Dual board

Visual representation of a Dual Board system

A Dual Board or Two Tier system is a corporate structure system that consists of two separate Boards of directors that work together in order to govern a business. The structure is composed of two boards, the "Management Board", and the "Supervisory Board" each of these serves a particular purpose.[1] The Dual Board system is prescribed by law in countries such as Germany. Here the "German Corporate Governance Code" prescribes that businesses which are quoted in the stock market such as Lufthansa, and Adidas must apply the Dual Board system. This is the case due to its more sustainable management which tends to have a better compliance to the social market system.[2] According to Stanford University using a two tier system also results in "more monitoring", "less aggressive performance targets", and dissemination of power by not allowing the CEO to be chairman. On the other hand it is considered to be "less efficient" from a market point of view.[3] The lack efficiency arises from the potential lack of communication, and the higher costs of running a Dual Board.[4]

History

The dual board system was first adopted in German companies in the 19th century, and it become compulsory after the Second World War.[5][6] Other countries that adopted this method include Finland, China, and the Netherlands. In addition to that the Singapore Manufacturing Federation, only recently decided to introduce a supervisory board as well.[7] In the European Union there are 10 countries using the two-tier system as opposed to 8 countries using the regular board. The other 9 countries use an amalgamation of both.[8] As of today most countries are moving towards a more managed corporate structure which tends to resemble the dual board system another example are The United States where the number of outside directors is increasing.[9]

Management Board

The Management board usually meets once a week, and operates as the everyday head of the business. Its responsibilities are tactical issues, the everyday sustainable management of the business, and transactions, although these usually have to be approved by the supervisory board.[2] By having a two tier system as opposed to a regular Board of Directors the Chairman of the management board has the ability to meet decisions more independently from the CEO, which increases the propagation of power within the business. This is a benefit for stakeholders, and creates a more stable picture of the management from a public point of view.[5]

Supervisory Board

The Supervisory board, elected by the Shareholders and usually composed of more experienced senior members, and employee representatives, advises and supervises the management.[5] The supervisory board is led by a chairman which also is in charge of the contracts that are made with the Management board. The Supervisory board is involved in the long term decision making, and strategic process of the business. Another task that the Supervisory Board is in charge of is the dismissal, and the designation of the members in the Management Board, to "ensure a long term succession planning".[10]

Cooperation Between Boards

The Management board has to closely cooperate with the Supervisory board to develop the business strategy, this is done by creating a steady flow of information between the two.[2] The information flow would include risk management, business development and any differences of the development of the business compared to the initial plan.[2] Open discussions between individual members of the boards are also key to the functionality of the business under a Dual Board management system, because these must exchange information frequently. Another major factor that requires cooperation is major transactions which require approval from the Supervisory board.[11]

See also

References

  1. ↑ James. "What is a dual board system". The Law Dictionary. Retrieved 26 October 2014.
  2. 1 2 3 4 Government Commission. "German corporate governance code" (PDF). Retrieved 26 November 2014.
  3. ↑ Carrasco, Vinicius. "Corporate Board Structure, Managerial Self-Dealing, and Common Agency" (PDF). Retrieved 26 October 2014.
  4. ↑ Aras, Crowther, Güler, David. "A Handbook of Corporate Governance and Social Responsibility" (PDF). Retrieved 26 October 2014.
  5. 1 2 3 Proctor, Miles (2002). Corporate Governance. Cavendish publishing. ISBN 1859416519
  6. ↑ WÜRDINGER, H. and PENNIGTON, R., R., German company law, London, Oyez publishing, 1975, 37-38 Xiii + 249.
  7. ↑ Cheng, Willie. "One and Two-tier Governance Systems". BT invest. Retrieved 26 October 2014.
  8. ↑ European Commission. "Gender Balance in Boards" (PDF). European Commission. Retrieved 26 October 2014.
  9. ↑ Sarra,j (2011). Corporate Governance in Global Capital Markets. UBC Press. ISBN 0774810041
  10. ↑ Mallin.A (2013). Corporate Governance. Oxford University Press. ISBN 9780199644667
  11. ↑ francois,Ginglinger,Slovin,Sushka, Belot,Edith,Myron,Marie. "Reforming Corporate Governance: Evidence from the Choice between Unitary versus Dual Boards of Directors" (PDF). Retrieved 26 October 2014.
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