Comparative Corporate Governance

Author: dr. Rado Bohinc, Published by: University of Primorska – Fakulteta za Management, 2010

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The author presents and compares some US (mainly MBCA, Delaware and California) and European (mainly the EU, Germany, UK, France and Slovenia) legislation on specific corporate governance issues, and attempts to explain the legal differences and similarities between the  legal systems on specific corporate governance issues. In addition, the author seeks to identify their broader (historical, societal) causes and implications so as to predict possible developments and of course to suggest the best alternatives for future Slovenian corporate governance developments. By comparatively analyzing the corporate governance legislation in a number of theoretically broadly discussed issues like the structure of boards of directors, one- or two-tier systems of corporate governance, the role of shareholders in corporate governance, the execution of the supervisory function over the conduct of a corporation, etc, the author attempts to find arguments supporting the views presented. Given that it is impossible to discuss these issues without previously providing theoretical explanations of certain general issues, the author presents them briefly, not very systematically, with only brief comments.

The new (knowledge-based) concepts of development and new forms of economic co-ordination (co-operation and partnership) engage the scholars and politicians from all over the world. In the search for a new equilibrium between the private, public and social sectors, economies in transition in addition face the challenge of the post-privatised ownership structure of the economy, significant for the strong public, weak social and emerging, newly-formed and consolidating private sectors. Further, there is an important historical and ideological burden of cultural patterns (and real experiences) that derives from certain similar concepts of the former socialist state.

However, when talking about the cultural environment in countries in transition it is necessary to say that the enthusiasm for private property and a market economy from the early 90s still prevails over the concepts of public and social principles of the economy. But, paradoxically, the privatisation of the economy (better put: the transformation from social to private forms of enterprises) caused the strengthening of the public sector. The state as an owner thereby took over public services and, in addition, became the owner of substantial parts of other businesses[1].

This research tries to analyze the differences and similarities, advantages and disadvantages of US single board system of corporate governance in comparison with some European two tier systems. With the phrase: “European two tier board” we have in mind two tier systems which are in different ways introduced in some European countries legislations and which are presented in this paper (for example: Germany, Austria, France, in certain way Slovenia, and the Societas Europea of the EU (EU Regulation on European Company). It is intended that legal analysis of this much discussed issue in US and European theory, contributes to some progress in defining best alternatives in this field of enormous importance for economic efficiency.

The issues, broadly discussed by the theory to which we give some comparative analysis thus first relate to the issue of composition of the board (single or dual) and distribution of powers between boards and the board of directors and executive management. Furthermore, the discussions centers on labor and other than shareholders’ constituencies in the boards in one and two-tier system. A number of thoughts are devoted to find solutions for more efficient supervision and monitoring of management, the issue that relates to the question of independency and outside directors, board’s committees and other forms of solving the agency cost problem, as effectively as possible.

US corporate law, similarly to UK law provides only for single board system with no mandatory labor representation statutory model of US corporation is basically, in vesting all corporate powers to a single board of directors (unlike separation of Management from Supervisory Board, provided for in some European legislation), with no further mandatory rules referring to composition of the board (as for ex.: mandatory participation of labor directors, as provided for in some European legislations)

The main difference between the single and the dual system is that US executive management powers are delegated by the Board of Directors and can theoretically be changed any time, but the powers of for example German Management Board (Vorstand) are vested by law and cannot be decreased even by the shareholders’ resolution on the amendments to the articles.

German corporate governance system had a great influence on a number of European countries (for ex. Austria, Slovenia and some other countries, newcomers to EU) in the introduction of different kinds of two tier systems to their legislation including relevant EU regualtion (i.e. Regulation on European Company) and directives (i.e. Directive on labour representation in the management in SE).

Under German company (corporate) law[2], unlike in the US, a stock corporation (Aktien Gesellschaft, AG) must have two different boards of directors: a Management Board (“Vorstand” AktG, par. 76–94), and a Supervisory B oard (“Aufsichtsrat,” par 95–117 Aktg)[3].

Contrary to US corporate governance concept, the German Management Board runs the corporation and makes all business decisions on its own responsibility based on law not the articles or supervisory board resolution. The two bodies (supervisory and management board) are strictly separated and it is restricted that a member of management board is at the same time a member of supervisory board.

Unlike US single board system the EU regulation on EU company introduces the separation of monitoring and business operational functions into two bodies, strictly separated between each other, if a company opts for such a system.

The EU Regulation on the structure of the EU company deals with such issues as the two tier system of management and supervision and the relevant directive introduces participation of labor in the organs of a European company.

Which system is more efficient for the country depends most on the ownership structure of a certain country; but this is a question that remains beyond this legal analysis of the problem. The answer lies in economic performance of the relevant economy and it has a lot to do with the existing uncertain economic and financial flows, known as economic and financial crisis. There certainly is a direct corelation between the corporate governance system and its performance and overall economic performance of a certain economy. This is why the issues of corporate governance are of such utmost importance and also all the time up to date.

But the fact is that US Board of Directors is becoming less and less executive and more and more monitoring and supervisory body (at least in big corporations) with the representation of the majority of outside and independent members and delegating more and more executive functions to executive and other comities and executives.

On the other hand the German Supervisory Board is in addition to its supervisory function strengthening its strategic role in a German corporation. Are these processes of obvious convergences in the field of corporate governance caused by the fact of economic and financial crisis, or it is something that follows the natural development of contemporary capitalism, is something that we want to find out through this research too.

[1] State and para-state institutions (funds, investment companies, public banks) today own more than 50% of the economy in Slovenia. Privatisation has thus led from a social to a publicly-controlled economy.

[2] German Stock Corporation act – Aktiengesetz, hereinafter referred as AktG, par. 76–94.

[3] The management organ and the supervisory organ are regulated by Article 3/1 AG:

(a)The company shall be managed by a management organ under the supervision of a supervisory organ.

(b)The members of the management organ shall be appointed by the supervisory organ. However, the members of the first management organ may be appointed in the memorandum or articles of association.