This paper addresses the question whether immediately switching from a managing to a monitoring function within a board is beneficial for a company or whether it should be regulated by a cooling-off period. On the one hand, companies have a mutual economic interest in continuously having a person’s experience within the board by switching him directly from a managing to a monitoring function. On the other hand, a cooling-off period may help to reduce the problem that is encountered when a person monitors processes and strategies which he himself has formerly developed and implemented. The analysis finds no definite evidence for or against an immediate switch from a managing to a monitoring board function. Nevertheless, the findings suggest that the effects of switching immediately from a managing to a monitoring function depend on the position subsequently taken in the board, e.g., modifications in present regulation should prohibit an opting-out when immediately serving as chairman of a monitoring body.

It is a common practice in the German two-tier system to nominate former members of the management board to the supervisory board, in particular in large listed corporations. Since the introduction of the ‘Act on the Adequacy of the Management Board’s Compensation’ in 2009, it is mandatory, according to §100(1) No. 2 of German Stock Corporation Act (GSCA), that the listed corporation abide by the two-year cooling-off period, as long as the opting-out clause is not taken into account, before executives switch to the supervisory board. It is a subject of debate as to how an immediate switch of former executives to the supervisory board may influence both performance of the company and response of the capital flow. This paper analyzes the advantages and disadvantages with respect to an (immediate) switch by using the principal-agent and stewardship theory. Furthermore, the paper links the results achieved by empirical research on corporate governance to this subject and derives normative need for action.

Following the 2008 financial crisis, the European Commission (EC) published three Green Papers in 2010 and 2011 titled, “Corporate Governance in Financial Institutions and Remuneration Policies”, “Audit Policy: Lessons from the Crisis”, and “Corporate Governance Framework for European Companies”. One of the objectives is to improve the activities of the supervisory board, i.e., the board of directors in the one- and two-tier systems. The latter shall be determined by adequate expertise and independence of its members. In this context, it is of foremost importance to reduce conflicts of interests in the supervisory board, i.e., among the board of directors in order to ensure proper corporate governance. In view of the German dual system, there may be conflict of interests, among other things, by an immediate switch of executives to the supervisory board, in particular from the Chief Executive Officer (CEO) to the chairman of the supervisory board.

In particular, this form of ‘chairman continuity’ (Bresser and Valle, 2008) is common in listed German companies (Grigoleit, 2011). Therefore, in 2009, the National Legislator introduced §100(2)1 No. 2 of GSCA with the ‘Act on the Adequacy of the Management Board’s Compensation’, a cooling-off period of at least two years in order to switch from executive board to supervisory board. This, however, can be circumvented by an opting-out option. The present paper focuses on the impact of switches from management to the supervisory board on both the companies’ performance and the reaction in the capital market. The paper is structured as follows: it presents the advantages and disadvantages of an immediate switch from management to supervisory board, in particular, with respect to both the principal-agent theory and the stewardship theory, followed by a normative development of the cooling-off period of selected international reference criteria (EU, Austria, Switzerland, and USA). Subsequently, it reviews the empirical corporate governance research from an international perspective, and finally, concludes with critical remarks in respect of normative need of action.

Corporate Governance Journal, Switching, Managing, Monitoring, Function, Board, Cooling-Off Period.