Why German companies should embrace the role of lead independent director This year, SAP announced a LID role reacting to investor The role of the LID in the German context concerns related to the non-independent chairperson.4 While we acknowledge that introducing the concept of a Here, the purpose was also to facilitate investor dialogue. LID in Germany may not always be straightforward, there We welcome the introduction of this role in each of these are several scenarios where the role could add value for cases and encourage other German companies to consider companies and investors alike: following suit. 1. During succession planning and the transition to a LIDs, also known as senior independent directors, are a new chairperson, it is not always clear who investors key component of governance in a number of established should approach to discuss the future composition of markets. In France and the United States, the position is the board. The outgoing chairperson is no longer the frequently used to counterbalance the combined role of appropriate point of contact, and the deputy chairperson chairperson and CEO. Additionally in the UK and Ireland, (usually an employee representative) is neither responsible the role of LID is also well established on public company for such decisions nor an objective representative of boards, irrespective of their leadership structure. shareholder interests. In this situation, a LID – who However, installing a LID might appear less appropriate should ideally chair the nominating committee – could lead the selection process for the new chairperson, for the two-tier board system widely adopted in representing an independent point of view and thus Germany, where the roles of chairperson and CEO avoiding the involvement of the previous chair in the are already separate. Some might also point out that selection process. As such, the individual would provide Germany’s co-determined boards5 already include a an alternative channel of communication for investors deputy chair elected by the employee representatives. and be a continuous point of contact in times of transition. Therefore, a LID might be viewed as not fitting naturally Combining the role of LID with chairing the nominating into the existing governance system. However, this fails committee should foster independent, transparent and to understand and appreciate the added value that role well-communicated succession planning, which can be can bring. There are situations in Germany where the lacking among German companies. addition of a LID would help address areas of the current 2. Investors may have legitimate concerns over the governance framework which may not be effectively chairperson’s independence, qualifications or addressed currently. performance which can result in dialogue between What does a lead independent director do? them becoming confrontational. Acting as a valuable intermediary between the board, the chairperson and As a fully independent member of the board, the LID shareholders, the LID can enable investors to express provides counsel to the chairperson in “normal” times their concerns and expectations openly, ensuring that and contributes to the effective functioning of the board. the entire board is made aware of their views. Having The LID is also an independent point of contact for other an independent, objective channel to the board in board members, company executives, investors and other these circumstances can allow honest and constructive stakeholders who may be unable or unwilling to raise conversations to take place. This ultimately builds trust issues directly with the chairperson. between boards and investors. In times of stress or when the company is facing a crisis, 3. Periods of difficulty for companies and their boards can the LID could be expected to help resolve the situation. arise from the deteriorating global economy, litigation This might involve liaising with external stakeholders, undermining public trust in company leadership, cases of including investors, where this cannot be done effectively large transactions that have attracted negative publicity or, by the chairperson or company management. We also as in the last couple of years, the Covid pandemic. In these see the LID as instrumental in assessing the chairperson’s situations, the chairperson may have adopted a position performance and leading the process of nominating and that is seen as too closely aligned with the management’s installing a successor. strategic decision-making and is therefore perceived as lacking independence. In such instances, the LID can Experience from other countries shows that a LID can be provide a means of communication between the board, a valued intermediary between the chair or the board as management and investors, strengthening trust among a whole and investors. This is especially true when there investors and the wider public alike. Experience from other are differing views on the best strategy ahead, where countries shows that, in difficult situations, a LID serving as investors are dissatisfied with their interactions with the chair of a combined nominating and governance committee chairperson, or where the chair of the supervisory board is can help to resolve litigation or other governance issues that not considered independent. could affect the company’s valuation. 4 Corporate Governance | SAP Investor Relations, February 2022 5 Deloitte, The German Supervisory Board: A Practical Introduction for US Public Company Directors, 2021: In most companies with more than 2000 employees, half of supervisory board members are to be elected by employees, while for companies with 500-2000 employees, this applies to one-third of the board. 2