What a Supervisory Board Can Achieve and Where It Fails

Why the question of the supervisory board concerns owners too

Most small businesses have no supervisory board. Many mid-sized companies, however, have an advisory board, several shareholders, or a managing director from outside the family. Wherever that is the case, the same task arises: someone is supposed to control, advise, and if necessary replace management without running day-to-day business themselves.

This article therefore asks: What can a supervisory board achieve, why does it fail at decisive moments, and what can be derived from this for control bodies in mid-sized companies? To answer it, we first clarify the duties under German law, then present groupthink as the thinking model, look at findings and documented cases with two readings, and finally apply the result to advisory boards and shareholder circles.

What duties a supervisory board has

For the stock corporation, Germany has a two-tier system: the management board runs the business, the supervisory board oversees it. Nobody may belong to both bodies at the same time. Other countries, such as the United States, have a single board with executive and non-executive members instead.

At a GmbH, the German limited liability company, a supervisory board is mandatory only under certain conditions, mainly with more than 500 employees under the One-Third Participation Act and more than 2,000 under the Codetermination Act. Smaller companies can voluntarily set up a supervisory board or an advisory board. How an advisory board is set up is described in Advisory boards in mid-sized companies.

The supervisory board thus has three roles: it controls, it advises, and it decides on the people at the top. Its most important source of information is the management board's report. That is exactly where its weakness lies.

The thinking model: groupthink according to Janis

In the 1970s, the psychologist Irving Janis studied why capable groups make poor decisions. He called the phenomenon groupthink: in closely knit groups, the desire for unanimity becomes more important than critically examining alternatives. Janis described typical symptoms, such as a sense of invulnerability, self-censorship of dissenting opinions, pressure on doubters, and the illusion that everyone agrees.

A supervisory board is susceptible to groupthink. It meets rarely, its members often know each other for a long time, and the management board it is supposed to control is frequently successful and persuasive. Anyone who is the only one to keep probing in such a group risks being seen as a troublemaker. On top of this comes the information asymmetry from principal-agent theory: the management board knows more about the business than the body that oversees it.

An analogy makes the situation tangible. Imagine a group of hikers following an experienced guide. Nobody has a map of their own. When the path narrows, everyone assumes the others know it is right, and nobody asks. Only at the edge of the cliff does everyone realize that no one has been looking anymore.

A supervisory board that only reads what management puts in front of it does not control management but management's report.

What studies and cases show

Uzun, Szewczyk, and Varma (2004) examined whether the composition of boards is related to corporate fraud. They formed 133 pairs of US companies accused of fraud between 1978 and 2001 and comparable companies of the same industry and size without such allegations. Fraud companies had, on average, larger boards, more members from within the company, and more members with business ties to the company. The more truly independent members sat on the board and on the audit and compensation committees, the less often fraud occurred.

The study shows a correlation, not a cause, and it concerns US companies with a single board. For Germany, one finding from mid-sized companies matters: in a study of 561 Belgian small and medium-sized enterprises, Uhlaner, De Massis, Jorissen, and du (2021) found that outside members only have an effect if management discloses firm-specific information to them and the body meets regularly.

The collapse of the payment services company Wirecard in June 2020 shows both sides. Critical press reports had existed since 2015. In October 2019, the supervisory board commissioned KPMG to carry out a special investigation. According to the case study by Bloch, Hunter, and Kleinman (2025), a member who joined in 2019 and chaired the board from January 2020 is said to have pushed for this review. Its report of April 2020 stated that material revenues could not be verified, and insolvency followed two months later. In civil proceedings, a Munich court ordered three former management board members to pay damages in September 2024 and dismissed the claim against a former supervisory board member. The judgment is not final; the presumption of innocence applies to everyone involved. What small businesses can learn from the case is described in Lessons from Germany's largest accounting scandal.

Two readings: a toothless body or an underestimated control?

The first view is supported by the major cases in which boards relied on reports for a long time. The second is supported by the fact that prevented failures are invisible because they never make the news. I consider both views accurate, but at different moments. In normal operation, a well-staffed supervisory board achieves a great deal, above all as an adviser and in choosing management. In an emergency, when a management board deceives or represses problems, it fails where it has no sources of information of its own and dissent finds no place in the room.

Lawmakers drew a lesson from this after 2020. Since the FISG, audit committees at public-interest entities must have members with expertise in accounting and in auditing, and through its chair the committee can obtain information directly from the heads of central functions such as internal audit. This is an attempt to reduce dependence on the management board's report.

How a control body in a mid-sized company becomes effective

From groupthink, information asymmetry, and the findings I derive a self-test for advisory boards and shareholder circles that I call the dissent test. It asks whether the body allows disagreement and its own information.

1. Secure independence

   At least one member has neither business nor family ties to the company or management and does not depend on the fee.

2. Open own sources

   The body may speak directly with the tax adviser, auditor, and bank, not only through management. An annual meeting without management is part of this.

3. Bad news first

   Every meeting starts with deviations and risks, not successes. Management submits figures before the meeting so that questions can be prepared.

4. Plan for dissent

   For important decisions, one member in turn takes on the role of dissenter and presents the best arguments against.

5. Meet regularly

   At least four times a year, so that the body knows the business and does not only see snapshots.

How the three lines of self-control, a second person, and an outside view work together is described in Corporate governance for small businesses. With several shareholders, it helps to settle roles and information rights early, as What shareholders should settle early shows. In family businesses, the separation of family and business is added, which Running a family business covers.

What holds in general and where it stops

A supervisory board rarely fails for lack of authority. It fails for lack of information and lack of dissent. An article in the German journal Aufsichtsrat (2025) therefore suggests incorporating the lessons of major corporate scandals into the training of supervisory board members so that they recognize warning signs earlier. The same applies on a smaller scale in mid-sized companies: an advisory board that knows the patterns from Patterns of accounting scandals asks different questions.

The limits of the findings are clear. The study by Uzun and colleagues looks at US companies before 2002, the Belgian study at small and medium-sized enterprises with their own board. German data on advisory boards in mid-sized companies are scarce. Groupthink is an explanatory model, not a measurement of individual boards.

Conclusion: control needs its own eyes and a dissenting voice

To the guiding question: a supervisory board can achieve a great deal. It chooses and advises management, reviews the financial statements, and can intervene in an emergency. It fails where it only knows the reports of those it controls and where groupthink stifles dissent. Studies link independent members with less fraud, and experience from mid-sized companies shows that outside members only have an effect with open information.

For your advisory board or circle of shareholders this means: include at least one independent voice, open its own sources of information, and make dissent the rule rather than the exception. A body that never disagrees is not a sign of unity but of missing control.

• Check whether your advisory board has at least one truly independent member.
• Enable the body to hold an annual meeting with the tax adviser or auditor without management.
• Change the agenda so that deviations and risks come first.
• Appoint a dissenter for the next major decision.