Advisory Boards in Medium-Sized Companies

An International Comparison

Daniel Graewe

• Publisher: De Gruyter
• Year: 2021
• eBook ISBN: 9783110665710
• Edition: 1
• Topic: Business
• Subtopic: Small Business
• Index: Business

Advisory boards offer various advantages in corporate settings related to shareholder relief, consulting know-how, and marketing. They have been gaining increasing importance across the world, especially in medium-sized companies which by nature differ from large corporations in their independent business models, leaner structures and special culture.

With contributions from renowned practical experts from several countries, Advisory Boards in Medium-Sized Companies helps to classify, compare and understand the role of advisory boards in SMEs in the main legal and economic systems around the world. This useful and timely book analyses the legal structure and framework of advisory boards in different countries and provides an overview of their situation, furthering critical mutual understanding of corporate law at the international level.

Experienced practitioners from each country have brought together their experiences to improve the understanding of, and raise awareness of the benefits of, advisory boards through up-to-date and practice-oriented country reports. This book provides valuable insights for managers, shareholders, consultants, practitioners and academics alike.

Chapter 1 Introduction

Daniel Graewe

Small and medium-sized companies (SMEs) differ from large corporations in their independent business models, leaner structures and special culture. Many strategic questions must be answered differently than with blue chip companies. Although medium-sized companies often occupy niches, at the same time they can be world market leaders or operate in the top group worldwide. Given such a background, internationality is not a vision of the future; it is part of everyday life. Especially medium-sized companies know their customers personally and are extraordinarily flexible. Flat hierarchies are their shortest path to success. Private ownership and visionary leaders establish a direct link between future orientation and risk balancing.

However, a (medium-sized) company cannot be successful in the long term if it is not also constantly able to adapt to new internal and external circumstances. An important factor for this is the quality of the governance structures and processes within the company. A well thought out and well-functioning management and control structure is not only an important instrument for realising the interests and will of the shareholders and stakeholders, but also an essential prerequisite for recruiting and retaining capable managers and employees.

However, the aftermath of the financial and economic crisis, globalisation, COVID-19 and increased complexity due to growth and increasing density of regulation also pose major challenges for owner-managed companies, especially in the coming post-corona period. In addition, numerous medium-sized companies are confronted with a growing circle of shareholders, the increasing unequal distribution of the shares of different shareholders and the resulting diverging interests, also between the various stakeholders. These are central hurdles for the future viability of medium-sized businesses. In this situation, a properly staffed, competent and responsible advisory board in the sense of good governance contributes significantly to the success of the company and its sustainable development.

In the economic literature, there are essentially three approaches for explaining the existence and benefits of such bodies.

The principal–agent theory attributes the existence of advisory boards to the conflicting goals and information asymmetries between the owner of the company (the principal) and its management (the agent). Accordingly, the principal and the agent pursue different goals and interests, which can lead to a threat to the success of the company. In this context, the agent has an information advantage due to his operative activity, which he can use for opportunistic behaviour.¹ For this reason, the principal can and must take measures to limit such benefit-maximising management behaviour, in particular an internal control and incentive system. For this task, principals set up a (voluntary) advisory board to reduce conflicts between such parties.

In family owned companies, these conflicts of objectives are not the primary concern since ownership and control do not necessarily have to fall apart. Here, the stewardship theory is primarily applied, according to which managers do not primarily pursue their own but rather collectivist goals and work towards the common corporate good for intrinsic motives. In these constellations, advisory boards are not primarily used for control, but rather to advise and support the management. In addition, through staffing, networking and know-how, the advisory board can provide important access to rare corporate resources that are difficult to imitate and substitute (the so-called resource-based approach), which promises competitive advantages.

However, to achieve the desired effect, the advisory board first needs a clear understanding of its own function. Primarily, it must be ensured that the rights and duties assigned to it are exercised in such a way that the interests of the shareholders, but also those of the other stakeholders, are adequately safeguarded; this includes in any case forward-looking advice, but may also include a control component based on past experience.

Having a clear focus is also another important characteristic of a well-functioning advisory board. Experienced advisory boards direct their attention to the long-term success and consistency of the business model and are able to focus on the relevant topics. The best supervisory boards spend at least two-thirds of their time on questions about the future instead of coming to terms with the past and questioning completed processes. An effective advisory board must therefore also ensure that operational management is in the hands of the best possible management talents. This means finding, attracting, hiring, integrating and monitoring excellent board members, but also supporting, challenging and promoting them. And that also includes paying them appropriately, retaining them in the company and, if necessary, replacing them (in good time).

After all, the value that an advisory board can generate for the company depends heavily on its composition. Advisory board work can be stimulating and fulfilling, but above all it is a demanding and complex task. The members must be individually suited for it, but also be able to use their potential as a group for the benefit of the company, its owners and the other stakeholders. Advisory boards are sometimes made up of quite different members, and discrepancies in experience, expertise, attitudes, perspectives and interests can create considerable tension. Productive interaction therefore does not happen by itself, but requires a lot of openness, goodwill and discipline and a certain amount of experience and willingness to cooperate. Here, much depends on the experience and ability of the members of the advisory board, and in particular the chairman of the advisory board, to adequately penetrate and deal with issues in a short period of time. In the best case, the chairman of the advisory board is a valuable sparring partner for the operative management. Another important function, especially for the chairman of the advisory board, is the mediation between shareholders and management and between the shareholders. This can be done informally and inconspicuously, but sometimes it develops into a conciliation procedure with high publicity.

Besides this globally applicable economic basis, advisory boards worldwide very much differ from one another. Whether advisory boards in SMEs are required by law or can be set up voluntarily, what their rights and obligations are, how much they can adapt to the respective companies and change their internal structure and if/how they can be dismissed varies from country to country and legal system to legal system.

