Understanding board structures

Understanding board structures: a guide to the two most common ways of running a company. Boards are essential teams with an important job to do. They are the DNA of a company, ensuring that it’s being run correctly now and on a path towards a successful future. If they get governance wrong, they will be called out. That’s why it’s essential they organise themselves in a way they feel works best. There are two main ways to do this: either the board operates as a single body (single-tier or unitary board), or it splits itself in two - with one looking after the day-to-day and the other focusing on the long-term. Let’s dive into what those two options mean. A reminder - what is a board? It’s the group of people tasked with steering the company. It’s usually responsible to the company’s shareholders and maybe other groups of stakeholders, depending on the circumstance. It casts a watchful eye over management and employees as they implement company strategy while making big decisions and giving a company direction. On a board you should find a wealth of experience in areas relevant to the company. A reminder - what are executive and non-executive directors? It’s important to keep this in mind because the main difference between board structures hinges on how execs and non-execs relate to each other. Executive Directors are paid, usually full-time members of the company’s management. Typical examples are the CEO, COO, and CFO. In addition to sitting on the board, they oversee one or more teams of employees. In this way, they are online day in and day out and will likely know every corner of the business as a result. This is one of their main strengths. Non-executive directors (NEDs) are not managers and do not work full-time with the company. However, they do have a strong expertise in an area relevant to the company. Such skills combined with the limited face-time make NEDs highly valued for their “outsider” views to look at the company as a whole and see its direction far more clearly than if they were managers. Understanding board structures The fundamental difference between unitary and two-tier governance structures is as you’d expect: unitary structures have one board, and two-tiered structures have two. Unitary boards generally feature executive and non-executive directors, while the two-tier boards keep them separate. Understanding board structures: unitary Everyone is around the same table in a unitary board structure: The executive directors - who will most likely attend board meetings amid their busy management schedules - and the non-executive directors - who have more time free outside meetings for other professional projects like consultancy, freelancing, or sitting on other boards. Unitary boards usually contain roughly 8-13 people. It depends on the company’s size and industry. The unitary board structure Everyone is around the same table in a unitary board structure: The executive directors - who will most likely attend board meetings amid their busy management schedules - and the non-executive directors - who have more time free outside meetings for other professional projects like consultancy, freelancing, or sitting on other boards. Unitary boards usually contain roughly 8-13 people. It depends on the company’s size and industry. Pros of the unitary structure: Efficiency: The buck stops with one team, meaning decisions are often easier to make. Unity: There’s an obvious benefit to having everyone with governance powers (especially execs and non-execs) in one room. People will likely find it easier to talk, listen, understand, and make a decision. This can foster a stronger company culture. Cons of the unitary structure: Blurred responsibilities: With execs and non-execs in the room together, it can be easy to fall into the trap of trying to tackle day-to-day and long-term at the same time. Sometimes, one of the above voices will be louder than the other, even though both need airtime. Centralisation of power: This happens with unitary boards. CEOs can enjoy strong - even unjust - influence and, alongside most other directors, dedicate themselves to maximum returns for shareholders with little interest in other issues. To some people, this is fine. To others - like employees - it’s not. Understanding board structures: two-tier The two-tier board separates directors into the non-executives (who form the supervisory board) and the executives (who form the management board). This means that the combined strength of both boards usually tops 20 people. The supervisory board looks after the long-term strategy. It represents all the company’s stakeholders and oversees the actions and decisions of the management board. In return, the management board provides regular feedback on strategy and suggests potential improvements based on their day-to-day work. Pros of the two-tier structure The separation of responsibilities: Having execs and non-execs in different rooms means both can concentrate on their own portfolios without the risk of blurred lines. More expertise: Having more than 20 people on the two-tier board means more expertise will be in the room - critical in a business world where priorities rapidly change. Checks and balances: separating management from long-term strategic decisions means that one body can act as a check on the other, functioning as “fresh eyes” on an issue wherever needed. Cons of the two-tier structure Complexity and the risk of overkill: Having two teams run the show will naturally mean there’s the risk of tying governance into knots. Slower decision-making: As with the above, you can’t expect quick approval on a decision that needs two teams. What board structure is better? There’s no correct answer. There are advantages and disadvantages to both, and, realistically, merit alone will rarely decide what board structure you use. It’s really about culture Countries and business cultures are decisive factors in what board structures you’re likely to find in a given place. For example, the unitary structure corresponds to the “Anglo-American” model of governance because it’s common in the UK, the US and other countries in the English-speaking world like Canada, Australia, Ireland and New Zealand. Professionals in these countries are used to the single-board model. They value the clear hierarchy it provides and the principle that shareholder returns are the number one goal. By contrast, the two-tier system corresponds to the “Continental” or “German” governance model. As you’d expect, this system developed in continental Europe and still has a heavy foothold there. Similarly, professionals in these countries value the checks and balances and the focus on all stakeholders - not just shareholders. It’s challenging to move away from these cultural norms, even if your business is new and open to change. In summary There are two systems defined by the number of boards and the separation between executive and non-executive directors. The unitary board system features one board that mixes both. The two-tier system features two boards and keeps the types of directors separate.

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