Author: Jože Bajuk
joze.bajuk@socius.si
http://www.socius.si/si/knjiznica/
The key novelty of the amendment to the Companies Act is its introduction of the opportunity to choose between the two-tier and one-tier systems for governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow this choice. The key novelty brought by the amendment to the Companies Act[1] is clearly the introduction of the opportunity to choose between the two-tier and one-tier systems of governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow such a choice, although in limited cases the law allows governance of public limited companies without supervisory boards, which should not be understood as the one-tier governance system known in _domestic_ Anglo-Saxon legal systems.
The System of Governing Public Limited Companies
In both theory and practice, two opposite governance systems have been created, the Anglo-Saxon one-tier[2] and the continental European two-tier[3] systems. Between these two, other governance systems may be classified, in fact taking individual solutions from both and therefore occupying the space between them.
There are three bodies for governing public limited companies in the two-tier system. Namely, the general meeting of shareholders, the supervisory board and the management board. Their competencies are relatively clearly delimited by the law itself. The general meeting of shareholders is primarily competent to adopt changes to the status of the company, profit-sharing and the appointment/dismissal of supervisory board members.
The supervisory board primarily supervises the operation of the management board, appoints/dismisses the management board, takes care
of the motivation of the management board and adopts annual reports. The management board conducts the company's business operations. The law also strictly restricts the option to transfer the authorities of one body to another body. Examples of such a transfer are the transfer of decision-making on the annual report from the supervisory board to the general meeting of shareholders, the restriction and tying of the adoption of the management board_s business decisions to the approval of the supervisory board etc.
The one-tier system knows two bodies of governance. They are the general meeting of shareholders and the board of directors. In its composition and competencies, the general meeting of shareholders does not differ considerably from the general meeting seen in the two-tier system. Thus, the general meeting also has the authority to appoint the company's directors. There are bigger differences in the board of directors. Its members are directors who the law itself divides into non-executive and executive types.
Theoretically, the competence of managing the company is held by the board of directors as the body of governance, however, it transfers this competence to the executive directors and for itself retains the competence of supervising their work. Here, I have to stress again that the board of directors consists of both executive and non-executive directors. A company may also have executive directors who are not members of the board of directors. It is possible to say that such companies have two types of executive directors who have different competencies, tasks and
responsibilities. Otherwise, the role of the executive directors strongly resembles the roles of management board members in the two-tier system of governance since the executive directors conduct the company's business operations.
Strengths and Weaknesses of Governance Systems
There is no universal answer to the question of which governance system is better. The reason is that corporate governance in the sense of arranging the relations between the shareholders and the boards should not be understood as merely a legal category. We must be aware that different models of governance have been formed in different economic and social systems. The one-tier system has thus been created in the Anglo-Saxon space, characterised by dispersed share structures, an active capital/securities market and, last but not least, a majority voting system[4] where the winner has very concentrated decision-making power etc. A pure two-tier system has developed in the Germanic environment characterized by majority shareholders of companies, powerful participation of the participants (employee participation), a less liquid capital market, a proportionate voting system[5] etc. The question of a better/poorer system has in fact only appeared in recent years when we started to witness serous globalisation trends in the economy. It started with the linking up of companies - multinational entities and continues with the strong tendency of shareholders to follow advanced standards of corporate governance[6]. A logical consequence of these trends and requirements is the search for the most efficient governance system which would
reduce the risk for shareholders, take their interests into account and, finally, enable the optimal level of influence by the relevant participants on the operation of capital companies.
Our advice to shareholders when choosing between one-tier and two-tier systems in the future is as follows. The practice of managing and governing companies has shown through the years that the one-tier system is probably more efficient in cases where the company has a majority or prevailing shareholder. Here, the joining together of the managerial and supervisory bodies may represent a certain advantage as there is no real conflict of interest between the shareholder and the management board. The goals and purposes of such companies are largely defined by the majority shareholder, be it a natural person or a company. The joining of the two bodies thus brings about the more efficient and faster adoption of important decisions.
There is a somewhat different situation in the relations between interests in companies with a dispersed share structure. In these companies the shareholders are unable to articulate the goals of the company as their interests differ and their only common denominator is the expectation of a yield in the forms of dividends and growth in the market price of the shares. In these cases an important role may be played by the supervisory board which is separated from the management board, with its task being, besides implementing, supervising and motivating the management board, to establish the goals and purpose of the company _on behalf of the shareholders_ or at least to constantly search for the common interest of capital owners - shareholders. Because of these positive effects, supervision by the separated body is better in quality and more transparent in these cases, which is in the key interest of the shareholders. As mentioned above, here the separation of the supervision and management bodies may produce certain advantages.
[1] Prepared by an expert team at the Ministry of the Economy.
[2] The case of the British legislation.
[3] The case of the German legislation.
[4]The latter should, of course, be understood as just an example of understanding the general view of society regarding the distribution of powers in the social environments concerned.
