ZEW Survey Among Financial Market Experts Draw Conclusion of Financial Crisis - Changes in Supervisory Board Structure Mandatory

The banks’ supervisory boards have not fulfilled their control function properly over the last few years and therefore are partly responsible for the crisis on the financial markets. The government definitely has to improve the supervisory board structure in banks. Priorities lie on higher requirements regarding the qualification and experience of board members, a limited number of mandates held by each board member and reinforcing the rights on information of the supervisory board towards the board of directors. A longer retention period when changing from the board of directors to the supervisory board is to be considered. These are the clear findings of a current survey conducted by the Centre for European Economic Research (ZEW) in Mannheim among 222 financial market experts within the monthly ZEW financial market test.

Due to the international financial market crisis, especially the top management in banks receives much criticism. Considerably less criticism falls upon the supervisory board. Its job is to monitor the management and prevent risky business deals. According to 88 percent of financial market experts surveyed by ZEW, the banks’ supervisory boards neglected this duty. Therefore they are partly responsible for the financial market crisis. Nine out of ten financial market experts want considerable changes in supervisory board structure in banks.

The experts consider higher requirements regarding the qualification of board members the best way to improve the supervisory board’s control function over the board of directors. About 94 percent of experts consider such measures good or very good.

Reinforcing the rights on information of the supervisory board towards the board of directors is considered to be a good or very good measure to improve the control function. Moreover, the number of supervisory board mandates held by each board member is to be limited. There are to be higher requirements of the experiences of supervisory board members. More than 80 percent of experts consider these measures to be good or very good. 71 percent of experts still want a certain retention period when a member of the board of directors changes to the supervisory board to prevent a possible clash of interests.

The financial experts are considerably more sceptical towards a limited number of supervisory board members. The majority of experts are not in favour of success-based compensation of supervisory boards. About 20 percent of experts consider such measures completely ineligible to improve the supervisory board’s control function over the management. This is not surprising as the broad public considers the bank managers’ success-based compensation to be one of the main reasons for the financial market crisis. Therefore, it does make any sense to introduce the same compensation concept for the supervisory board.

For further information please contact

Matthias Köhler, E-Mail: koehler@zew.de

Further information and an overview about current measures by the German government to strengthen the supervisory board can be found in a current ZEW study "Corporate Governance and Current Regulation in the German Banking Sector – An Overview and Assessment".