The Structure of the Board of Directors: Boards and Governance Strategies in the US, the UK and Germany
To be published in: RESEARCH HANDBOOK ON COMPARATIVE CORPORATE GOVERNANCE (Afra Afsharipour & Martin Gelter eds., forthcoming)
52 Pages Posted: 17 Mar 2021
Date Written: March 15, 2021
The chapter continues and advances our earlier research on ‘Board Models in Europe’.** We explore ‘The Structure of the Board of Directors’ with a view to the basic governance structure as provided by a board model vis-à-vis techniques of structuring the decision-making body, which can be used independent of the chosen board model. We focus on boards of large business corporations with a stock exchange listing to secure cross-country comparability. Our three sample jurisdictions are the US, the UK and Germany. France and Italy are also considered to round out the discussion of selected issues. Our key findings are as follows:
1. Board models like the one-tier board, as used in the US and the UK, or the two-tier board, as used in Germany, provide a basic governance structure that enables the use of specific governance strategies. It is the use of specific governance strategies, not the choice of a board model, which determines the role of the board in alleviating agency problems between owners and managers, controlling and non-controlling shareholders, and shareholder and stakeholder constituencies. Based on this finding, the choice of the suitable board model should be left to private parties.
2. The market for corporate control is known as a removal strategy that alleviates the agency problem between owners and managers of potential target companies. To achieve this effect, it must be ensured that takeover defenses are adopted in the interest of shareholders rather than as a means to shield the incumbent board from removal by the acquirer. The governance options include focusing the board structure through the allocation of decision-making power to independent directors (US) or to the supervisory board (Germany), and, as an alternative, reinstalling shareholder decision-making and thus removing the board from its coordination task (UK). Counter-intuitively, one might group US and German law together, despite differences in their basic board structures and despite the European Union’s adoption of UK-style control shift regulation.
3. The three sample jurisdictions follow a similar pattern for securing fairness of related party transactions (RPTs). The UK relies on a structuring of the shareholder body, requiring ex-ante approval of the disinterested shareholders (MOM approval), a strategy that is also used in France but in a weaker form due to the possibility of ex-post authorization. In the US, the predominant choice seems to be structuring the board so as to leave the decision to independent directors, a strategy that Italy has, on one hand, sought to enhance with the obligatory involvement of a minority appointed director but, on the other hand, has weakened by allowing the board to override a recommendation of the independent directors. Germany also relies on board structuring in that it requires supervisory board approval of RPTs, but compared to the use of independent directors, the cooperation between the two boards provides a basis for manager-friendly results one would expect only from a jurisdiction that openly promotes board empowerment.
4. The most far-reaching advance of the corporate purpose debate relates to a further structuring of the board so as to provide employee representatives with a voice, as known from German co-determination. Proposals to reallocate a proportion of the appointment rights from shareholders to employees have not found their way into legal reform in the US or the UK. Out of the governance strategies discussed in this chapter, it is only employee co-determination that calls for a basic governance structure which solely a two-tier board model can provide.
Keywords: board models, corporate governance law, corporate purpose, directors’ duties, director independence, related party transactions, shareholder approval, takeover law, employee co-determination
JEL Classification: G18, G30, G34, G38, K22
Suggested Citation: Suggested Citation