HomeChapter 3: Boards - Conflict Perspective3.4 A Conflict Perspective of Two-Tier Board Model Attributes

3.4 A Conflict Perspective of Two-Tier Board Model Attributes

In strong contrast to the discussion on the organization and composition of one-tier boards, the independence of two-tier boards has hardly been disputed in the international corporate governance debate. Bacon and Brown of The Conference Board distinguish the following four characteristics of two-tier boards:

 

  • two-tier structures separate in a tangible way the direct management of a company and the function of supervising and overseeing the management function. In countries with a single board, these functions are perceived as separate and to some extent are carried out separately. But since some individuals bear the responsibility for both they can become muddled and the supervisory function may become weakened in the process;
  • the physical separation into two bodies not only results in delineating and defining the two functions of management and supervision, but assures that one person is not asked or expected to do both;
  • the two-tier structure changes – and to an important degree diminishes – the role of the traditional director. The supervisory body is not granted direct managerial authority over company afFfairs;
  • a two-tier structure may insulate supervisory directors from the degree of liability that, in some countries at least, is attached to serving as a director on a single board.

Source: The Conference Board (1977:8).

 

In some way similar to the definition of The Conference Board (1977), Cadbury (1995) identifies three main differences between one-tier and two-tier boards:

 

  • the unitary board, however many outsiders it has on it, remains in full control of every aspect of the company’s activities. It initiates action and it sees that the action which it has initiated is carried out. All its directors, whether executive or non-executive, share the same aims and the same responsibilities. The supervisory board, on the other hand, may have to approve management action, but it is primarily a monitoring body, not an initiatory one. The tasks and duties of the two boards are different as are their legal responsibilities;
  • the chief executive at least will be on a unitary board, so the board combines non-executive and executive directors whereas the supervisory board does not;
  • the kind of people who are non-executive members of a unitary board will not be precisely the same as the members of a supervisory board; this is leaving on one side the possibility that some supervisory board members may have been appointed by the employees. This distinction arises because being a non-executive member of an operating board may require a different set of attributes from that of being a member of a strictly supervisory body.

Source: Cadbury (1995).

 

In summary, the composition of two-tier boards seems to be strictly divided in executive and non-executive directors who have different legal responsibilities. Executive managing directors are seated in the management board. The separate supervisory board is composed entirely of non-executive supervisory directors. Board leadership is also formally separated from executive board responsibilities. This means that CEO-duality is not possible in two-tier boards. The formation of board committees in two-tier boards is not enforced by legislation or stock exchanges. Supervisory boards are also not necessarily co-determinated. The supervisory board in Germany has directors representing employees while the Dutch two-tier board operates without employee representatives. The differences between the attributes of one-tier and two-tier boards are summarized in table 3.2.

 

Table 3.2

Board Model Attributes of One-Tier and Two-Tier Corporate Boards

 

 

Attributes

 

One-tier boards

Two-tier boards

Composition:

Executive and non-executive directors operate in one board.

Executive and non-executive directors operate in separate boards.

Committees:

Mandatory or recommended.

Recommended.

Organization:

Unitary.

Binary.

CEO-duality:

Admitted.

Impossible.

 

 

 Source: based on Maassen and van den Bosch (1997b).

 

These differences give rise to the comparison of one-tier and two-tier boards in this study. As recognized previously in this chapter, board composition and board leadership structures may account for problems associated with the independence of one-tier boards. Assumptions 1a and 1b indicate that one-tier boards composed of a majority of executive directors and one-tier boards that are directed by a CEO who also holds the position of chair are negatively associated with the separation of decision management from decision control. In contrast, the description of two-tier board models may suggest a positive association between the composition and the leadership structure and the separation of decision management from decision control in two-tier boards. Seen from a conflict perspective of board organization, the characteristics of the two-tier board model suggest that the formal division of board roles between executive and non-executive directors may reduce agency costs and may simplify directors' duties and liabilities (Guthrie and Turnbull, 1995). The attributes of two-tier boards are further explored in the following paragraphs.

 

Two-Tier Board Composition

Based on the fundamental belief that boards composed of a majority of non-executive directors are more effective in protecting shareholder interests than those dominated by executive directors, proponents of a conflict perspective of board organization advocate the strong representation of independent non-executive directors at corporate boards (Mallette and Fowler, 1992; Sundaramurthy et al., 1996). The previous description of two-tier boards suggests that the supervisory board is entirely composed of non-executive directors. The management board is entirely composed of executive managing directors. Based on a conflict perspective of board organization, assumption 2a suggests:

 

Assumption 2a: the composition of supervisory boards in two-tier boards is positively associated with the separation of decision management from decision control.

 

This study could not find evidence in the literature that supports this assumption. To fill this gap in the literature, chapter eight and nine of this study further investigate this assumption in more detail.

