Kulturschock: Lessons for Non-German DAX-40 Board Members

How can German companies attract and integrate foreign board members?

Germany’s blue-chip DAX-40 companies are unmistakably global businesses. Some 80% of total revenue is generated abroad, 90% of shares are in foreign ownership, and almost two-thirds of the workforce hail from outside Germany. Yet only one-third of DAX-40 supervisory board directors come from other countries (including 8% from German-speaking Austria and Switzerland).

^{*Source RRA analysis; Turnover: CapIQ 2023 data, Annual Reports, market-cap-weighted averages without six DAX40 companies not reporting turnover by regions; Shareholders: “Who owns the German DAX?”, S&P Global Market Intelligence and DIRK, June 2023 on 2022 data; Employees: “Wie deutsch ist der Dax? (How German is the DAX?)“, WirtschaftsWoche, June 2024}

Despite efforts to make German governance more accessible to foreign directors — e.g., German Corporate Governance Code recommendations were already introduced in 2002 — the number of international board directors has only marginally crept up during the past decades. Why?

To answer this question, Russell Reynolds Associates conducted in-depth interviews with more than one-third of the international (i.e., non-German/Austrian/Swiss) DAX supervisory board members – exploring their personal thoughts of and experiences with the German governance system and prodding them to supply suggestions on how to attract more non-German directors to DAX 40 supervisory boards and integrate them successfully.

Here’s what we learned.

Lesson 1: International directors are eager to get involved in German companies, but governance often gets in the way

When it comes to the boardroom, Germany has a two-tier system which mandates that management board executive duties be separated from supervisory board oversight responsibility. Furthermore, at most larger companies, half the board must be made up of employees and union representatives to ensure the so-called “parity co-determination” – a truly unique trait of German corporate governance.

While many international directors grasp some of the benefits of this model, it inflates German supervisory boards to a size that makes meaningful debate difficult or well-nigh impossible. Thus, many directors complain about rather formal, inefficient processes. And when they try to actively contribute to core strategic or other business matters that are (or should be) at the front of management’s mind, the two-tier system discourages them from doing so.

Yet despite these obstacles, international directors are still attracted to German boards because of Germany’s longstanding reputation as a world leader in industry and technology. In the words of one interviewee, “If it were not for the strong German industry tradition, you would not have so many international people willing and ready to join boards and help.”

Personal relationships are also a factor. Many international directors agree to serve on German boards because of their personal relationships with other supervisory board members or the management team. To quote another participant, “(I) love the management team and feel a duty to deliver.”

Lesson 2: Language, travel, and cultural differences are an issue – but they aren’t necessarily deal-breakers

After Covid-19, most German supervisory boards returned to conducting meetings in person. This obviously makes attendance more onerous for international directors. Also, unless they have a good grasp of German, the language barrier can be a challenge, too, as even the best translation services cannot do justice to a fast-paced live discussion.

However, the bigger problem for international members on DAX boards is a lacking sense of belonging. Many international directors report feeling like strangers or outsiders, all the more so because their German counterparts don’t always make them feel especially welcome. As one person put it, “There is a sense of loneliness and not being wanted. Board colleagues who speak perfect English switch to German in my presence, even in the taxi.”

These issues are not insurmountable. Yet they require willingness and significant effort by the company, the chairperson, and other board members, as well as by the international directors themselves. For example, onboarding and induction processes must address governance and cultural matters head-on, and the board must commit to honest openness in integrating a foreigner into its core processes, e.g., by including them in committee work early on.

Lesson 3: Those with previous exposure to the German system are both more sceptical and more likely to succeed

As one might expect, international directors with previous experience of the German system are more likely to foresee challenges and prepare for them. And they are less surprised about what they find; to quote one respondent without previous exposure, “Had I known what I was getting myself into, I would have kindly declined.”

But these international directors are also more likely to succeed than first-timers, likely due to their greater familiarity with German culture, their better grasp of the German language, and prior social connections in Germany that make them feel less of an outsider. Companies seeking to increase their share of international directors should know that the most successful individuals are initially cagey about joining their boards.

Lesson 4: Despite undeniable challenges, there are five steps German companies can take to attract international directors

While most international directors find the German system challenging, they also discern its value and can navigate it. So, how can German companies attract more international directors and set them up for success? By applying these five measures:

1. Look for directors with “some” experience of the German system and knowledge of its board culture (speaking or understanding some German helps a lot).
   
   
2. Create a robust onboarding and induction process to help international directors understand not just the company, but the corporate governance and the unwritten board room rules.
   
   
3. Give international directors the chance to get involved in committee work early on so that they can onboard in the smaller, content-oriented setting of a committee.
   
   
4. Require German supervisory board directors to engage with their international counterparts. Personal relationships are key to making international directors feel part of the team.
   
   
5. Accommodate international best practice by stretching formal constraints. In the words of one interviewee, “Transform the leadership structure to be more agile and open and develop a passionate and engaged leadership team.”

Authors

Jens-Thomas Pietralla leads the firm's Board & CEO Advisory Partners in Europe and serves as Global Head of the Industrial & Natural Resources Sector. In this capacity, he leads the firm's business with clients in aerospace & defense, automotive, capital and electrical goods, chemicals, energy, and industrial services. Jens-Thomas helps companies build superior boards and advises his clients on leadership matters, succession planning, and strategy. Recent work includes searches for a number of CEO, CFO, and other CxO positions, as well as assignments for chairmen and non-executive directors at listed and private equity-owned companies around the globe.

Dr. Philip Bacher is a core member of the board & CEO Advisory Partners. He works with clients in building effective boards and management teams and advises on governance effectiveness and leadership, succession planning, and transformation. He is active across industries focusing on industrial and technology companies and financial services. Functionally, Philip emphasizes strategy and development as well as governance, legal, risk, compliance, and other corporate functions. He is passionate about tomorrow’s strategic challenges and the leadership required to address these effectively. Philip joined from the private equity industry, where he was a partner and board member. Prior to that, he was a partner in strategy consulting and interim director for more than ten years. Earlier, he was an associate partner in a corporate law firm. He is an expert author and conference speaker on governance and transformation.