The German Supervisory Board on Its Way to Professionalism
Conversely, the amendment of Section 171(2) shows promise. Under this so‐called “incentive rule”31, the supervisory board is obligated to inform the shareholders’ meeting of publicly held companies with regard to the issues, which committees it has established and how often the supervisory board and its committees have actually met. Thereby, the reporting obligation raises the informational level of the stockholders, and, thus, makes the monitoring process of the supervisory board more transparent. Furthermore, the provision incentivizes the supervisory board to meet more often and to establish an appropriate number of committees in order to demonstrate to the shareholders’ meeting, in particular to institutional investors, that it takes its monitoring obligations seriously.32 If a supervisory board of a large public firm consists of twenty members, it will hardly be able to explain that it did not establish even a single committee. On the other hand, if the supervisory board consists of only three or six members, it is frequently not necessary to establish committees at all, because the supervisory board is small enough to reach decisions rapidly, and to facilitate an unconcealed exchange of ideas.33 This example shows that the concept of an incentive rule is convincing. Which committees the supervisory board establishes and how often it and its committees actually meet, depends on the size, structure, industry and any other particularity of a given company, as well as on the size and structure of the supervisory board including the applicable standard of codetermination34. In any case, anecdotal evidence indicates that Section 171(2) seems to fulfill its function in practice.35
IV. Cooperation of Supervisory Board and Auditor
Finally, several new provisions of the 1998 amendment of the German corporate law improved the cooperation of the supervisory board and the auditor. The main intention of the legal changes was to overcome corporate malfeasance and to ensure that the auditor serves again as “principal supporter of the supervisory board”.36 Although the legal changes as of 1998 have been minor ones, applied as a whole, they led to significant improvements in the corporate governance system. In particular, they reduced informational asymmetry between the management board and the supervisory board, as the supervisory board, under the new law, receives more and better accounting‐ and auditing‐related information from the auditor. Moreover, the new provisions mitigated the
Hommelhoff & Mattheus, (note 23), 250; see also, LIEDER (note 2), 548, 622‐624.
See, Official Explanatory Statement (note 17), 23.
See, LIEDER (note 2), 548‐549.
Regarding German codetermination see, section G of this paper.
See, Lutter (note 3), 775.
Hommelhoff & Mattheus, (note 23), 251‐252; Seibert (note 27), 5.