          

Two-Tier Board Leadership Structure

One-tier boards provide the possibility that the CEO acts as an executive director who is responsible for the daily management of the firm. The CEO can also be held responsible for the overall governance of the corporation. In other words, dual leadership structures in one-tier boards can formally put the tasks of decision management and decision control in the hands of a powerful and influential member of the board. Seen from a conflict perspective of board organization, such a concentration of power may result in agency problems. An independent board leadership structure may effectively reduce agency problems due to the separation of decision management from decision control. The integration of CEO and chairman roles is not possible in two-tier boards because a member of the management board may not simultaneously act as a member of the supervisory board. As a result, an executive managing director can not act as chairman of the supervisory board. Such an independent board leadership structure may effectively avert the “two hats problem” of the CEO when he or she also holds the position of chairman of the board (Tricker, 1984). Based on a conflict perspective of board organization, assumption 2b suggests:

 

Assumption 2b: the board leadership structure of two-tier boards is positively associated with the separation of decision management from decision control.

 

The literature review of this study could not find research that has investigated this assumption. To enrich our understanding of board leadership structures and the formal independence of two-tier boards, this assumption is further investigated in chapters eight and nine of this research.

 

Two-Tier Board Committees

As previously noted, oversight board committees are balancing devices to secure the independence of one-tier boards of directors (Davis, 1991). Demb and Neubauer (1992b:29) suggest that board committees appear to be used in one-tier boards to “ . . . accomplish to some degree a purpose similar to the legal separation between the management and the supervisory board . . . ” in two-tier boards. Listing requirements and corporations laws do not call for oversight board committee structures that support the independence of supervisory directors who operate in two-tier boards. Although audit, remuneration and nominating committees are becoming more universal in countries with a two-tier board model (Pic, 1995), they are not necessarily formed to improve the independence of the board. Maassen and van den Bosch (1999a) suggest that board committees such as the audit and nomination committees of Dutch supervisory boards may serve as integrative devices by means of a mixed composition of both executive managing directors and non-executive supervisory directors. As such, the function of audit and other oversight board committees in two-tier boards may differ from those in one-tier boards. As integrative devices, these committees may support the integration of decision management with decision control. Based on this observation, a conflict perspective of board organization may support the following assumption:

 

Assumption 2c: oversight supervisory board committees of two-tier boards that are composed of both executive directors and non-executive directors are negatively associated with the separation of decision management from decision control.

 

This assumption is further investigated in chapters eight and nine of this study.

 

Two-Tier Board Organization

Sheridan and Kendall (1992) acknowledge that two-tier boards clearly separate the legal obligations of executive and non-executive directors. Tricker (1984:198-197) sees two-tier boards as structures “ . . . with an absolute separation of supervision from executive management.” Cadbury (1995:66) indicates that supervisory boards are in the position “ . . . to take an entirely independent view of the actions of management, since there is no overlap of membership between the two boards.” Seen in light of a theoretical conflict perspective of board organization, the management board is in charge of the initiation and implementation of strategic decisions (decision management). The independent supervisory board ratifies and monitors the conduct of the members of management board (decision control). The separation of board roles in one-tier and two-tier boards is presented in table 3.3. The table indicates that one-tier boards combine several board functions such as the supervisory function and the management function of the board (Demb and Neubauer, 1992b), the service, the strategic and control roles of directors (Zahra and Pearce, 1989) and the performance enhancement role and the monitoring role (Hilmer, 1993).

 

Table 3.3

Formal Board Structure and the Division of Board Roles

 

One-Tier Board

Two-Tier Board

Authors

Management board.

Supervisory board.

 

Supervisory function and management function.

Management function.

Supervisory function.

Demb and Neubauer (1992b).

Accountability, supervision, direction and executive action.

Direction and executive action.

Accountability and supervision.

Tricker (1984).

Decision management and decision control.

Decision management.

Decision control.

Fama and Jensen (1983).

Performance enhancement role and monitoring role.

Performance enhancement.

Monitoring role.

Hilmer (1993).

Decision making and decision taking.

Decision making.

Decision taking.

Pahl and Winkler (1974).

Strategic and financial control.

Not specified.

Strategic and financial control.

Baysinger and Hoskisson (1990).

Service, strategic and control roles.

 

Service and strategic role.

Monitoring role.

Zahra and Pearce (1989).

 

 

These roles are formally separated by the organization of two-tier boards. This observation is formalized by the following assumption on the separation of board roles in two-tier boards. Based on a conflict perspective of board organization, assumption 2d suggests:

 

Assumption 2d: the binary structure of two-tier boards is positively associated with the separation of decision management from decision control.

 

This assumption is further investigated in chapters eight and nine of this research.

 


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.