MANAGEMENT is efficiency in climbing the ladder of success; LEADERSHIP determines whether the ladder is leaning against the right wall - Stephen Covey

Sunday, August 20, 2006

Two-tier Boards?

Companies in most countries like the US, Great Britain & Japan have ‘unitary boards’, in other words, just one board of directors accountable to the shareholders and the CEO often holding the position of the Chairman of the Board. If you may observe, the origins of unitary board lie in the 17th century and early British Joint Stock companies such as the East India Company (the corporate outfit established in India for trading in various commodities worldwide). The need for a unitary board was never under-estimated (and never would be!) but with so many scandals that have recently proliferated in the near past, we begin to question the very purpose for having / incorporating a unitary board model in the present corporate setting.

Another approach to better corporate governance is to have a ‘two-tier’ board structure. Of course, this is not new to a few countries like France, Germany, Finland, Netherlands et al which already boasts of companies with two-tier boards (a supervisory board and a management board), the Management Board being responsible for oversight of management issues and is therefore led by the CEO and the Supervisory Board being responsible for general oversight of the company and of the Management Board.

Indeed, for a two-tier structure to be effective, there has to be a functional relationship between the management & supervisory boards, where the Chairman of the supervisory board plays a pivotal role in the overall governance and administration (effective functioning!) of the corporation and is responsible for ensuring that the two boards work well collectively and in the best interests of the shareholders for ensuring effective & ethical governance.

On a personal note, I wish more companies (and their shareholders’) should opt for a two-tier board structure as an effective governance mechanism as against the customary & conventional unitary board structure for the simple reason that the CEO is always held responsible & accountable to the supervisory board. Well, again…its just a wish!


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