Supervisory board

A supervisory board or supervisory committee, often called board of directors, is a group of individuals chosen by the of a company to promote their interests through the governance of the company and to hire and supervise the executive directors and CEO.

Corporate governance varies between countries, especially regarding the board system. There are countries that have a one-tier board system (like the U.S.) and there are others that have a two-tier board system like Germany.

In a one-tier board, all the directors (both executive directors as well as non-executive directors) form one board, called the board of directors.

In a two-tier board there is an executive board (all executive directors) and a separate supervisory board (all non-executive directors).

German corporation law, the Aktiengesetz, requires all public companies (Aktiengesellschaften) to have two boards: a management board called a Vorstand and a supervisory board called an Aufsichtsrat.

In Germany the supervisory board of large corporations is composed of 20 members, 10 of whom are elected by the shareholders, the other 10 being employee representatives. The supervisory board oversees and appoints the members of the management board and must approve major business decisions.

When a German company has between 500-2,000 employees, the minimum of members a board can consist of is three, and the maximum is 21. The number of members has to be divisible by three, as stated in the law. In such companies, the workers select one-third of the supervisory board.

When it comes to internal elections the chairman of supervisory board, the Aufsichtsratsvorsitzender, has two votes in case of a draw.

The supervisory board, in theory, is intended to provide a monitoring role. However, the appointment of supervisory board members has not been a transparent process and has therefore led to inefficient monitoring and poor corporate governance in some cases (Monks and Minow, 2001). The discussion about whether a one-tier or a two-tier board system leads to better corporate governance is ongoing in Germany and many other countries. Improvements in corporate governance are often the result of shareholders (such as active private investors or activist investment funds) holding boards (whether one- or two-tier) of companies in which they invest to account.

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