Klaus J. Patrick C. Hopt served as the former director of the Max Planck Institute for Comparative and International Private Law in Hamburg, Germany. Professor (hon.) Leyens teaches at the University of Bremen. ) at the Erasmus University Rotterdam. This post is based on their recent paper. Related studies from the Program on Corporate Governance include Lucian Bebchuk and Assaf Hamdani’s The Elusive Quest for Global Governance Standards.
The core of internal corporate governance is the board of directors. The widely used board model, which is known from the US or the UK, reveals a one-tier hierarchy. In a two-tier structure, like those in Germany and other countries in continental Europe, management and monitoring responsibilities are split between two boards. We observe persistent divergence with regard to board models despite a trend of functional convergence in internal corporate governance. The majority of advancements target the board of directors directly or indirectly, as is known from significant corporate governance reforms. Therefore, it seems like a long overdue inquiry to determine whether selecting a specific board model affects how governance strategies are implemented. Private parties should be allowed to select the board model they believe will best serve their interests if it doesn’t.
What is DUAL BOARD? What does DUAL BOARD mean? DUAL BOARD meaning, definition & explanation
Why is a two-tier board structure used?
To create an impartial decision-making process for the business and to create a more balanced, upbeat outlook on production, a two-tier board structure is used. Additionally, it keeps a single board from becoming overburdened by managing a company’s management, operating system, and function. Instead, the supervisory board can handle the overall management of the business, while the management board can manage the system and function of a business. It is possible to have board members who more accurately represent the needs and concerns of employees with a two-tier board. This is a way to address important issues more thoroughly.
It also supports maintaining a diverse workplace and a company’s focus on professional ability over friendship. A company’s two-tier board structure also enables objective professional criticism that isn’t motivated by personal connections. This supports the growth of employees and the overall company. Another justification for having a two-tiered board structure is to get input from various company shareholders rather than having just one group make all the decisions and approve them. One person handling everything increases the likelihood that the business will be run according to personal biases.
What is a two-tier board structure?
Instead of having a single board oversee everything, a two-tier board structure has two boards of directors. In a two-tier board structure, one board is in charge of the day-to-day operations of a company and its finances, while the other board is in charge of the long-term management of the entire business. The supervisory board handles matters that could affect a company’s profitability, reputation, and growth, while the management board typically oversees employees, daily operations, and workplace culture. The management board is at level one, and the supervisory board that regulates the management board is at level two.
It’s common for corporate shareholders to select a supervisory board that operates independently of the company. To enhance communication between them and the management board, the shareholders occasionally choose some company personnel to work with them. Biases that might exist within the organization can be eliminated by having a supervisory board that is largely separate. These teams continue to collaborate for the benefit of the business by having the management board give the supervisory board information about the business in joint meetings or reports.
What are the advantages of a two-tier board structure?
Two-tiered structures have many benefits that can boost a company, including:
One-tier board structure vs. two-tier board structure
A one-tier board is a single, usually smaller group that oversees all aspects of company management and oversight. To handle business tasks separately, a two-tier board combines a small management panel and a larger supervisory panel. Because there are more board positions in a two-tier board structure, more types of shareholders can participate and contribute their ideas. Because there are fewer open board member positions in a single-tier structure, the variety of shareholder types is also less. One-tier boards operate only from within a company.
Two-tier boards have an internal management panel and an external supervisory panel that both work for the company. Due to their handling of both management and supervision, single boards can reach decisions more quickly. The management panel must send decisions to the supervisory panel for approval because dual boards each have a separate supervisory panel. This can lengthen the decision-making process. Additionally, in a dual-tier situation, the supervisory board must base its decisions on the management board’s recommendations because it cannot directly monitor the management board’s actions.
FAQ
What is the difference between one tier and two tier boards?
In a one-tier board, the CEO (chief executive officer) and board chairman sit on the same board. In contrast, a two-tier board structure places the company’s chairman in charge of the supervisory board and the CEO of the management board.
What is the difference between a unitary board and a two tier board?
In the one-tier board model, a single management body is composed of both executive directors and supervisors or non-executive directors. The directors and the supervisory board are two distinct organizations in the two-tier board model.
Which model is also known as two tier board?
In the one tier board model, the board of directors serves as a corporate body that is collectively elected (for a description of the term “board of directors,” see “board of directors”). Executive and non-executive directors are chosen to collaborate for the company’s long-term sustainability.
