Evaluating Supervisory and Executive Committees at Financial Institutions
Initially overlooked, the January 2014 amendments to the German Banking Act (KWG) tightened up the requirements for evaluating supervisory committees at financial institutions. hkp.com spoke to Petra Knab-Hägele and Regine Siepmann.
As experts in bank and board services, you have developed your own approach to evaluating supervisory committees at financial institutions. What specific requirements do supervisory boards have to meet?
Petra Knab-Hägele: Supervisory committees at financial institutions are faced with a complex range of requirements with respect to evaluation. Paragraph 25d of the recent amendments to the Banking Act upped the list of requirements significantly. Essentially, supervisory boards are required to evaluate the structure, size, composition, and performance of the management and supervisory boards regularly – at least once a year.
Regine Siepmann:: They must also evaluate the knowledge, skills, and experience of the individual supervisory board members and the supervisory board as a whole. Some financial institutions take this to mean that they should evaluate specific individuals, but that is not mandatory under the regulations.
Similar requirements previously applied to companies listed on the stock exchange. What is the purpose of the requirements for financial institutions?
Regine Siepmann: The purpose of the evaluation is to enable financial institutions to critically assess the function and performance of the tasks of their own supervisory board and their compliance with the institution's own rules, including its rules of procedure and statutes. It should also reveal any potential for improvement.
How does that happen specifically?
Regine Siepmann: The evaluation covers the organization of the supervisory board and its committees, its meetings, and the long-term analysis of decisions by the supervisory board, plus the flow of information between the management board and the supervisory board, and between the chairman/committees of the supervisory board and the rest of the board.
Petra Knab-Hägele: It also includes reviewing the personnel requirements and the selection processes for members of the supervisory and management boards, and how the supervisory board members see their role, in addition to assessing the control and monitoring function of the supervisory board and how strategic developments are reflected.
The amendments to the Banking Act apply alongside existing regulations …
Petra Knab-Hägele: Yes. Financial institutions must take into account in their evaluation other rules and recommendations under the Banking Act, the minimum requirements for risk management (MaRisk), the EBA guidelines on internal governance (GL 44), and the leaflets published by the German Financial Supervisory Authority (BaFin) on checking the members of management and supervisory bodies and managers.
hkp/// group has developed a special evaluation form to help companies implement the regulations. Tell me about your approach.
Regine Siepmann: Together with the European Center for Board Efficiency (ECBE) and Professor Michael Wolff, holder of the Chair for Management and Control at the Georg-August-University in Göttingen, we have developed a standard evaluation form for checking that institutions meet the regulatory requirements for the supervisory board's work and structure, at the same time as reviewing the best-practice requirements for its work and activity.
What does that mean in practice?
Petra Knab-Hägele: The evaluation of supervisory activities is based on structured questionnaires. Those questionnaires are also available online so they can be filled out efficiently by members of the supervisory board or key individuals in the company, such as the institution's in-house legal advisor or people working in the office of the supervisory board.
Regine Siepmann: Most of the questions require simple yes or no answers. This identifies areas for action and leads to recommendations. To assess best practices – i.e. the requirements for the work of the supervisory board – the yes/no questions are evaluated by looking at average levels of agreement and the coherence of the answers.
Petra Knab-Hägele: So the approach measures not only the average evaluation by all members of the supervisory board but also the extent to which evaluations by different members of the supervisory board agree with each other.
Given the complexities of the regulations, that sounds relatively
Regine Siepmann: It is. Supervisory board evaluations at financial institutions should be efficient, pragmatic and impactful – not some sort of data graveyard.
What conclusions can companies draw from the results of your evaluation process?
Regine Siepmann: By comparing agreement levels and consensus we can derive possible implications and recommendations for members of the supervisory board. A neutral evaluation by an external service provider such as ourselves aids discussion within the supervisory board and creates a basis for approaching potential development areas and devising constructive solutions.
Petra Knab-Hägele: Evaluating supervisory boards is not just about meeting the regulatory requirements, it's also about comparing voluntary best practice. Thanks to our fact-based experience in supporting supervisory committees at a national and international level – and not just in banks and other financial institutions – we are able to provide highly efficient support.