Dr Hans-Christoph Hirt

is an exec­u­tive direc­tor and board mem­ber at Her­mes EOS. He leads
and over­sees the glob­al engage­ment pro­gram­me. Dr Hirt is a UK-qual­i­fied lawyer, holds degrees
in Busi­ness Admin­is­tra­tion from uni­ver­si­ties in
Ger­many and the UK, has the ACCA qual­i­fi­ca­tion
and a PhD from the Lon­don School of Eco­nom­ics.

Cap­i­tal mar­kets

Supervisory boards need to engage with their shareholders

By Kristin Köh­ler / Foto: zVg

Investor com­mu­ni­ca­tion with boards has long been non-exis­tent in two-tier board sys­tems. Where­as non-exec­u­tive direc­tors in the US and the UK are reg­u­lar­ly involved in investor rela­tions activ­i­ties, the same does not apply for many Euro­pean coun­tries. In Ger­many, an ini­tia­tive of investors, com­pa­nies, researchers and stan­dard set­ters has devel­oped prin­ci­ples for the dialog between investors and the board. An inter­view with co-ini­tia­tor Dr Hans-Christoph Hirt, Her­mes.

Dr Hirt, you sup­port­ed the Ger­man ini­tia­tive “Devel­op­ing Share­hold­er Com­mu­ni­ca­tion”. Why? What was your rea­son­ing for this?

First of all, ade­quate investor and super­vi­so­ry board com­mu­ni­ca­tion is an impor­tant issue. After all, ­investors elect the mem­bers of the board, includ­ing non-exec­u­tive direc­tors. But there is a lot of uncer­tain­ty in two-tier sys­tem mar­kets like Ger­many. Part­ly this is because non-exec­u­tives direc­tors are not accus­tomed to speak­ing direct­ly with investors. Although investor rela­tions activ­i­ties with executive­ boards or com­mit­tees have become an estab­lished cor­po­rate prac­tice, his­tor­i­cal­ly the super­vi­so­ry board of most com­pa­nies had vir­tu­al­ly no rela­tion­ship with the cap­i­tal mar­kets. In addi­tion, some lawyers ­believe that under Ger­man com­pa­ny law, com­mu­ni­ca­tions between investors and super­vi­so­ry boards are not allowed. All of this means that there is uncer­tain­ty on how to engage from a com­pa­ny and an investor per­spec­tive. As rep­re­sen­ta­tives from the investor side who reg­u­lar­ly engage with com­pa­nies, includ­ing non-exec­u­tive direc­tors, we co-found­ed the initiative­ “Devel­op­ing Share­hold­er Com­mu­ni­ca­tion” to ­devel­op some guid­ance address­ing investor ­demands on the one hand, and com­pa­ny uncertainty­­ on the oth­er.

Why is there no estab­lished prac­tice?

The Ger­man two-tier sys­tem is very dif­fer­ent from the UK one-tier sys­tem. If you strict­ly inter­pret Ger­man law you can come to the con­clu­sion that the super­vi­so­ry board does not or should not have a role in com­mu­ni­ca­tions with investors. There is a lot of legal uncer­tain­ty, and there are a lot of lawyers who say that Ger­man non-exec­u­tive direc­tors should not speak with investors. What we want­ed to achieve with this ini­tia­tive is to address the uncer­tain­ty, and define guide­li­nes for investors and super­vi­so­ry boards. We clear­ly under­stand that a Ger­man non-­executive chair can­not speak about the same top­ics as an UK non-exec­u­tive chair. But investors want and need to speak to the super­vi­so­ry board, so the guide­li­nes are aimed at enabling a more effec­tive dialog and pro­vid­ing more clar­i­ty when it comes to the investor super­vi­so­ry board inter­ac­tion.

Has there been any reac­tion to the ini­tia­tive from Ger­man com­pa­nies?

We had excel­lent par­tic­i­pa­tion in the project by major Ger­man com­pa­nies*. Hav­ing said this, I have not yet received direct reac­tions, pos­i­tive or neg­a­tive. Ger­man DAX com­pa­nies have already begun to estab­lish investor super­vi­so­ry board rela­tion­ships, so from their per­spec­tive the ini­tia­tive is real­ly describ­ing cur­rent prac­tices. For small­er com­pa­nies like MDAX or SDAX it is still new ter­ri­to­ry. I expect that the crit­i­cal dis­cus­sion will take place among legal aca­d­e­mics and not among com­pa­nies, as the ben­e­fits for both investors and super­vi­so­ry boards are clear.

In a nut­shell, what are the most impor­tant pre­req­ui­sites for share­hold­er board com­mu­ni­ca­tion?

A will­ing­ness to engage and have con­struc­tive con­ver­sa­tions when there is a salient request from a share­hold­er is most impor­tant. And then to engage­ with­in an appro­pri­ate time frame, and on the right top­ics. For exam­ple, it is not par­tic­u­lar­ly help­ful to ini­ti­ate con­ver­sa­tions four weeks before the AGM when all deci­sions have been made. What best-prac­tice com­pa­nies are doing is to reach out to investors between nine to twelve months before super­visory board elec­tions to dis­cuss the nom­i­na­tion cri­te­ria per­haps based on a recent board eval­u­a­tion. As out­lined in the guide­li­nes we do not want to pro­pose can­di­dates, but we think it is use­ful for com­pa­nies to talk about can­di­date pro­files with investors.