[6] This is proven by the many national and transnational codes of corporate governance that have been adopted.
joze.bajuk@socius.si
http://www.socius.si/si/knjiznica/
The key novelty of the amendment to the Companies Act is its introduction of the opportunity to choose between the two-tier and one-tier systems for governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow this choice. The key novelty brought by the amendment to the Companies Act[1] is clearly the introduction of the opportunity to choose between the two-tier and one-tier systems of governing domestic public limited companies. This is indeed a true novelty since the existing legislation does not allow such a choice, although in limited cases the law allows governance of public limited companies without supervisory boards, which should not be understood as the one-tier governance system known in _domestic_ Anglo-Saxon legal systems.
The System of Governing Public Limited Companies
In both theory and practice, two opposite governance systems have been created, the Anglo-Saxon one-tier[2] and the continental European two-tier[3] systems. Between these two, other governance systems may be classified, in fact taking individual solutions from both and therefore occupying the space between them.
There are three bodies for governing public limited companies in the two-tier system. Namely, the general meeting of shareholders, the supervisory board and the management board. Their competencies are relatively clearly delimited by the law itself. The general meeting of shareholders is primarily competent to adopt changes to the status of the company, profit-sharing and the appointment/dismissal of supervisory board members.
The supervisory board primarily supervises the operation of the management board, appoints/dismisses the management board, takes care
of the motivation of the management board and adopts annual reports. The management board conducts the company's business operations. The law also strictly restricts the option to transfer the authorities of one body to another body. Examples of such a transfer are the transfer of decision-making on the annual report from the supervisory board to the general meeting of shareholders, the restriction and tying of the adoption of the management board_s business decisions to the approval of the supervisory board etc.
The one-tier system knows two bodies of governance. They are the general meeting of shareholders and the board of directors. In its composition and competencies, the general meeting of shareholders does not differ considerably from the general meeting seen in the two-tier system. Thus, the general meeting also has the authority to appoint the company's directors. There are bigger differences in the board of directors. Its members are directors who the law itself divides into non-executive and executive types.
Theoretically, the competence of managing the company is held by the board of directors as the body of governance, however, it transfers this competence to the executive directors and for itself retains the competence of supervising their work. Here, I have to stress again that the board of directors consists of both executive and non-executive directors. A company may also have executive directors who are not members of the board of directors. It is possible to say that such companies have two types of executive directors who have different competencies, tasks and
responsibilities. Otherwise, the role of the executive directors strongly resembles the roles of management board members in the two-tier system of governance since the executive directors conduct the company's business operations.
Strengths and Weaknesses of Governance Systems
There is no universal answer to the question of which governance system is better. The reason is that corporate governance in the sense of arranging the relations between the shareholders and the boards should not be understood as merely a legal category. We must be aware that different models of governance have been formed in different economic and social systems. The one-tier system has thus been created in the Anglo-Saxon space, characterised by dispersed share structures, an active capital/securities market and, last but not least, a majority voting system[4] where the winner has very concentrated decision-making power etc. A pure two-tier system has developed in the Germanic environment characterized by majority shareholders of companies, powerful participation of the participants (employee participation), a less liquid capital market, a proportionate voting system[5] etc. The question of a better/poorer system has in fact only appeared in recent years when we started to witness serous globalisation trends in the economy. It started with the linking up of companies - multinational entities and continues with the strong tendency of shareholders to follow advanced standards of corporate governance[6]. A logical consequence of these trends and requirements is the search for the most efficient governance system which would
reduce the risk for shareholders, take their interests into account and, finally, enable the optimal level of influence by the relevant participants on the operation of capital companies.
Our advice to shareholders when choosing between one-tier and two-tier systems in the future is as follows. The practice of managing and governing companies has shown through the years that the one-tier system is probably more efficient in cases where the company has a majority or prevailing shareholder. Here, the joining together of the managerial and supervisory bodies may represent a certain advantage as there is no real conflict of interest between the shareholder and the management board. The goals and purposes of such companies are largely defined by the majority shareholder, be it a natural person or a company. The joining of the two bodies thus brings about the more efficient and faster adoption of important decisions.
There is a somewhat different situation in the relations between interests in companies with a dispersed share structure. In these companies the shareholders are unable to articulate the goals of the company as their interests differ and their only common denominator is the expectation of a yield in the forms of dividends and growth in the market price of the shares. In these cases an important role may be played by the supervisory board which is separated from the management board, with its task being, besides implementing, supervising and motivating the management board, to establish the goals and purpose of the company _on behalf of the shareholders_ or at least to constantly search for the common interest of capital owners - shareholders. Because of these positive effects, supervision by the separated body is better in quality and more transparent in these cases, which is in the key interest of the shareholders. As mentioned above, here the separation of the supervision and management bodies may produce certain advantages.
[1] Prepared by an expert team at the Ministry of the Economy.
[2] The case of the British legislation.
[3] The case of the German legislation.
[4]The latter should, of course, be understood as just an example of understanding the general view of society regarding the distribution of powers in the social environments concerned.
[6] This is proven by the many national and transnational codes of corporate governance that have been adopted.
