How German AG Supervisory Boards Appoint Management, Seat Employees and Break Deadlocks
Germany's two-tier system separates the management board from the supervisory board and seats employees on the latter, a structure that differs from a single US board.
A German stock corporation, the Aktiengesellschaft or AG, does not have one board of directors. It has two bodies with separate jobs. The management board (Vorstand) runs the company, and the supervisory board (Aufsichtsrat) appoints and oversees the people on the management board.
The structure is set by the Stock Corporation Act (Aktiengesetz, AktG), and a separate Co-Determination Act (Mitbestimmungsgesetz, MitbestG) gives employees seats on the supervisory board. For executives and investors in multinationals, the split determines who approves senior appointments, who can sit on which body, and how deadlocks are settled.
Two Bodies With Separate Jobs
Under § 84 of the AktG, the supervisory board appoints members of the management board for up to five years at a time. Reappointment is allowed, again for up to five years, but it requires a new supervisory board resolution that can be passed no earlier than one year before the current term ends.
An extension is handled differently. The statute permits an extension without a new resolution only if the original appointment was for less than five years and the total term stays within five years. The service contract can run until the end of an extended term.
The same section gives the supervisory board power to revoke an appointment for good cause. Paragraph 4 names gross breach of duty and inability to manage properly as examples. A loss of confidence by the shareholders' meeting also counts, unless it rests on obviously unobjective reasons.
Under § 84(2), when several people are appointed to the management board, the supervisory board may name one of them as chair of the management board. Revocation can cover that designation as well.
In practice, the body that hires and can dismiss the executive team is not the body that runs day-to-day operations. IG Metall says the supervisory board names, counsels and supervises the executive board, reviews the annual financial statements, and is not permitted to intervene directly in day-to-day management.
Why Executives Cannot Hold Both Seats
Under § 105(1) of the AktG, a supervisory board member cannot also be a member of the management board. The ban extends to a permanent deputy of a management board member, to a Prokurist (a holder of commercial power of attorney), and to an authorised agent empowered to act for the whole business.
The supervisory board appoints the people who run the company, and those people cannot sit on that board.
The statute allows one exception. Under § 105(2), the supervisory board may appoint its members as temporary deputies for absent or prevented management board members, for up to one year. The appointment must be for a period fixed in advance.
While serving in that role, they cannot carry out supervisory board duties, and the non-compete rule in § 88 does not apply to them. Reappointment or extension as a deputy is allowed only if the total still does not exceed one year.
For an executive moving into a German AG's supervisory board, this means any management board role at the same company must end. The temporary deputy arrangement is the only overlap the statute permits.
Employees Hold Equal Seats on the Supervisory Board
Under § 7(1) of the MitbestG, the size of the supervisory board follows the number of employees a company normally has. A company with up to 10,000 employees has six shareholder seats and six employee seats. Between 10,000 and 20,000 employees, the figure is eight of each, and above 20,000 it is ten of each.
A company in the smallest or middle tier may opt in its articles of association for a larger board size.
Within the employee seats, § 7(2) sets the mix between company staff and union representatives. At six seats, four go to company employees and two to union representatives. At eight seats, the split is six and two. At ten seats, it is seven and three.
Eurofound says the 1976 Co-determination Act applies to companies that normally employ more than 2,000 employees, and IG Metall gives the same parity threshold. IG Metall also describes a one-third employee share for corporations with more than 500 employees.
Eurofound reported 705 companies covered on 31 December 1997.
Because the shareholder and employee benches are equal in size, employee representatives sit on the same body that appoints and dismisses the management board. IG Metall's parity board sizes of 12, 16 or 20 members match the three tiers.
Deadlocks and the Chair's Second Vote
When a supervisory board vote ends in a tie, § 29(2) of the MitbestG requires a repeat vote on the same item. If that vote is also tied, the chair casts two votes.
Section 29(2) also applies § 108(3) of the AktG to the second vote. That subsection covers absent members taking part through written votes.
The deputy chair does not receive that second vote.
Eurofound says the chair is always elected by the shareholder representatives, and that the double vote gives the shareholder side a one-vote advantage in practice. IG Metall says the chair always comes from the management side and that employers generally prevail in a tie.
IG Metall describes the mining and steel model, which it calls the strongest form, as one with parity seats and an additional neutral chair.
“The supervisory board appoints the people who run the company, and those people cannot sit on that board.”
The Single US Board as a Comparison
Delaware's corporate code places management in one body. Section 141(a) says the business and affairs of a corporation are managed by or under the direction of a board of directors, except as the chapter or the certificate of incorporation provides otherwise.
Where the certificate makes such a provision, the powers and duties of the board are exercised by the persons the certificate names, to the extent it names them. The text leaves room for the certificate to change who exercises board powers.
The contrast lies in where the rule sits. In Germany, the separation between management and oversight is written into the AktG. In Delaware, the single board is the starting point, and the certificate can assign board powers to others.
Section 141(a) does not refer to employees. The MitbestG, by contrast, sets employee seats on the supervisory board by company size, so a German AG can have a workforce voice inside its oversight body that § 141(a) does not provide for.
What This Means for Executives and Investors in Multinationals
For executives, the German rules settle three points. The supervisory board makes management appointments for terms of up to five years, a supervisory member cannot also serve on the management board, and a management appointment can be revoked for good cause.
For investors, the shareholder side of a supervisory board sits alongside employee representatives in companies covered by the seat formulas. Eurofound describes the chair's double vote as favouring the shareholder side in a tie, and IG Metall says employers generally prevail in a tie.
Coverage depends on the thresholds above, measured against the number of employees a company normally has. Eurofound's coverage count is from 1997.