What are the right top­ics?

Every­one would agree that there are a num­ber of issues that can­not be addressed by the man­age­ment board, e.g. the super­vi­so­ry board com­po­si­tion and its per­for­mance, man­age­ment board appoint­ments and remu­ner­a­tion.

The guide­li­nes address the sit­u­a­tion in Ger­many, but do they also apply to oth­er two-tier sys­tems?

Yes, absolute­ly. Ger­many was at the top of the agenda­ but there is a wider issue world­wide regard­ing com­mu­ni­ca­tions between investors and non-­ex­ecutive direc­tors. Two-tier sys­tems add a lay­er of com­plex­i­ty because of the dif­fer­ing roles and ­respon­si­bil­i­ties.

What improve­ments are nec­es­sary to fur­ther enhance cor­po­rate gov­er­nance prac­tices and share­hold­er board dialog?

The prin­ci­pal right of investors is to elect the mem­bers of the board. When you look at cur­rent investor prac­tices and com­pare how much time is devot­ed to remu­ner­a­tion issues as opposed to board com­po­si­tion, can­di­date pro­files or board per­for­mance the bal­ance is not quite right. Com­pa­nies are increas­ing­ly open to dis­cuss the com­po­si­tion and per­for­mance of the board, rather than just remu­ner­a­tion, even in the Asian coun­tries.

You are not only respon­si­ble for gov­er­nance ­aspects, but also sus­tain­abil­i­ty issues in gen­er­al. How inter­est­ed are main­stream investors in this?

This is an area in which we have seen sig­nif­i­cant devel­op­ments over the last decade. Most investors focus on sus­tain­abil­i­ty in the con­text of busi­ness per­for­mance and long-term finan­cial suc­cess. This is the way com­pa­nies need to address them. It’s impor­tant to think about the main­stream, not just ESG investors. And com­mu­ni­ca­tions should be led by the CEO or CFO and not by a junior IR spe­cial­ist. The key here is inte­gra­tion on both the investor and the com­pa­ny side.

What is your take on inte­grat­ed report­ing?

It is a good idea, but it will take more time to prove use­ful for every­one involved – investors and com­pa­nies alike. The real val­ue is the focus on ESG aspects that relate to the busi­ness mod­el. How­ev­er, too often we see that a good idea in the­o­ry is still very much work in pro­gress in prac­tice and lit­tle more than an amal­ga­ma­tion of tra­di­tion­al annu­al and sus­tain­abil­i­ty reports.


*Mem­bers of the task force: Prof. Dr Alexan­der Bassen (Uni­ver­si­ty of Ham­burg), Dr Jür­gen Ham­brecht (BASF, Daim­ler, Fuchs Petrol­ub), Dr Hans-Christoph Hirt (Her­mes Invest­ment Man­age­ment), Prof. Dr Dr Dr h.c. mult. Klaus J. Hopt (Direc­tor (em) Max Planck ­Insti­tute for Com­par­a­tive and Inter­na­tion­al Pri­vate Law, Ham­burg), Prof. Dr Ulrich Lehn­er (E.ON, Henkel, Deutsche Telekom, Porsche Auto­mo­bil Hold­ing, ThyssenK­rupp), Dr Stephan Low­is (RWE), Ingo R. Main­ert (Allianz Glob­al Investors), Daniela Mattheus (EY), Prof. Chris­tian Strenger (HHL Leipzig Grad­u­ate School of Man­age­ment).

Guid­ing prin­ci­ples for the dialog between investors and super­vi­so­ry board 

Accord­ing to the new EU Share­hold­ers’ Rights Direc­tive effec­tive 2017, going for­ward insti­tu­tion­al investors should assume a more active role in the mon­i­tor­ing of pub­licly list­ed com­pa­nies. To do so, exten­sive dialog between investors and the super­vi­so­ry board as the cen­tral mon­i­tor­ing body is key to fos­ter­ing mutu­al trust and enhanc­ing trans­paren­cy.

The ini­tia­tive “Devel­op­ing Share­hold­er Com­mu­ni­ca­tion” has for­mu­lat­ed eight guid­ing prin­ci­ples for direct com­mu­ni­ca­tion between investors and super­vi­so­ry boards that ­provide prac­ti­cal dialog guid­ance. The guid­ing prin­ci­ples per­tain to the fol­low­ing areas of com­mu­ni­ca­tion between investors and super­vi­so­ry board: per­ti­nent issues; com­po­si­tion and remu­ner­a­tion of the super­vi­so­ry board; inter­nal organ­i­sa­tion and mon­i­tor­ing process; board appoint­ment, ter­mi­na­tion and remu­ner­a­tion; strat­e­gy devel­op­ment and imple­men­ta­tion; audi­tors, par­ties involved, con­fig­u­ra­tion.