Two-tier board

3 key takeaways

• A two-tier board structure separates management and supervisory functions into two distinct boards.
• The management board handles daily operations, while the supervisory board oversees and advises the management board.
• This structure aims to enhance oversight and improve corporate governance by providing clear separation of duties and responsibilities.

What is a two-tier board?

A two-tier board system is a corporate governance model commonly used in countries like Germany and the Netherlands. It consists of two separate boards: the management board (or executive board) and the supervisory board. This structure is designed to ensure a clear division of responsibilities and to provide effective oversight of the company’s management.

Components of a two-tier board

The two-tier board system comprises two main components:

• Management board: The management board is responsible for the company’s daily operations and strategic decision-making. It is composed of executives and senior managers who run the business and implement policies. Members of the management board are appointed by the supervisory board.
• Supervisory board: The supervisory board oversees the management board’s activities, provides advice, and ensures that the company adheres to legal and regulatory requirements. It is typically composed of non-executive members, including representatives of shareholders, employees, and sometimes other stakeholders. The supervisory board has the authority to appoint and remove members of the management board.

Roles and responsibilities

The two-tier board structure delineates clear roles and responsibilities for each board:

• Management board:
  • Executes the company’s business strategy and policies.
  • Manages day-to-day operations and decision-making.
  • Reports to the supervisory board on business performance and significant issues.
• Supervisory board:
  • Monitors and evaluates the management board’s performance.
  • Provides strategic advice and guidance to the management board.
  • Ensures compliance with laws, regulations, and corporate governance standards.
  • Represents the interests of shareholders and other stakeholders.

Examples of two-tier board systems

The two-tier board structure is commonly used in several countries, particularly in Europe:

• Germany: German corporations, such as Siemens and Volkswagen, use the two-tier board system, with a management board (Vorstand) and a supervisory board (Aufsichtsrat).
• Netherlands: Dutch companies, such as Royal Dutch Shell and Philips, also employ the two-tier board model, following similar principles to those in Germany.

Understanding the two-tier board structure is crucial for comprehending different corporate governance models and their impact on company oversight and decision-making. For further exploration, topics such as corporate governance, board responsibilities, and comparative governance models provide deeper insights into the advantages and challenges of the two-tier board system.