The Debate: End of unitary board of directors

Watch out for two-tier stealth
By Peter Williams

The UK and the US have traditionally been in favour of the unitary board where all directors – executive and non-executive – carry the same legal can. In continental Europe it has been more common for the directors’ functions to be split between a high level supervisory board and a management or executive board.

Boards are, at the very least, expected to fulfil three functions: monitoring management, ensuring accountability, and shaping strategies. Post-Enron there is universal agreement over the need for good corporate governance.

But amidst all the soul searching most commentators in the UK have said that we should not move away from the unitary system. That’s fine, but what worries me is that while the unitary board isn’t up for grabs there is a danger that we are moving towards a two-tier system by stealth.

In a two-tier system the management board is responsible for day-to-day operations and the supervisory board has responsibility for reviewing and approving the financial statements, and has hiring, firing and remunerating power over the management board. Which sounds like a combination of a substantial part of the roles of the audit, remuneration and nomination committees.

Sarbanes-Oxley has enhanced the responsibilities of the audit committee in the USA. If the duties of the audit committee are beefed up and if initiatives like the Higgs report increase the responsibilities of non-execs in the UK, then the greater the chance that a wedge could be driven between executive and non-executive directors.

No doubt corporate governance experts will point out that the audit, remuneration and nomination committees are sub-committees of the main board and still report to it. Formally that may be the case but a single system de jure, is increasingly looking like a two-tier system de facto.

I am not advocating either system. But I am advocating that we don’t place so much emphasis on the role of the non-execs and the responsibilities of key committees that we find ourselves with a two-tier system by mistake.

  • Peter Williams is a chartered accountant and editor of Gee’s corporate governance newsletter.

An opportunity lost
By Jonathan Hunt

Significant to the debate is what happens, or does not happen, in the USA. Whatever your views on the merits or otherwise of the Sarbanes-Oxley Act, I suggest that Congress, in its rush to get something onto the statute book, appears to have missed an opportunity; that of a rethink about board structures and the combined role of chairman/CEO. Did they consider the experience of others?

A decade earlier in the UK, post Maxwell, two key safeguards put into the highly respected Cadbury report were the separation of the functions of chairman and of chief executive, and properly structured boards.

So far, the US continues to be wedded to the combined role of the chairman/CEO. Power remains concentrated in the hands of one person, whereas in the UK one person runs the board and the other manages the company. Sarbanes-Oxley makes no recommendations here so don’t bet on quick change, other than by market pressures.

While both countries follow the unitary board model, there are differences.

UK boards usually have a reasonably balanced number of executives and non-executives. Contrast this with a US board, where there may only be two executives and sometimes only one, the CEO who is often the chairman.

In this situation of potentially unfettered power, US non-executives could argue that they outnumber the CEO in board meetings and can easily challenge the information provided to them. But there perhaps is the core of the issue, non-executive directors can only question the information they are given by the CEO.

The dynamics of meetings are likely to be very different if three or four additional members of the executive team are there to openly debate issues. The UK’s unitary board model gives non-executives an opportunity to watch for any unease in the body language of the executive directors, ask questions and have a better chance of getting to the heart of an issue.

An opportunity lost for the USA? Perhaps so far, but nevertheless I would commend to our friends across the pond a thoughtful read of the Cadbury report.

  • Jonathan Hunt is head of corporate governance at the ICAEW. The views expressed are his own.

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