At a glance: responsibilities of company boards in Germany

Responsibilities of the board (supervisory)

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure of stock corporations (AG), European stock corporations (SE) and partnerships limited by shares (KGaA) follows the two-tier system, with a management board that manages and represents the company and a supervisory board that supervises the management board. In Germany, only SEs are allowed a one-tier system with one board (an administrative board) that consists of executive and non-executive board members.

Most companies with limited liability (GmbH) only have managing directors, who are all executive directors, but they are allowed to implement a supervisory or advisory board in its articles of association, resulting in a two-tier structure. However, a supervisory board is compulsory in a GmbH in cases of co-determination. A GmbH cannot have a one-tier board.

What are the board’s primary legal responsibilities?

The supervisory board has the power to appoint and dismiss members of the management board and is responsible for supervising the management board’s activities. A supervisory board is entitled to regularly or irregularly request reports from the management board and define certain transactions and measures in the management board’s rules of procedure or in individual cases that are subject to the supervisory board’s approval (eg, regarding significant transactions and measures exceeding a certain threshold). This definition may also be made by the shareholders in the company’s articles of association. However, this approval does not have any effect on the transactions or measures with regard to third parties, but only on the internal relationship between the two bodies and the liability of members of the company’s management board.

Whom does the board represent and to whom do directors owe legal duties?

The supervisory board does not represent anybody in fulfilling its own legal duties; rather, the supervisory board is independent to a large extent. Supervisory board members, who may be delegated or elected from a certain shareholder majority, are not allowed to pass on any information received in their function as members of the supervisory board to the respective shareholder. Consequently, supervisory board members must always act in the best interest of the company, which itself is defined by the ‘stakeholder model’ (the opposite of the Anglo-Saxon shareholder model, in which board members must act in the best interest of the shareholders). The members of the management board and managing directors of a GmbH also owe their legal duties to the company and must, therefore, only act in the best interest of the company (ie, its stakeholders).

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgment rule?

Managing directors of a GmbH may be instructed to take or refrain from taking certain measures by way of shareholder resolutions. Management board members of an AG and an SE are, conversely, entitled to manage the company at their own discretion. Consequently, neither the general meeting nor the supervisory board is allowed to adopt management decisions or bring forward enforcement action against members of the management board. However, the supervisory board is entitled and, according to case law, obliged to assert liability claims against the management board if the company suffered damage owing to a breach of tasks and duties by the management board. Members of both the supervisory and management board, as well as managing directors of a GmbH, may be exempt from liability if at the time of their action they could have reasonably been assumed, based on adequate information, to have acted in the company’s best interest (the business judgment rule). The scope and application of the business judgment rule have been refined by numerous court decisions.

Do the duties of directors include a care or prudence element?

Managing directors of a GmbH and management board members of an AG, an SE and a KGaA do have to apply the care of a prudent and diligent business person. In addition, in supervising the management board of an AG or SE, the supervisory board must follow this principle.

To what extent do the duties of individual members of the board differ?

Generally, supervisory board members have the same rights and duties. However, applicable law and the DCGK provide for the requirement of appointing individual members with certain skills (eg, finance, reporting and auditing expertise). Thus, these members’ duties differ from the other members’ duties. The differences in duties do not reflect higher liability exposure.

The tasks and duties of the management board of an AG, SE or KGaA are usually allocated to several functional or operational departments for which individual members of the management board are responsible. However, all members of the management board remain jointly responsible for the management of the company. Therefore, members of the management board also have a duty to reasonably be aware and oversee the operation of departments for which they are not directly responsible.

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The supervisory board is not allowed to assume management responsibilities, nor is it allowed to delegate supervisory functions to the management board or to other persons. The supervisory board is, however, entitled to implement committees from its midst. In some instances, such as regarding the management board members’ service agreements, the committees are statutorily not entitled to resolve on these matters in place of the supervisory board, but only to prepare the respective resolutions for the supervisory board and to supervise their execution. In addition, the board may ask a board member to prepare a certain topic. However, the responsibility to decide upon this topic remains in any instance with the supervisory board.

