Gen-ethics in the boardroom

Those of you who have studied Polish commercial law will know that the pre-WW II Commercial Code was an attempt to unify three separate legal systems. Up until 1918, Poland had, for 123 years, been divided between German, Russian and Austrian control. The newly reborn nation inherited three separate commercial and administrative systems. Quite sensibly, the new code sought to take the best from all three systems. Of course, there is never any guarantee in genetic engineering that the offspring of widely different parents will inherit the best, rather than the worst, characteristics. From the German system, the concept of the supervisory board was adopted. The supervisory board was introduced in nineteenth-century Germany to take account of a somewhat unique set of circumstances. In Germany, historically the banks took an equity stake in private companies. Clearly the banks could not devote as much time to the affairs of the company as the other owners who were often working directors. The role of the supervisory board was designed to allow for the outside shareholders to exercise overall control over the direction the business on a more regular basis than once a year at the general meeting of shareholders. The management board implemented general strategy formulated by the supervisory board. The supervisory board, in turn, typically reserved for itself the right to approve major acquisitions, new borrowings and changes in direction, but did not interfere in the day-to-day running of the company. In the Polish version the supervisory board is a somewhat different beast. In many cases, and particularly in the case of fully or partly state-owned enterprises, the supervisory board appears to be purely about “jobs for the boys” and regular interference in the work of professional managers. The input to debate is often limited, and the boards often override the operational decisions of management boards in areas which should not be of their concern. There is a particular problem as the legal responsibility of supervisory board members is very limited in relation to that of the management board. Recent scandals concerning major Polish companies clearly show that the supervisory boards have been largely ineffective in curbing management excesses. Criticisms have also been levied against non-executive directors of US companies, who are supposed to provide a supervisory service on behalf of shareholders. However, these directors are now beginning to be prosecuted for failing to exercise due care and attention in the exercise of their duties. Will the same happen in Poland? The recently amended Polish commercial law does not provide any more guidance on the role of the supervisory board and it is still left to shareholders to define the role and competencies of both the management and supervisory boards. There are already plans to amend the new law as there are clearly a large number of areas which require immediate change to bring Polish commercial law into line with twenty-first century business practise. One of the changes should be a much clearer legal definition of the role of the supervisory board. Clearly, the board members should be held accountable for the way they have controlled and supervised the work of the management board. Whether this would mean that fewer individuals were willing to serve on supervisory boards remains to be seen. There is, however, a need in larger corporations for professional input into control and review on a regular basis. There is also a need to ensure that management decisions are reviewed in the light of what is best for shareholders rather than management. That just leaves the question of who guards the guardians. At present, although auditors in Poland indirectly report on the work of the management board (and in particular on the convergence of the management report with underlying financial data) and also on systems of internal control, there is no requirement (and indeed no possibility) to report on the effectiveness of the work of the supervisory board. Maybe it is time that such an obligation is introduced. This would allow shareholders, including the state, to receive a much more complete picture of what has happened to their investments and how those responsible for the performance of the investments have fulfilled their obligations. Maybe too much of a revolutionary idea, but clearly significant moves need to be made before investors regain their confidence in corporate governance. Andrew Kinast is the managing partner of Grant Thornton Poland.