Choosing between the Us Single Board or the European Two-Tier Board: A Brief Comparative Corporate Governance Analysis

Posted: 26 May 2000

See all articles by Rado Bohinc

Rado Bohinc

University of California School of Law

Abstract

This article tries to analyze the differences and similarities as well as advantages and disadvantages of the US' single board system of corporate governance compared to certain European two-tier systems. By the phrase 'European two-tier board' we have in mind two-tier systems which have in different ways been introduced into some European countries' legislation and which are presented in this article (for example: Germany, Slovenia and the EU's proposed Fifth Directive). It is intended that legal analysis of this much discussed issue in US theory will contribute to progress in identifying the best alternatives in this field of enormous importance for economic efficiency.

The issues broadly discussed by theory, on which we give some comparative analysis, thus first relate to the issue of the composition of a board (single or dual) and the distribution of powers between boards and the Board of Directors and executive management. Furthermore, the discussions centered on labor constituencies and constituencies other than shareholders in the boards in single and two-tier systems. Some effort is devoted to finding solutions for more efficient supervision and monitoring of management, an issue that involves the question of independence and outside directors, board committees and other forms of resolving the agency cost problem as effectively as possible.

Similar to UK law, US corporate law only provides for a single board system with no mandatory labor representation. The statutory model of US corporation basically invests all corporate powers to a single Board of Directors (unlike the separation of Management and Supervisory Boards provided in some European legislation), with no further mandatory rules referring to board composition (as, for example, the mandatory participation of labor directors as provided in certain European legislation).

The main difference between the single and dual systems is that US executive management powers are delegated by the board and can theoretically be changed at any time, whereas the powers of, for example, the German Management Board are vested by law and cannot be reduced even by a shareholders' resolution on amendments to the Articles. The German corporate governance system has had a great influence on a number of European countries (for example Austria, France and Slovenia) in their introduction of different kinds of two-tier systems to their legislation, including the relevant proposed but still not enacted EU directives. Under German corporation law, unlike in the US, a stock corporation (Aktien Gesellschaft, AG) must have two different boards of directors: a Management Board ('Vorstand' AktG, pars. 76 - 94), and a Supervisory Board ('Aufsichtsrat,' pars. 95 - 117 Aktg).

Contrary to the US' corporate governance concept, the German Management Board runs the corporation and makes all business decisions for which it is solely responsible based on law, not the Articles or a Supervisory Board resolution. The two bodies (Supervisory and Management Boards) are strictly separated and it is prohibited that a member of the Management Board be at the same time a member of the Supervisory Board. The proposed fifth EU directive on the structure of public companies and the powers and obligations of their organs deals with issues such as the 'two-tier system' of management and supervision and the participation of labor in the organs of a company.

Again unlike the US' single board system, the proposed directive introduces the separation of monitoring and business operational functions into two bodies, strictly separated from each other.

Which system is more efficient for a country in transition, like Slovenia, with its specific ownership structure remains a question beyond this legal analysis of the problem. The answer lies in the economic performance of a particular economy. But the fact is that the US' Board of Directors is increasingly becoming a monitoring and supervisory organ (at least in big corporations) with the representation of most outside and independent members and the delegating of ever more executive functions to executive and other committees. On the other hand, the German Supervisory Board is, in addition to its supervisory function, strengthening its strategic role within the German corporation.

Suggested Citation

Bohinc, Rado, Choosing between the Us Single Board or the European Two-Tier Board: A Brief Comparative Corporate Governance Analysis. Available at SSRN: https://ssrn.com/abstract=221969

Rado Bohinc (Contact Author)

University of California School of Law

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States

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