Business companies in the Corona crisis: The hour of the supervisory board (Part 1)

Article by SEViX Senior Executive Partner, Dr Thomas Forster

?Economic Situation in Germany

Corona presents the entire economic system and almost all companies in Germany with new challenges.

The economic situation in Germany has deteriorated dramatically. The gross domestic product (GDP) shrank by 10.1 percent in the second quarter of 2020 compared to the previous quarter. This was the sharpest decline since quarterly GDP calculations began in 1970. Economic output collapsed by 11.7 percent in comparison with the previous year. Economic output had already fallen significantly at the beginning of the year. Germany, Europe's largest economy, is in a deep recession.

For Germany the economists of the Allianz subsidiary Euler Hermes expect an accumulated increase of bankruptcies of 12 percent in the period 2020 until the end of 2021 compared with 2019. In absolute figures, the accumulated number of bankruptcies in Germany is expected to rise to around 21,000 cases within the period. The lion's share, of eight percent, is likely to be registered in 2021. For 2020, Germany is expected to see a four percent increase. Against the background of these disastrous record figures, Euler Hermes warns of a deep recession.

Covid-19- Insolvency Suspension Law

In case of insolvency or over-indebtedness, the legal representatives of companies of certain legal forms are obliged to file for insolvency according to the Insolvency Code (InsO). For the period until September 30, 2020 and possibly until March 31, 2021, the legislator has abolished this obligation with the Covid-19 Insolvency Suspension Act (COVInsAG), but only for those companies that have fallen into insolvency or over-indebtedness due to the Covid-19 pandemic and its consequences and for which there is a prospect that they will become solvent again.

But, even if the obligation to file for insolvency has been suspended in certain cases, there remains a risk for board members and managing directors of insolvent companies to be made liable and prosecuted for delaying insolvency proceedings. This can be the case especially if the insolvency is not due to the Covid 19 pandemic or if there is no prospect that the insolvency can be eliminated. It is extremely doubtful whether this regulation makes sense from a business and economic point of view and whether the companies actually initiate measures.

A dramatic deterioration of the situation in many companies

Most companies will find, however, that their economic situation has already deteriorated dramatically with Corona. At the latest with the pending layoffs of employees or with a drop in profits, the corporate crisis is likely being felt with external impact. In all probability, many companies will find themselves in a situation in which their economic existence is specifically endangered.

Necessary action would have been required even before Corona and this latest call for action may be missed again.

Management of the corporate bodies of companies in crisis

Even in a corporate crisis, the primary duty and responsibility to act lies with the Board Members and management. But is the responsibility for possible inaction solely with the management, the board of directors, the CEO or does the supervisory board not adequately fulfill its control function and its tasks and duties? 

The hour of the Supervisory Board should already have come some time ago.

The control and monitoring tasks assigned to the Supervisory Board are not only related to the past, but also to the future. Its task is to supervise the management board, the management of the company, not to be operationally active itself. It does, however, have a large number of options at its disposal for identifying a corporate crisis in good time and taking action. Especially in times of Corona we are dealing with an intensification of corporate crises. In the crisis, as in the case of an emerging deterioration in earnings, the Supervisory Board must increase its influence on the company. This is in line with the trading and due diligence requirements prescribed in the German Stock Corporation Law. The originally required consulting and control effort by the supervisory board must be transformed into a supporting and accompanying activity of the management board and the management as the crisis spreads. In order for the Supervisory Board to be able to assess the economic situation of the company, it must receive comprehensive reports from the Management Board and examine them. In particular, the Chairman of the Supervisory Board should set an example of permanent communication with the Management Board during the crisis, whereby the discussion of strategic issues should also be in the foreground. Only an ongoing, profound preoccupation with the current crisis situation can lead to decisive measures and results. The Supervisory Board should therefore impact as quickly as possible on the Management Board and management to make the clear causes of the crisis transparent and therefore work towards the preparation of necessary company analyses. The analysis of reports, P + L, key figures and sources of information from the past will no longer be sufficient for this purpose. Above all, Corona questions old business models, markets, locations or product life cycles. Strategic analyses, social and methodological competence are therefore in greater demand than ever before.

Summary

Strategic goals, a resilient business model based on competitive advantages, cycle management and a competitive organizational structure are currently the issues that should concern the responsible supervisory board. Therefore, the Supervisory Board will work to ensure that the Management Board not only exhaustively analyzes the causes of the crisis, but will rather demand that, based on the analysis and fundamental strategic considerations; a workable concept for overcoming the crisis, including a timetable and a sustainable business model will be developed. 

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