Supervisory boards don’t think sustainably enough

The meeting of the G20 countries and the immediately following world climate summit in Glasgow turned out to be rather disappointing. Binding and ambitious targets to reduce CO2 emissions in the major economies are still a nuisance. Nevertheless: The pressure on German corporations to produce sustainably will not decrease. Every climate event, that is the lesson from the flood disaster in Rhineland-Palatinate and North Rhine-Westphalia, should increase it further.

The pressure is coming from all sides – not least from the street and the non-governmental organizations. The NGOs are increasingly relying on companies to react faster to the challenges than politicians. Anyone who thought “Fridays for Future” was a temporary youthful mood is mistaken. But politics, whether in Berlin or Brussels, will not be able to shirk its responsibility either.

The self-imposed claim to be a “climate government” puts the future traffic light government under pressure from day one. However, the combination of market liberalism of the FDP and regulatory goals of the Greens, especially in view of the limited state budgets, will mean that the implementation responsibility will fall on the companies. But pressure also comes from the capital market. Sustainability risks, rising CO2 costs and a lack of speed of change will have negative consequences for the valuation and development of the share prices of companies that are not doing enough sustainably.

The first big loser in this context is the German automotive industry. The establishment of absolute CO2 limits for cars with the political requirement to regard electric vehicles as zero-emission vehicles is massively changing business models.

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The stock exchange anticipated this development six years ago and halved the valuations of traditional car companies. Confidence in the business model and the versatility of these companies was low, especially since board members and supervisory boards remained fixated on the old world of the internal combustion engine for too long.

RWE fought against windmills

Another example is RWE. The fight against the activists in Hambacher Forst was a fight against windmills, not listening to the early tips of the shareholders was a mistake. The chief executive officer Rolf Martin Schmitz has long been history, his successor Markus Krebber has set out on a march to catch up.

Most of the board members of German corporations are now aware of the seriousness of the situation. All that remains for them is to flee forwards and concentrate on traditional virtues: to design processes, procedures and procedures in such a way that Germany becomes the innovation leader and a role model for other nations in the sustainable restructuring of the economy.

In this Herculean task, the management levels have to perform a balancing act – on the one hand, the traditional business models must be maintained to such an extent that they have enough investment funds for the transformation. On the other hand, it increases the sustainability risks.

The result: The pressure on company figures and share prices is growing. In view of the fact that they have reacted too late to the climate crisis, what companies are missing now is time. Finally, the speed and direction of the transformation must be discussed.

The supervisory board members are primarily the sparring partners for the board of directors. And that is a problem for Germany. Very few supervisory boards have special sustainability expertise. They have made their careers predominantly in other times and have mostly turned their backs on operational business for many years. Your skills reflect the past rather than the future.

Supervisory boards are not diverse enough

The composition of the supervisory board is also in need of improvement. In addition to competence in matters of sustainability, the necessary diversity is often lacking. In view of the necessary speed of change in the business models, the five-year term of the mandate acts like a brake. Experienced supervisory board chairmen know about the shortcomings and refer to expensive sustainability consultants when talking to shareholders. That won’t be enough.

The consequence is a consultation and control vacuum of the supervisory board vis-à-vis the management board – the orientation of the strategy towards more sustainability cannot be discussed on an equal footing. The supervisory body is often not in a position to challenge the board of directors and question the consequences for the business model. This is all the more true if the chairman of the supervisory board was previously responsible for the old business model as CEO.

In the case of upcoming appointments to the supervisory board, greater attention must therefore be paid to diversity. Deka will increasingly question whether the new supervisory board members have real industry-specific sustainability expertise and are up to date. In the case of business models with particularly pronounced sustainability risks or a significant need to act to adapt the business model, consideration must also be given to including a sustainability expert in the supervisory bodies, analogous to the financial expert.

In addition, executive board remuneration must correlate with success in terms of sustainability. The defined sustainable performance indicators must be anchored in the variable long-term remuneration components.

Capital is needed for innovations

The shareholders are not alone with these demands. The EU Commission also complains about the lack of sustainable future viability of the supervisory boards and has already started considering reforms with a focus on sustainable corporate governance.

In addition, the Corporate Sustainability Reporting Directive will enforce significantly expanded sustainable reporting obligations from 2024, a challenge in particular for the audit committee of the supervisory bodies. In addition, the directive in Germany will no longer only affect 500 to 600 companies, as is the case today, but around 15,000.

Shareholders will accompany serious transformations constructively and critically. That secures the company’s value, especially now that the German economy needs capital for innovation and investments in order to secure its future. However, those who move too slowly are threatened with turning away by shareholders and massively falling share prices.

In addition, there is a growing risk of attacks from activist investors. Companies with CO2-intensive business models, high free float and sluggish management and / or supervisory boards are particularly in their crosshairs.

Few of them are concerned with sustainability – activist investors use sustainability rather as a lever to force changes in the board of directors, supervisory board or strategy and thus move share prices at short notice.

Glasgow will one day go down in history – whether as a tipping point or a turning point. The corporate archives, on the other hand, later recognize the achievements of today’s business leaders. It is they on whose shoulders a large part of the responsibility now rests.

The author: Ingo Speich is Head of Sustainability and Corporate Governance at Deka Investment.

More: What supervisory boards need to learn

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