Sherpany: Mr Schichold, we primarily associate your name with DIN Spec 33456. Can you briefly explain for the non-German audience what it is about?
Bernd Schichold: DIN SPEC 33456 contains guidelines for business processes in supervisory bodies. The reference model is a listed stock corporation in Germany. The guidelines show how certain transactions can be arranged in supervisory boards with due consideration for statutory provisions and the recommendations of the German Corporate Governance Code. Eight standardised processes are presumed:
1. Process for nominating and appointing members of the supervisory board, particularly independent financial experts (including further qualifications of the supervisory board)
2. Assessment of the supervisory board’s efficiency
3. Appointing, setting goals, compensating and incentivising the executive board
4. Monitoring of the internal control and risk management systems by the supervisory board, particularly the audit committee
5. Review of the accounts and annual report by the supervisory board and audit committee
6. Monitoring of the auditor’s work by the supervisory board or audit committee
7. Review of the supervisory board’s plans and reports, particularly the reports as per Section 90 of the German Stock Corporation Act (AktG)
8. Supervisory board’s report to the general meeting
Many supervisory boards are unsettled by the rising number of requirements for their work. First and foremost, the standardisation of supervisory board processes in the form of a DIN norm should close gaps in knowledge and provide assistance to the supervisory board. Supervisory boards can also use the process documentation to question their own work.
Sherpany: DIN Spec 33456 was published in December 2015. How is the implementation at the supervisory board level? What have the reactions to it been?
Bernd Schichold: The reactions have been very positive so far. The DIN is implemented through “planned learning.” Learning objectives and the desired learning results are specified in advance. Associations that want to train their supervisory board in the new standard and thus act as catalysts play a significant role in dissemenating DIN Spec 33456.
Sherpany: What role does digitalisation play with regard to DIN Spec 33456 in particular and the work of the supervisory board in general?
Bernd Schichold: An important element for dissemenating DIN Spec 33456 are digital boardrooms, which can be used by supervisory boards as highly secure data repositories for company information and meeting documents. We anticipate that digital boardrooms will have up to 80% market share in 5 years.
DIN Spec 33456 consists of a map that can be stored in digital boardrooms and thus made accessible to the supervisory board at any time. At the end of each process within this process map there is a resolution or decision that must be effective. If decisions are made and implemented in the sense of a workflow, it can be ensured that nothing is overlooked. Good software that supports the decision-making process makes things even more secure, standardised, effective and efficient, as it makes it possible to model routines and free up time for the supervisory board to deal with really important matters.
Sherpany: Which challenges do you foresee in terms of implementing digital tools in supervisory boards? I am thinking of virtual general meetings, online voting, board portals and/or other applications?
Bernd Schichold: By far the most important issue for the supervisory board is user-friendliness. This is because many supervisory board members, as well as the people who support them, have relatively modest digital skills. I will give you an example: If we perform our onboardings via Skype and arrange a date with the supervisory board, we often start late as it initially takes half an hour until all the supervisory board members are on Skype. Do you understand what I mean? Assistants who offer the supervisory board online guidance often do not know how to handle hardware and software. Exceptional user-friendliness is therefore of the utmost importance for any software.
We must also not forget that personalised access to applications (login via private IDs, e-mail addresses, mobile phone numbers etc.) is often a hurdle as the login cannot be performed, or can only be performed by passing on sensitive third party data (e.g. from assistants). Supervisory board members are often not used to this – but it is gradually getting better as a change of generation is taking place. However, we are also noticing that the support teams for supervisory boards (assistants, IT, consultants) are becoming increasingly smaller. This is primarily the case in small and medium-sized companies, where the supervisory board has no budget or infrastructure. The user-friendliness of a software is therefore even more important here, particularly during the login process.
Finally, data security continues to be a major and important issue. Access to supervisory board documents must be regulated and protected against unauthorised persons. The rights concept must therefore be very clearly defined and a watertight confidentiality agreement is required. Consideration must also be given to guaranteeing the security of processes (e.g. with a blockchain). The importance of internal training sessions to make employees aware of the issue of information security should not be underestimated.
Sherpany: Where do you see the opportunities for the supervisory board in terms of using artificial intelligence, deep learning, big data, etc.? We are thinking of Vital, the robot, who is involved in investment decisions made by the supervisory board at Deep Knowledge Ventures.
Bernd Schichold: But what is actually robotised? Primarily processes that can be formalised to a large extent. It is no different with a software that supports the decision-making process: When I feed the software with data it secures the systematic processing of the information and thus my decision. Ultimately, people make the decision (machines are rational but have no conscience), but the personal risk of the supervisory board is minimised and the company is protected.
Increased robotisation undoubtedly results in the creation of new profiles and old profiles are replaced or streamlined. An inspection robot can take over 90% of the work, so people’s fears are justified in part. However, from a legal perspective the final responsibility still lies within the decision-maker. The supervisory board must therefore learn to take advantage of new technologies. This means, in particular, that it determines how the robot makes the decision.
Sherpany: Finally, how does digitalisation influence corporate governance in companies? Keywords: compliance; risk management; monitoring/control; asymmetry of information between the committees, etc.
Bernd Schichold: I have personally observed that with increased digitalisation – for example through the use of specialised software - the supervisory boards become more efficient, which has a positive impact on the company’s performance. Supervisory boards become more valuable to the company through their direct and visible contribution to its success. It is therefore meaningful for investors to apply pressure and ask questions about the organisation of the supervisory board and the use of online access and online tools. We must look at it like this: What is today seen as pioneering work will be normal in 20 years. However, an effective supervisory board equips itself today to be prepared for the digital future.
Sherpany: Prof. Dr. Schichold: Thank you so much for this interview.