As a matter of fact, a transition or turnaround on Germany’s executive floor has started: more and more, supervisory boards are changing from mere supervisors to co-managers in the background.
When companies face economic challenges, implement far-reaching changes, or a scandal threatens to damage the company’s reputation, this is the supervisory board’s moment to shine as the executive board’s surveillance authority. At this point, what’s needed is best practice. This requires professionalism, professional competence and understanding of both the market as well as the company’s interests. However, how do things actually proceed within supervisory boards? To what extent are the supervisory boards of companies in various sectors part of the company culture? What about their involvement, mission, stability and adaptability?
A recent pilot study of about 50 supervisory board members at listed and non-listed German companies, performed by Denison Consulting, a global consulting firm with its European headquarters in Switzerland, reveals the need for improvement among the sparring partners of the executive board and the owners, namely the supervisory board.
The Denison model of organisational culture highlights four key traits that an organisation should master in order to be effective and links organisational culture to organisational performance metrics, such as sales growth, return on equity (ROE), return on investment (ROI), customer satisfaction, innovation, employee satisfaction, quality and more.
At the centre of the model are the organisation’s ‘beliefs and assumptions’. These are the deeply held aspects of an organisation’s identity that are often hard to access. The four traits of the Denison model – mission, adaptability, involvement and consistency – measure the behaviours driven by these beliefs and assumptions that create an organisation’s culture.
MISSION: Do we know where we are going?
ADAPTABILITY: Are we responding to the marketplace/external environment?
INVOLVEMENT: Are our people aligned and engaged?
CONSISTENCY: Do we have the values, systems and processes in place to create leverage?
Denison’s research has demonstrated that effective organisations have high culture scores in all four traits. Thus, effective organisations are likely to have cultures that are adaptive, yet highly consistent and predictable, and that foster high involvement, but do so within the context of a shared sense of mission. This robust model also splits into hemispheres: internal/external and flexible/stable.
EXTERNAL FOCUS
Adaptability + Mission An organisation with a strong external focus is committed to adapting and changing in response to the external environment. It has a constant eye on the marketplace and a strong sense of where it is headed. A strong external focus typically impacts revenue, sales growth and market share.
INTERNAL FOCUS
Involvement + Consistency An organisation with a strong internal focus is committed to the dynamics of the internal integration of systems, structures and processes. It values its people and prides itself on the quality of its products or services. A strong internal focus has been linked to higher levels of quality and employee satisfaction.
FLEXIBILITY
Adaptability + Involvement A flexible organisation has the capability to change in response to the environment. Its focus is on its customers and its people. A flexible organisation is typically linked to higher levels of product and service innovation, creativity and a fast response to the changing needs of customers and employees
STABILITY
Mission + Consistency A stable organisation has the capacity to remain focussed and predictable over time. A stable organisation is typically linked to high return on assets, investments and sales growth, as well as strong business operations. The tension between top-down and bottom-up management, represented by the mission and involvement traits, is important for organisations to understand. To be successful, an organisation must be able to link the mission, purpose and goals of the organisation to create a shared sense of ownership, commitment and responsibility for its employees.
There is a lack of clear values and ethical code
While the study showed that participants see great strengths in defining or contributing to the strategy, vision and goals of a company as well as displaying a great degree of cooperation and collaboration as a team, when it comes to taking difficult decisions or to managing and resolving conflict as well as sharing a common perspective, the results also show the clear need for improvement in three specific areas.
‘THE SUPERVISORY BOARD SHOULD REPRESENT THE ORGANISATION’S FUNDAMENTAL VALUES, EXEMPLIFY THEM AND HELP OTHERS DO THE SAME’
Measured against today’s demands of management and company culture, company pillars like values, focus on customers or the question of personal development play an important role when it comes to performance. However, these aspects are far from being practically applied in supervisory boards, the impact of which is growing within companies. A third of the study participants say that there is no clear and constant value system, also, more than half state that there is no clear ethical code that assists the supervisory board as an ethical guideline to distinguish between right and wrong.
