Investor Leverage Straight from the Chairperson's Mouth

International investors are increasingly seeking access to supervisors who oversee companies in Germany, fanning fears they will exploit insider information to the disadvantage of smaller shareholders. Some board members wants to limit their access to top decisionmakers.
Facing Tough Demands: Ulrich Lehner.

Ulrich Lehner, the grand old man of German supervisory boards, recently signaled that the era of “cozy Germany Inc.” is gone forever.

“The chairman of the supervisory board should speak about his work with the shareholders who elected him,” acknowledged Mr. Lehner, who chairs supervisory boards at major German firms Deutsche Telekom and steel conglomerate ThyssenKrupp.

His words are proof of the new power yielded by international investors, who are disrupting the long-held dogma that supervisory boards are the last bastion of entrepreneurial power in Germany.

Shareholders are increasingly looking to break down the walls of secrecy within German companies. To do it, they're seeking to bypass management and instead gain access to the company's overseers.

In Germany, while executives handle day-to-day management, it is the supervisory board that has the power to steer a company's overall strategy, hire and fire executives and generally keep watch over a firm's financial health.

It's all part of a new breed of activist shareholders, who have been turning up to annual meetings in record numbers and are looking to dictate company policy. Top investors have already found success in the past few years in toppling executives, including, for example, at struggling Deutsche Bank last year.

Investors’ insistence that they receive information directly from supervisory boards confronts corporate monitors with an entirely new challenge.

But holding annual shareholders’ meetings and approving management boards no longer satisfies those steering investment funds worth billions, who increasingly demand a direct line of communication with the non-executive supervisory board.

Investors are hoping to get a look into the inner workings: They want to know how supervisory boards select and compensate executives, what they think about the strategy pursued by company managers and how they monitor their performance.

Many managers have resisted this intrusion and reject supervisory board members having direct contact with the overseers. They cite stock corporation law in Germany, according to which the chief executive is essentially the foreign minister of the company.

But even Manfred Gentz, chairman of the Corporate Governance Commission and representative of its conservative wing, admits that these Chinese walls may be breaking down. “There are indeed questions that the management board can’t answer because these are in the purview of the supervisory board.” Given that, he said an “exclusive external representation” cannot be maintained.

In a bid to settle the matter, the new investor pressure has prompted experts and prominent members of supervisory boards in Germany to draft a document called “Guidelines for Dialogue between Investors and Supervisory Boards.”

Handelsblatt obtained a copy of the eight-point paper, signed by Mr. Lehner and Jürgen Hambrecht, who chairs the BASF supervisory board. Other influential corporate monitors also participated, ranging from Deutsche Bank Chairman Paul Achleitner to Werner Wenning of Bayer.

The initiator on the investors’ side is Hans-Christoph Hirt, co-head of the British pension fund Hermes, a top shareholder in many German companies who has already sent many a chief executive into a cold sweat.

Mr. Hambrecht said the guidelines cover how a supervisory board and investors should conduct their dialogue, including recommendations based on “practical experience.”

But that is precisely the problem. If supervisory boards have conversations with individual shareholders, other shareholders could be put at a disadvantage. Stock corporation law states unambiguously that all shareholders should be treated equally.

Labor unionists also warn that such a dialogue could give shareholders an advantage regarding access to information. The Confederation of German Trade Unions, or DGB for short, worries that large financial backers could acquire too much influence over companies, demand excessive profits and ride roughshod over the interests of workers.

Investors’ insistence that they receive information directly from supervisory boards confronts corporate monitors with an entirely new challenge. They must take care not to violate insider-trading rules and transparency requirements.

For example, a supervisory board could create major problems for itself if it confided to a critical investment fund that an incapable chief financial officer would soon be replaced.

To get around the problem, one of the authors of the dialogue guidelines said supervisory boards will be obliged to issue "ad-hoc" disclosures, meaning they will be required to release a public statement as soon as a market-moving decision is taken. “There can be no more coffee-shop chitchat,” said the author, who declined to be named.

In order to sooth skeptics, the guideline authors also took the precaution of including a buffer. Dialogue between the supervisory board and investors “can” be conducted, but is not an explicit duty.

It remains to be seen whether this will prove enough to help firms ward off overly pushy investors and show them the door.


Dieter Fockenbrock is Handelsblatt’s chief correspondent for companies and markets. To contact him: [email protected].