The tasks and duties of the management board of an AG, an SE or a KGaA are usually allocated to several functional or operational departments for which individual members of the management board are responsible. Decisions within each department are made by the responsible member of the management board unless a material decision requires a resolution of the entire board. Similar structures may be implemented among managing directors of a GmbH; however, a designation of a chairman spokesperson is less common.

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

In the case of a one-tier system within an SE, applicable law requires that the majority of the board’s members be non-executives. Members are non-executive if they are not registered as managing directors of the SE in the commercial register. If they are registered as managing directors, they have the power to manage and represent the company. Non-executive members are not allowed to do so and are only entitled to supervise the executive directors (ie, the managing directors) within the company’s internal relationship. Additionally, according to the German Corporate Governance Code (DCGK), in the case of listed companies, the supervisory board shall, in its opinion, propose a reasonable number of independent members. When proposing individuals for election to the supervisory board, the individuals’ independence from controlling shareholders, the management board and other groups (eg, competitors) are factors that the supervisory board must consider.

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

The supervisory board of an AG, an SE and a KGaA must have at least three members. Unless the stock corporation is co-determined (meaning that one-third or half of the board members are elected by the employees), the supervisory board’s members may number a statutorily higher amount of up to nine, 15 or 21 members – depending on the registered share capital of the corporation. In the case of statutory co-determination, the number of members must be divisible by three. In the case of equal co-determination, the total number of supervisory board members is dependent on the total number of German employees.

Shareholder representatives on the supervisory board are generally appointed by the general meeting and in cases of co-determination employee representatives are appointed by employee elections. In the case of vacancies, under certain circumstances, members can, upon filing, also be appointed by a court.

In AGs, SEs and KGaAs that are co-determined and listed on a stock exchange, the supervisory board (or, in the case of a one-tier system SE, the administrative board) must comprise at least 30 per cent women and at least 30 per cent men. The minimum percentage must be complied with by the supervisory board in its entirety. Furthermore, corporations that need to fulfil the aforementioned gender criteria for their boards must include a declaration on corporate governance in their management report. This declaration must include information on whether the company has complied with the requirements for appointing male and female supervisory board members.

There is no minimum number of members required for a management board, unless the company’s articles of association provide otherwise. Members of the management board must fulfil basic statutory requirements regarding personal reliability (eg, no criminal record). In a listed or co-determined company, the supervisory board must determine and annually report on a target percentage for women on the management board, the supervisory board and the second line management and deadlines by which this percentage is to be reached. The DCKG makes several recommendations regarding the diversity of the management board and the tenure of its members. ‘Diversity’ is not defined, but does include criteria such as nationality and expertise.

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

In the German two-tier system, the chief executive (and other members of the management board), who manages and represents the company, is strictly separated from the functions of the supervisory board. Neither body is allowed to assume the functions of the respective other body. In the case of a one-tier system, within an SE, the CEO and chair of the board may be the same person as there is no separation requirement.

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

A supervisory board is entitled to establish committees from its members. In some instances, the committees are statutorily not entitled to resolve on matters instead of the supervisory board, but only to prepare resolutions of the supervisory board and supervise their execution. Listed AGs, SEs and KGaAs are statutorily required to implement an audit committee. The DCGK recommends that listed companies also implement a nomination committee for nominating the candidates for election to the supervisory board. Committees of the management board or of a GmbH’s managing directors are less common.

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

Supervisory boards of listed companies are statutorily required to hold at least four meetings a year. Supervisory boards of non-listed companies are entitled to resolve on holding only two meetings per year. In any case, the supervisory board must report on the number and main topics of its meetings in its annual report to the general meeting. There is no minimum number of meetings to be held by the management board, but it will usually meet on a regular basis (eg, monthly).

Is disclosure of board practices required by law, regulation or listing requirement?

A supervisory board is statutorily obliged to report on its constitution, its meetings, the attendance of its meetings and its supervisory activities in an annual report to the general meeting. The same applies to the work of its committees. There is no obligation for a management board to report on its practices, but some information will likely be included in the annual management report.

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

No such evaluations are provided for, either statutorily or according to regulation or listing requirements. This applies to both the management and supervisory board. However, the DCGK recommends that the supervisory board self-evaluates its own effectiveness regularly and reports on the self-evaluation in the corporate governance declaration. In compliance practice, self-evaluations are also often implemented for the management board.