Question

Explain how a “two-tier” structure for the board of directors such as the one in Germany differs from the unitary approach in the U.S. Do you think the two-tier system better serves the goal of having strong and effective corporate governance?

Answer 1

In two teir structure of board in Germany there are two groups of directors, first is management group who manage the workings of the group and do day to day activities, its member are appointed by supervisory board member who do not interfere in the day to day activities. Member of management board are generally experts in their field and are appointed based upon that only. Whereas member of the supervisory board are appointed by shareholders. These are generally the big shareholders or the founders and co-founders.

No, I dont think that two teir serves better because of the possible conflicts of interest in practice, though theoritically it seems that supervisory board do not intefere but they do lobby their position and not let any major decision be taken by supervisory management which affects them adversly. This directly impedes corporate governance which says that company should be directed, contrtolled and managed in such a way that it increases the value for its stakeholders. Whereas in unitary approach there is no seggregation, instead different committees are formed in it which guides the board in effective decision making.

Thus, with conflicts of interest, less transperancy in decision making it is not advocatable that two teir system serves the goal of having strong and effective corporate governance better than unitary