Board of Directors

Introduction
Te board of directors leads and controls a company and hence an board is
fundamental to the success of the company. The board is the link between mangers
and investors, and is essential to good corporate governance and investor
relations.
Types of Board Structure
• Unitary Board (One tier) • Dual Board (Two tier)
Unitary v/s Dual Board
A major CG differences between countries is the board structure, which may be
unitary or dual depending on the country. In the majority of EU members states, the
unitary board structure is predominant. However In Austria, Germany, The
Netherlands and Denmark , the Dual Structure is predominant.
Unitary Board
A Unitary BOD is the form of Board Structure in the UK and USA, and is
characterized by one single board comprising both executive and non executive
directors. The Unitary Board is responsible for all aspects of the company’s
activities, and all the directors are working to active the same ends. The
shareholders elect the directors to the board at the company’s annual general
meeting.
UNITARY BOARDS
• A single board comprising executive (those with direct responsibility for
operations) and nonexecutive (independent, with no management responsibilities
within the organisation) • Elected by shareholders
• Unitary boards include both executive and non-executive directors and make
decisions as a unified group.
Two -tier boards
• Two -tier boards (Dual Board) • Two -tier boards have two separate boards: • a)
the management board and • b) the supervisory board.
DUAL BOARD
• Supervisory board responsible for strategic management • Management board
responsible for operating the organisation • Clear separation of management and
control • Shareholders elect supervisory board members, who then appoint management
board members
• a) The management board generally includes only executives. It focuses on major
operational issues and is headed by the chief executive.
• b) The supervisory board deals with the strategic decisions and oversees the
management board. The chairman of the company sits on the supervisor board.
Supervisory boards consist exclusively of non executive directors.
• The supervisory board is often used as a way to represent various stakeholder
groups, by including representatives on the board, such as employees or
environmental consultants.
• Two- tier boards are effective relationship between the chief executive (head of
the management board) and the chairman (head of the supervisory board).
UNITARY VERSUS DUAL
• the supervisory board is unable to monitor the activities of management •
supervisory boards usually meet infrequently, and do not receive sufficient
management information to enable them to have a clear understanding of day to day
events • conflicts of interest may occur, caused by the differing stakeholders on
the senior board (for example, German supervisory boards include representatives of
the workforce and trade unions, as well as management)
UNITARY VERSUS DUAL (CONT’D)
• Unitary boards increase likelihood of agency problem, especially if CEO/Chairman
are not separated • Unitary boards may not take a sufficiently long view • Lack of
employee representation on unitary boards may adversely affect employee relations
ROLES
• Chairman (CM): ideally independent (NED). Task is to manage the board, not run
the organisation’s operations • Chief Executive Officer (CEO): Task is to manage
the operations of the organisation on behalf of the board • Usual practice in USA
is to have joint CEO/CM, in UK and many other economies it is considered to be poor
governance practice
NON-EXECUTIVE DIRECTORS
NONEXECUTIVE DIRECTORS (NEDs)
• Also known as independent directors • No direct management responsibility for
operations • May be senior managers from other similar enterprises • Best practice
is for chairman and other key roles to be NED • Some governance codes have specific
descriptions of the role NEDs should take
BOARD SUBCOMMITTEES
MAIN BOARD SUB-COMMITTEES
• Audit committee • Remuneration committee • Nominations committee
GOOD AND BAD PRACTICES • Good • The CEO sees the board as providing positive and
constructive advice and guidance • Information is freely and comprehensively
provided • Agendas are designed to encourage and enable open debate • All board
members are able to make effective contributions in discussions • The roles of CEO
and Chairman are separated • All board members are able and prepared to address
important issues without the threat of removal • Independent directors have the
ability to request and obtain the information they need • Independent directors are
able to make contributions to strategic direction as appropriate
• Bad • The CEO sees the board as an unnecessary bureaucratic burden • Information
flow to directors from management is poor • CEO sets rigid agendas, and discourages
debate and interjection • Senior management do not facilitate open debates to
discuss serious issues • Directors are subordinate to the wishes of the CEO •
Directors are unwilling to confront important issues due to a fear of being
replaced or sidelined • Strategic information is provided solely by executive
directors • Timely interventions to avoid strategic errors are discouraged
THE THREE GOLDEN RULES
• Separation of CEO and Chairman • Effective and properly independent NEDs (ideally
also chairing the key sub-committees) • An effective and competent audit committee

It is probable that if any more than one of these rules is not complied with
effective corporate governance cannot be guaranteed