Trading places

Blog

13 June 2018

Sometimes members of the management board and supervisory board trade places. After stepping down as a director someone joins the supervisory board. Or the opposite may be true: in the absence of the director, a supervisory board member temporarily takes his place. Is that possible? Is that allowed? Is it desirable?

In my opinion, the right answer to these questions consists of five golden rules:

  1. It is possible and it is allowed, but you should only do it if there’s really no other option in the interest of the company; so try to avoid it if you can.
  2. If there’s no way around it, you should very clearly explain to all stakeholders why this solution was chosen.
  3. If it concerns a supervisory board member who becomes a director, it should be of a temporary nature (for a maximum of approximately six months).
  4. In that case, make every effort to find a suitable successor.
  5. If it concerns a director who becomes a supervisory board member, regularly evaluate the role change and how it is fulfilled.

Why do you have to be so careful with trading places like that? It has its benefits as well, doesn’t it? Absolutely. The advantage is that the person in question knows the company very well. This is true for both versions of trading places. As a result, the person concerned can quickly be effective in his new role. Another advantage is that a sometimes difficult, time-consuming and uncertain application procedure is avoided. You know what you’re getting. What are the disadvantages? Although they are a bit more vague, they are significant. First, let’s look at the case where the director becomes a supervisory board member. The supervisory board supervises the management. A supervisory role is fundamentally different from a managerial role. A director actively executes the policy. A director does the work and determines himself how to do it. In principle, the supervisory board member shouldn’t be involved in this at all. The (sole) responsibility of the supervisory board member is to monitor if the director effectively implements the adopted policy. “If” and not “how”. That’s a very thin line of demarcation. Normally it’s already quite difficult for most supervisory board members not to take place in the director’s seat when exercising supervision. For a supervisory board member who has just retired from his role as director it’s a bit too much to ask in his new supervisory role not to interfere, no matter how good his intentions may be, with the way in which the management manages. For this reason, most corporate governance codes have included the rule that a former director must observe a “cooling-off period” of at least three years before he can take a seat on the supervisory board.

As far as the case is concerned where the supervisory board member becomes a director, things are even more complicated. It’s questionable whether someone who is suitable to serve a company as a supervisory board member is also suitable as a director. It’s definitely possible, but the opposite may be true just as well. Therefore, you should only give such a “promotion” if there’s really no other option. An example would be the situation where the (entire) management has stepped down due to unforeseen circumstances and there’s no one available within the organization to take over the role of director. In such a case, a member of the supervisory board can temporarily step in to keep things going. In the meantime, the other supervisory board members should do their utmost to select and appoint one or more new directors. Also, please note: sometimes when the management steps down, the supervisory board has played a role in their dismissal. If a member of the supervisory board then takes over the role of director himself, even if it’s only temporary, it’s a very critical move for the company’s survival. After all, it’s quite possible that the supervisory board members are all on the wrong track. Their view of things then becomes embedded in the role of the director. Therefore it’s very important to make proper arrangements about what will happen next. Let him stay on his post as short as possible and start looking for a suitable, preferably external successor immediately. According to the above mentioned rule in most corporate governance codes, the supervisory board member who has been so kind to temporarily take on the position of director cannot return to the supervisory board afterwards. It’s good to know that in advance and clearly agree on it. So, it’s better not to trade places and definitely not twice.

This blogpost is also available in Papiamentu. Click here to download the pdf version.

Do you have a question about corporate governance yourself? Please e-mail it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.