The Chair of the Supervisory Board in Times of Modern Corporate Governance

As the number of legal obligations continues to grow and lawmakers and courts further tighten management liability, the work of supervisory boards is increasingly coming into focus. A substantially higher requirements profile and significantly increased liability risks particularly affect chairs of supervisory boards and supervisory board members with special areas of responsibility.

I. Introduction
German stock corporation law expressly provides that the supervisory board, unlike the management board, must elect a chair from among its members (Section 107(2) AktG). The office of chair of the supervisory board is therefore prescribed by law, although it does not constitute a separate corporate organ. As a rule, the chair of the supervisory board can therefore act only within the framework of resolutions adopted by the supervisory board as a whole. Nevertheless, the chair is more than merely primus inter pares, as is already shown by the double counting of chair mandates under Section 100(2) sentence 1 no. 1, sentence 3 AktG for the purposes of the total number of supervisory board mandates. In addition, the chair of the supervisory board must be identified as such on all business letters of the company (Section 80(1) sentence 1 AktG) and in the notes to the company’s annual financial statements (Section 285 no. 10 sentence 2 HGB).

II. Powers of the Chair of the Supervisory Board
The German Stock Corporation Act contains no single provision that comprehensively sets out the duties and functions of the chair of the supervisory board. However, a number of special powers and competences are expressly regulated throughout the Act. For example, in addition to the general reporting obligation owed by the management board to the supervisory board under Section 90(1) AktG, the management board must report directly to the chair of the supervisory board “on other important occasions” (Section 90(3) AktG). The chair leads supervisory board meetings and signs the minutes prepared for them (Section 107(3) AktG). The chair may prohibit other supervisory board members from attending a meeting of a supervisory board committee of which they are not members (Section 109(2) AktG). Together with the members of the management board, the chair of the supervisory board must file the resolution and implementation of an ordinary capital increase with the commercial register (Sections 184(2), 188(2) AktG). The same applies to resolutions on a conditional capital increase (Section 195(1) AktG), a capital reduction (Sections 223, 229(3) AktG) and a cancellation of shares (Section 237(2) AktG).

In a deadlock during decision-making by a parity-composed supervisory board, the chair of the supervisory board has a second vote when the resolution is repeated (cf. Sections 29(2) sentence 1 and 31(4) sentence 1 MitbestG). In companies that are not subject to the Co-Determination Act, such a second voting right of the chair of the supervisory board is usually provided for in the articles of association.

The recommendations of the German Corporate Governance Code (DCGK) also underline the prominent position of the chair of the supervisory board. Section 5.2(3) DCGK provides in particular that, between meetings, the chair of the supervisory board should maintain regular contact with the management board, especially with the chair of the management board, and discuss with them issues relating to strategy, planning, business development, risk position, risk management and compliance. The chair of the supervisory board should also inform the general meeting about the principles of the remuneration system (Section 4.2.3(6) DCGK). Members of the management board should report conflicts of interest to the chair of the supervisory board without delay (Section 4.3.3 DCGK). The same applies to the auditor in the case of possible grounds for exclusion or bias that are not immediately resolved (Section 7.2.1(2) DCGK).

The chair of the supervisory board is regularly assigned the task of chairing the general meeting by a provision in the articles of association, giving the chair a special position also in relation to the general meeting.

III. Special Role of the Chair of the Supervisory Board in Corporate Practice
In corporate practice, the special role of the chair of the supervisory board is further reinforced by the phenomenon of the “factual discontinuity of the supervisory board’s actions” (v. Schenck, AG 2010, 649, 651). Despite the supervisory board’s continuing duties, the body is not permanently active, but often meets only a few times per year. By contrast, the chair of the supervisory board is continuously active. The chair maintains ongoing contact with the management board or its chair and, in this respect, acts as a link ensuring continuity in the supervision and advisory support of the management board (M. Roth, ZGR 2012, 343, 363; Drinhausen/Marsch-Barner, AG 2014, 337, 342).

IV. Liability Consequences
Although the chair of the supervisory board must therefore act continuously and not infrequently react under time pressure, these factual implications of the office are not adequately reflected in the statute. As a mere member of the corporate body, the chair of the supervisory board performs in practice — and under the recommendations of the DCGK — tasks that the statute actually assigns to the supervisory board as a whole. Against this background, because of the “wide gap” between statutory regulation and legal reality, the chair of the supervisory board sometimes acts without a proper basis of authority (v. Schenck, AG 2010, 649, 651 et seq.).

In particular, the fact that the chair of the supervisory board is continuously active and in constant contact with the chair of the management board, while the supervisory board as a body is not permanently active, leads to increased liability risks for the chair of the supervisory board — potentially even to sole liability of the chair if no breach of duty can be attributed to the other supervisory board members. Such a breach of duty affecting only the chair may arise, for example, where the chair fails to pass on information received from the management board to the other supervisory board members, or fails to do so in good time, or where the chair fails to treat the receipt — or refusal — of information, despite urgency, as grounds for convening an extraordinary supervisory board meeting. The signing of incorrect supervisory board minutes must also generally be regarded as a breach of duty specifically attributable to the chair of the supervisory board.

Even if all, or at least several, supervisory board members have breached their duties, the special role of the chair may be relevant where the chair bears a higher individual degree of fault. While corporate body members who have breached their duties are jointly and severally liable, and the objection that another corporate body member was also, or even predominantly, at fault does not reduce liability vis-à-vis the stock corporation, each corporate body member is liable to the company in full for the damage caused by the breach of duty (cf. BGH, NZG 2008, 104). However, the degree of fault plays an important role in internal recourse among joint and several debtors. A higher individual degree of fault on the part of the chair of the supervisory board therefore also establishes an increased duty to contribute in internal recourse under corporate liability law. Such higher individual fault may arise, for example, where the chair of the supervisory board, due to constant contact with the management board, could more easily have recognised the risks of a transaction to which the supervisory board as a whole wrongfully consented than ordinary supervisory board members.

V. Conclusion
In corporate practice, the chair of the supervisory board has a decisive influence on both the development and the economic strength of the company. However, the prominent position and powers of a supervisory board chair are accompanied by significantly increased liability risks. The office of chair of the supervisory board can therefore hardly still be exercised as a mere secondary function, at least in listed companies. In view of the increasing complexity of the tasks involved and the time commitment required, the path towards “professional supervisory board members” appears to be already mapped out.

Source: NJW-Spezial 15/2015, Munich; Higher Regional Court of Düsseldorf, order of 30 April 2015 – I-3 Wx 61/14 = BeckRS 2015, 11485