“The Supervisory Board shall examine the efficiency of its activities on a regular basis.”
(section 5.6 of German Corporate Governance Code)
The German Corporate Governance Code recommends Supervisory Boards to perform regular efficiency reviews. Adopting this recommendation can – especially in the beginning – call for some rethinking and some effort from members of the Supervisory Board. However, regular efficiency checks provide significant value:
- Efficiency checks can significantly enhance the productivity of the board.
- Board members can demonstrate that they are fulfilling their role responsibly and may reduce personal liability risks or damage to their reputation.
The German Corporate Governance Code is silent on how to carry out an efficiency check in practice. Also the meaning of the expression “on a regular basis” is not explained, but most sources interpret it as “on a yearly basis”.
Supervisory Boards can tailor their review of efficiency to the individual circumstances of their company. Therefore, current practice shows a variety of ways to perform efficiency reviews. Basically, board members can apply the following alternative approaches:
Efficiency check based on standardized questionnaires
Standardized questionnaires allow supervisory boards to check their own efficiency on a regular basis and with relatively little effort. This questionnaire is designed so that every member of the Supervisory Board can complete it individually. We recommend that the results be evaluated anonymously, possibly by a member of the supervisory board, the auditor, or an external consultant and that the findings be discussed in a meeting conducted by the chairman of the supervisory board or another suitably qualified person. The results and their implications should be discussed by the board as a whole.
Deloitte offers the following detailed questionnaires as an aid to checking efficiency:
- Supervisory Board Self-evaluation – An aid to checking efficiency
- Audit Committee Self-evaluation – An aid to checking efficiency
Efficiency check tailored and moderated by an independent expert
The questionnaire focuses on evaluating the structure and work of the supervisory board. Additional strategic added value can be gained by examining whether the supervisory board deals with the right topics and hence is working effectively. This question can only be analyzed at the level of each enterprise. Thereby it can be helpful to have the evaluation process moderated by an independent expert, who can tailor the process to the specific situation of the enterprise and its supervisory board. In particular this enables a structured benchmarking of the efficiency of the supervisory board against other boards or against best practice.
Supervisory Board Self-evaluation
Supervisory boards not only have to cope with the increasing complexity of business operations but are constantly confronted with new legal requirements as well – recently, for example, the Act to Modernise Accounting Law (Bilanzrechtsmodernisierungsgesetz) and the Appropriateness of Executive Board Remuneration Act (Gesetz zur Angemessenheit der Vorstandsvergütung). At the same time, ever more demanding requirements for supervisory boards also entail a higher risk of personal liability.
The Deloitte questionnaire Supervisory Board Self-evaluation – An aid to checking efficiency allows Supervisory Boards to recognize high-risk areas on a timely basis and avoid liability risks. This detailed questionnaire can be tailored to the specific circumstances of individual companies and focuses on organizational topics such as board meetings, information and communication as well as the allocation of tasks. This makes the questionnaire a valuable tool supporting board members in fulfilling their duties. It allows Supervisory Boards to analyze their strengths and weaknesses systematically and hence creates a basis for identifying steps to improve the board’s performance.
Audit Committee Self-evaluation
Reviewing the efficiency of Supervisory Boards includes a review of the structure and work of these boards’ committees. Mainly, it is the Audit Committee that is in the spotlight, since this committee is responsible for an extremely wide range of tasks. Most recently, the Act to Modernise Accounting Law (Bilanzrechtsmodernisierungsgesetz) has assigned the essential tasks of assessing the effectiveness of internal controls and risk management systems to the Audit Committee.
Also, in many cases, the Supervisory Board confers to the Audit Committee the competency to make final decisions in important areas. The Supervisory Board should therefore take an unbiased view on the work of the Audit Committee.
The questionnaire Audit Committee Self-evaluation – An aid to checking efficiency has the same basic structure as the Deloitte-checklist for the self-evaluation for Supervisory Boards. The questions mainly relate to the composition of Audit Committees as well as to organizational questions such as meetings, information and communication. A special emphasis has been laid on reporting to the Supervisory Board and the assignment of tasks to the Audit Committee.