This book aims to help to classify, compare and understand the role of advisory boards in SMEs in the main legal and economic systems. Experienced practitioners from each country have brought together their experiences to improve understanding of these particular bodies through up-to-date and practice-oriented country reports and to raise awareness of the benefits of such a corporate body.

Notes

1

For reasons of readability only the male form is used in this book although it addresses all genders; male and female.

Chapter 2 Germany

Daniel Graewe

2.1 Introduction

In Germany, the law only provides for a mandatory advisory and controlling body – the so-called supervisory board (Aufsichtsrat) – for stock corporations (Aktiengesellschaften (AG)), the Societas Europaea (SE) and for larger cooperatives (Genossenschaften). In other enterprises, mandatory supervisory bodies are either not regulated by law at all or are only mandatory from a certain number of employees.

In most cases, medium-sized enterprises and in particular family owned companies do not exceed the legal size requirements for the mandatory establishment of supervisory boards, namely 500 employees. For them, the only question that usually arises is the formation of voluntary advisory boards. The term “advisory board” is generally used as a generic term for the various forms of advisory bodies, supervisory boards, administrative boards with management powers or shareholders’ committees, etc.

Voluntary advisory boards are not limited to special legal forms of companies typical for medium-sized businesses. However, the possibility of an advisory board is expressly provided for in Section 52 of the German Law concerning limited liability companies (GmbHG). With more than one million registered entities, the company with limited liability is also the most economically important form of company in the field of medium-sized and family enterprises in Germany. The following considerations therefore focus on this legal form.

2.2 Concept and definition, delimitation from other corporate bodies

On closer examination of the advisory board in medium-sized enterprises, it must first be clarified what is meant by such a body and how an advisory board distinguishes itself from other bodies, in particular the supervisory board.

2.2.1 Concept

There is no legal definition of the term “advisory board”. However, an advisory board is generally defined as a body that can be formed in partnerships and corporations (and also in foundations or cooperatives) and to which various tasks can be assigned. It is a body set up by the shareholders/partners on a voluntary basis, but not a legally prescribed body.

Other terms are used synonymously for the advisory board: board of directors, supervisory board, family board, shareholders’ committee, board of trustees, working committee or board of elders. However, it is recommended to use the term “advisory board”, which has become widely used and established.

2.2.2 Distinction from supervisory boards

The German Stock Corporation Act (Aktiengesetz (AktG)) contains mandatory provisions for the establishment of a supervisory board for stock corporations in Sections 95 et seq. AktG. The formation of an advisory board is nevertheless permissible but may not change the mandatory competence regulations in favour of the supervisory board under stock corporation law; the advisory board of a stock corporation may therefore only have consulting/advisory functions.

The legal form of a limited liability company frequently used in medium-sized or family owned enterprises does not initially provide by law for the formation of a third body in addition to a shareholders’ meeting (Gesellschafterversammlung) and the managing directors (Geschäftsführer). However, according to Section 52 GmbHG, an optional supervisory board can be set up if it does not have to be set up by law anyway on the basis of other statutory provisions (Section 52 Para. 2 GmbHG). In the case of a GmbH, this includes forming a supervisory board with a so-called employee parity, if the requirements under the German One-Third Participation Act (Drittelbeteiligungsgesetz (DrittelbG)), starting from 500 employees, the German Co-Determination Act (Mitbestimmungsgesetz (MitbestG)), starting from 2,000 employees or other co-determination acts are met; the powers of the co-determined supervisory board are prescribed by law and cannot be changed (Section 25 Para. 1 sentence 1 no. 1 MitBestG, Section 1 Para. 1 no. 3 DrittelbG).

Voluntary supervisory boards are those supervisory boards that are set up by the shareholders without legal obligation, irrespective of the legal form or size of a company. A supervisory board within the meaning of Section 52 GmbHG exists if the authority of the body corresponds to the model set by stock corporation law. This depends on an overall assessment, in particular the question of whether, for example, supervisory and personnel competencies have also been transferred to the board, or only advisory/consultancy tasks.

If there is no supervisory board as defined by stock corporation law, it is a – voluntary – body to which Section 52 GmbHG and the provisions of the stock corporation law do not apply. It can then be an advisory board. In this case, the legal limits for the formation of an advisory board are merely drawn from the principle of the sovereignty of the association and the principle of self-governance. The principle of the association sovereignty demands that the shareholders/partners must always have the possibility (if the necessary majorities are met) to abolish the advisory board again, to curtail its competences or also to revoke decisions of the advisory board.

Higher Regional Court of Berlin, Judgment of 23 July 2015 – file no. 23 U 18/15

The Higher Regional Court of Berlin (Kammergericht, KG) has ruled in favour of the establishment of an optional supervisory board (not: advisory board) in a GmbH in accordance with Section 52 GmbHG as follows:

The subsequently resolved establishment of a supervisory board in a GmbH must be notarized and registered with the competent commercial register, even if there is an opening clause to establish such a body in its articles of association.

The court rejects the unanimous view in legal literature that the establishment of a supervisory board can be decided with a simple majority without any certification/notarization and becomes effective without registration with the commercial register if the articles of association provide for the establishment of a supervisory board as a possibility.

Most authors are rather vague on these questions. In some cases, for example, there is only the remark that the establishment of an advisory board must be stipulated in the articles of association or introduced retrospectively by amending the articles of association. Only in a further half sentence is it noted succi...

Table of contents

• Title Page
• Copyright
• Contents
• Preface
• Chapter 1 Introduction
• Chapter 2 Germany
• Chapter 3 Austria
• Chapter 4 Brazil
• Chapter 5 China
• Chapter 6 France
• Chapter 7 Italy
• Chapter 8 Russia
• Chapter 9 United Kingdom
• Chapter 10 United States of America