Corporate Governance: One-tier versus Two-tier Boards

Corporate Governance
Knowledge Center

 

Next Topic

Corporate Governance > Best Practices > Corporate Governance: One-tier versus Two-tier Boards

Corporate Governance: One-tier versus Two-tier Boards
Jaap de Jonge, Editor, Netherlands
Somebody asked me the other day for the differences between the two main corporate governance systems (1-tier and 2-tier boards) existing today as well as the way they're heading. I couldn't find a reasonably concise overview anywhere, so I created the summary below.
Please note that the precise characteristics of any of these governance models depend on the jurisdiction of the company concerned, and the implementation in the company concerned. Also corporate governance systems are changing constantly to reflect changes in the way society sees corporations.

Source: 12manage.com

CharacteristicsOne-tier Boards (also "Unitary model")Two-tier Boards (also: "Dual model")
OrganizationOne-layered board structureTwo-layered board structure
CompositionThere is only one single Board of Directors, composed out of both executive directors as well as non-executive directors. In the classic form, the executive directors used to form the majority; nowadays increasingly the majority is formed by non-executive directors.- The Supervisory Board consists fully our of non-executive (supervisory) directors.
- The Board of Directors (Management Board) consists fully out of executive, managing directors.
CommitteesThere are (compulsory) supervisory committees, such as an Audit Committee and a Compensation Committee, and sometimes also a Nominating Committee and a Governance Committee, who are typically composed out of a majority of non-executive directors. The CEO and other executive directors may be members or even chairman of the various committees. Recently, the focus on the independence of committee members has increased.Supervisory committees were historically not compulsory (because the Supervisory Board was handling these issues), but due to increasing complexity there recently is an increase of the (influence of) committees in the two-tier model as well.
CEO and Chairman positionIn the classic model, the CEO and Chairman role can be held by one and the same person (CEO duality). Increasingly, the CEO is no longer chairman of the Board of Directors, but an independent, non-executive director.No CEO-duality, although the CEO can be a regular attendee or even a member of the Supervisory Board in certain modern forms.
Executive DirectorsAppointed by the general meeting (of shareholders), based on a nomination by the Nominating Committee or by the Board as a whole or by the general meeting.
Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors.
Appointed by the general meeting (of shareholders), based on a nomination by the Supervisory Board, the Nominating Committee (if there is one), or by the general meeting.
Non-executive (Supervisory) DirectorsAppointed by the general meeting, based on a nomination by the Nominating Committee or by the Board as a whole or by the general meeting.
Some jurisdictions also permit the board of directors to appoint directors, either to fill a vacancy which arises on resignation or death, or as an addition to the existing directors.
Appointed by the general meeting, based on a nomination by the Supervisory Board, the Nominating Committee (if there is one), or by the general meeting.
Sometimes a part of the Supervisory Directors can be appointed by third parties, such as the public government, a bank or the employees.
Notes: the above is a general overview of the current two main corporate governance systems. The precise characteristics of both governance models depends on the jurisdiction of the company concerned and on the implementation in the company concerned.
Besides that, the exact characteristics of both models are changing. Over the past 10 years they have been converging.

Hopefully you find this overview useful... I'm looking forward to your builds, improvements and reactions...
 

 
One-tier versus Two-tier Boards
Jan Riven, Consultant, Canada, Member
This is a great compilation of the key characteristics of the two board structures. Can you clarify whether the CEO in a two-tier structure would be a 'regular member' of the supervisory board, as noted, or whether you mean that the CEO would be a regular 'attendee' - i.e. not a member of the board per se.
 

 
One-tier versus Two-tier Boards
Jaap de Jonge, Editor, Netherlands
Thanks Jan for your good question about the role of the CEO in the supervisory board in the 2-tier model.
Indeed I wrote in modern forms he CAN be a member of the supervisory board (although in the classic form of course he would not have been a member and certainly not the chairman). Nowadays the CEO could be an attendant (for informational, practical reasons) or even a (voting) member of the Supervisory Board, depending on the legislation (country) and depending on the implementation (for a company) of course. I will add the distinction attendee/member to my overview. Thanks for bringing that up.
 

 
CEO Duality in One-tier Boards
E Benshetler, Project Manager, United States, Member
Excellent summary! Two-tier boards seem to be prevalent in Europe and one-tier boards in the U.S.

At least in large U.S. firms, the CEO and Chairperson positions almost always were separate until the 1980s and 1990s. It's only recently that there's been movement in some companies to go back to separate positions.

Whether duality is good or bad for firm performance has been studied in the academic community, with (as is often the case) no clear consensus. One of the classic papers is 'CEO Duality as a Double-Edged Sword: How Boards of Directors Balance Entrenchment Avoidance and Unity of Command,' Finkelstein & D'Aveni, Academy of Management Journal, 1994 (vol. 37, no. 5, pp 1079-1108).
 

 
One Tier versus Two Tier Boards - Functions
Volker Potthoff, Director, Germany, Member
I would like to add that there is an important difference in the roles of One Tier boards and Two Tier boards: in the Two Tier board the Supervisory Board may not interfere with the operational functions and decisions of the Management Board. In particular, it is the responsibility of the Management Board to develop the strategic direction of the Company. The Supervisory Board is (still) restricted to its advisory and controlling function. However, due to EU-based regulation the Supervisory Board has to involve itself more and more into the strategic direction of the company, e.g. by asking the Management Board to present its strategy to the Supervisory Board. Those interested have a look at this excellent study.
 

     
Special Interest Group Leader

Interested? Sign up for free.


Corporate Governance
Summary
Forum
Best Practices


Corporate Governance
Knowledge Center

 

Next Topic



About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2019 12manage - The Executive Fast Track. V15.1 - Last updated: 23-8-2019. All names of their owners.