The supervisory body shall monitor the listed companies in Germany (DAX30, MDAX, Federation of the Federation implementation of the measures it has resolved be taken in this regard. No. para. 4 PCGC, status: June 30, 2009. SDAX, TecDAX): 96 per cent of the responding companies had performed a board Evaluation in Governance It should be ensured [ ] that the effectiveness of the the last two years. 74 per cent of companies survey Family-owned Code for Family supervisory body's activities is reviewed regularly. the work of their supervisory boards annually. companies Businesses No. GCFB as amended on June 19, 2010* An analysis of the annual reports of the companies from the DAX30, MDAX, SDAX and The nomination committee supports the TecDAX by EY draws an equally positive picture supervisory body of t he pre va lence a nd t he reg u la r it y of *Unofficial translation. German law the regular (at least once a year) Evaluation of structure, board Evaluation .