Sustainability efforts, pressure to transform, regulatory initiatives, crises and wars ─ companies are facing major challenges at all levels. As the foundation of successful business, good corporate governance is required to provide guidelines and define responsibilities. Yet this is a complex undertaking in times of constant change. hkp.com spoke to hkp///group Managing Partner Michael H. Kramarsch and Senior Partner Regine Siepmann about key aspects of forward-looking corporate governance.
Mr. Kramarsch, Ms. Siepmann, we live in turbulent times. This also affects corporate governance in particular. What do you see as the key developments?
Regine Siepmann: There are a number of specific individual topics to mention here. Fundamentally, many companies are focusing on their transformation and the sustainable alignment of their business models and the underlying organization. The embedding of sustainability aspects in processes and structures is also being demanded by regulatory, legal and investor bodies.
Michael H. Kramarsch: Important keywords are also transparency, accountability and effectiveness with regard to corporate governance. Stakeholder trust should be promoted and the long-term stability and sustainability of companies ensured.
What has changed with regard to the various stakeholders?
Regine Siepmann: In recent years, we have seen a recalibration of the power triangle of the Supervisory Board, the Management Board and shareholders, in particular institutional investors and their proxy advisors. The role of the Supervisory Board has seen a considerable increase in responsibility, consequently drawing greater focus from the capital market. At the same time, shareholders have been given a greater opportunity to influence strategic matters, for example through say-on-pay at annual general meetings.
Michael H. Kramarsch: Institutional investors are no longer just interested in the financial performance of organizations. Today, they have a much broader view of their investments. And this also includes ESG performance - in the sense of risk mitigation, but increasingly also in the sense of value generation.
In other words, demands for environmental, social and governance targets...
Michael H. Kramarsch: They are decisive criteria for the long-term well-being of a company, especially in times of global crisis. The capital market also knows that sustainable management secures the basis for business.
But this focus on sustainability is not new.
Regine Siepmann: That's right. That's why there are already relevant international standards for the "E" - i.e. the environmental aspect - in reporting. In view of national legislation and corporate governance codes, this also applies to the "G".
Michael H. Kramarsch: The increasing importance of the "S", i.e. the social aspect, is relatively new. This is extremely diverse and includes, for example, the perception of a company's external social responsibility, for example in the area of corporate citizenship, responsibility towards customers and suppliers, but also internal social responsibility towards the company's own workforce. This is about equity, diversity and inclusion, non-discriminatory business processes, future-proof talent management and guaranteeing the human rights of all employees worldwide.
What are the consequences of this?
Michael H. Kramarsch: Looking at the "S" puts the HR function in the spotlight of the capital market. Institutional investors demand information on these aspects, ideally in the form of centralized, industry-specific, comparable key figures and their development over the years. This requires a reorganization of the relevant reporting, which in the past has often consisted of more prose and less substance. A start has been made here, but there still needs to be some dialogue between companies and regulators in order to create meaningful standards as well as between companies and investors.
Regine Siepmann: ESG issues pose considerable challenges for Supervisory Boards in particular. Traditional requirements for financial knowledge are no longer sufficient. Supervisory Boards must build up their expertise in the areas of sustainability and HR and demonstrate or develop a strong sensitivity to these issues.
These are also recommendations of the German Corporate Governance Code.
Regine Siepmann: That's right. And ESG, sustainability and CSR are actually among the most frequently reported areas of expertise on Supervisory Boards across all indices - behind finance, accounting and auditing and ahead of industry experience. 95% of DAX, MDAX and SDAX companies state that their Supervisory Boards have the relevant expertise. Another question is how sustainability is structurally anchored in the Supervisory Board: Is there a specific committee or is there a need for a comprehensive approach where all committees and the plenum address such issues?
And what is your preference?
Regine Siepmann: Market practice is currently leaning towards a sustainability committee. This may be a first step in the right direction. However, sustainability aspects should be considered in all committees and in plenary sessions, as sustainability is a pervasive issue that intersects with all business areas and processes.
In conclusion: What can and must happen to ensure that corporate governance provides a solid foundation in the area of conflict between sustainability and transformation?
Michael H. Kramarsch: The transformation of companies under the influence of ESG and sustainable investing requires the continuous reassessment of corporate governance roles, structures and processes. In times of global challenges, the answers to key questions of good corporate governance are of crucial importance. However, these answers can only be found in an intensive, productive and benevolent dialog between all parties involved.
Mr. Kramarsch, Ms. Siepmann, thank you very much for the interview!
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