Although a strong value system, integrity, and solid ethical principles in particular are important decision factors when selecting and nominating supervisory board members, these aspects seem to lose relevance when it comes to actual responsibility for a company.
The question arises: to what extent could financial results be improved if values and an ethical code were integrated into the work of the supervisory board with more consistency?
This is where stability and consistency are needed. The supervisory board should represent the organisation’s fundamental values, exemplify them and help others do the same. Regular news about misconduct and the resulting negative influence on a company still confirm the discrepancy between expectation and reality.
No investment in continuous development
The same applies when it comes to continuous development. While almost everyone surveyed felt they were well informed by the company and also rate collaboration as being positive, there were discrepancies when it came to the question of ongoing development of skills. Although qualitative interviews after the quantitative study showed that the majority of participants consider onboarding practices and training as satisfactory, more than a third of those surveyed said that there was no investment in the continuous development of the supervisory boards.
Can we afford that in a world that changes with increasing speed? Our task is – no matter in what area you are active and what responsibility you have – to first work on your own transformation to even be in a position to guide, supervise or drive a transformation in the company. The study has shown that supervisory boards want more input from the company in this area, while they recognise their own responsibility in the continuous development of skills and competencies. There may be areas where a supervisory board member indeed should take charge of his or her skill building, but geopolitical themes and trends that have an impact on a company’s strategy should be discussed or presented as part of the continuous development.
‘ONE OF THE DECISIVE FACTORS FOR PROFITABLE GROWTH IS EXTERNAL ORIENTATION TO THE MARKET AND THE COMPETITIVE ENVIRONMENT WHILE FOCUS ON THE CUSTOMER, IN TURN, HELPS DEVELOP INNOVATIONS’
Lack of understanding for customer needs
One of the decisive factors for profitable growth is external orientation to the market and the competitive environment while focus on the customer, in turn, helps develop innovations. Although 70 per cent of those surveyed consider their reaction to competition and changes in the business environment as a supervisory board to be appropriate, only half of them said that there is a deep understanding of the wishes, needs and concerns of the customers. Yet how is a supervisory board supposed to develop valid strategies without a deep understanding of customer and consumer needs? Even though it is not in the supervisory board’s task to seek direct customer contact, there is a need for discussion on how to instill and cultivate customer understanding and focus in the board and in the organisation, in order to fulfil the supervisory board’s strategic and economic responsibility.
Isn’t it a contradiction to state that the reaction to changes in the competitive environment is appropriate whilst not believing it is necessary to have a deep consumer or customer understanding? Of course, it depends on the industry as to whether or not direct customer contact is possible; while it is relatively easy for a supervisory board member to deepen the understanding of consumer insights in the fast-moving consumer goods industry it is, of course, more difficult for example in the B2B segments. However, several qualitative interviews provided examples of supervisory boards visiting customers as a group in industries other than consumer goods. Apart from these visits, there are plenty of additional sources of information to deepen the customer understanding, such as market research studies that most companies have.
It is certainly an area that needs to be addressed carefully as a supervisory board should not interfere with the responsibilities of the executive management team. However, the study clearly shows that it is an area that should get more attention in supervisory boards, otherwise we should ask whether companies are really certain that their supervisory boards are prepared and equipped for the challenges of the VUCA world, digitalisation, artificial intelligence, cyber-security, or traditional yet constantly changing important variables, such as consumer insights/customer needs?
With the above three areas of necessary improvements, it is surprising that 26 per cent of participants in the study state that the composition of their supervisory board is not regularly assessed. And 24 per cent said that their board does not need new skills and competencies and therefore doesn’t need to change in composition.
So, does that mean, that we feel equipped and are ready to react to market changes, but that these transitions are feasible with our existing teams? Or does it mean that we simply feel more comfortable in sticking to old structures and staying in our comfort zone?
