Difference Between One-Tier and Two-Tier Board of Directors

Edited by Diffzy | Updated on: November 19, 2022

       

Difference Between One-Tier and Two-Tier Board of Directors Difference Between One-Tier and Two-Tier Board of Directors

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Introduction

A firm's board of directors comprises a select group of highly skilled and experienced managers and executives charged with overseeing and protecting the company's interests as a whole. The company's success depends on its employees' well-being, profitability, legalization of ideas, seamless operation of the organization, and peaceful work atmosphere.

Another way, a company's strategic choices are made only by its one-tier board of directors (also known as a unitary board). Executive and non-executive directors are included.

Boards of directors are divided into two separate tiers, one for the management board and one for the supervisory board of directors. Two panels are responsible for directing the company's operations: a management board and a supervisory board. The company's supervisory board decides the company's long-term strategy.

One-Tier vs Two-Tier Board of Directors

As opposed to a two-tier board of directors composed of two different committees, a one-tier board takes all critical administrative decisions on behalf of the organization. In contrast, the two-tier board has separate committees for setting policy for the company.

One-Tier Boards of Directors have only one committee that determines all management decisions. It consists of the company's executive and non-executive directors. The term "Unitary Board of Directors" refers to a board of directors with only one-tier.

Instead, a Two-Tier System is in charge of monitoring how well policies are being implemented. Each of the two independent boards, the Management and Oversight Boards, is chaired by a different individual. CEOs lead both the Management and Supervisory Boards.

Difference Between One-Tier Board of Directors and Two-Tier Board of Directors in Tabular Form

Table: One-Tier vs Two-Tier Board of Directors
Parameters of Comparison
One-Tier Board of Directors
Two-Tier Board of Directors
Composition
The board of directors comprises executive and non-executive directors, all employed by the corporation (independent external directors). Both of them are members of the same board.
Directly chosen by shareholders, the board of directors includes senior members of the board and staff representatives. The supervisory is in charge of selecting and removing the members of the board of directors.
Segregation of roles
In a one-tier or unitary board of management, executive and non-executive directors sit on the same panel. Therefore, there is no apparent division of responsibilities.
In a two-tier board, there are two separate boards, one for management and the other for policymaking, and both are present at the same time.
Decision-making
Since a single board makes and approves all choices, the decision-making process in a unitary council moves more quickly than in other types of boards.
In contrast, in a two-tier structure, decisions made by the management board must be authorized by the supervisory board before it's implemented, which might take time. If the management and supervisory board disagree on a specific schedule, the wait may be extended.
Stakeholder Indulgence
Different stakeholders cannot be represented on a unitary board of directors because of their makeup. For this reason, a unitary council can only include non-executive directors as independent input, as a single panel cannot contain a high number of board members.
When there is a two-tier structure in which the management board and the supervisory board are separate, it allows for the inclusion of additional stakeholders, including employees.
Role of chairman and CEO
The Chairman of the board and CEO (chief executive officer) sit on the same board in a one-tier board.
The Chairman heads the supervisory board in a two-tier board arrangement, while the CEO runs the management board.
Communication and supervision
Executives and non-executives sit together on a single board under a unitary council. As a result, both of these directors are constantly involved in making choices. These directors, who are primarily responsible for overseeing executive directors, will be able to carry out their responsibilities more effectively.
The supervisory board can't hold the management board accountable under a two-tier structure, as the two boards meet separately.

What is One Tier Board of Directors?

The most essential administrative, management, operational, and financial decisions are made by a committee at the top of any organization, whether a profit-making firm or a non-profit organization. Additionally, the Board of Directors, which governs the institution as a whole, meets regularly to debate and make decisions for the good of the entire company. The committee also keeps a careful eye on how well its policies are implemented.

The term "one-tier board of directors" refers to a single committee at the top of a company's organizational structure. To help the business grow, they make quick and unified choices and policies. The One-Tier Board of Directors is under the ChairmanChairman of the Board of Directors of the company.

Advantages and disadvantages of one tier board of directors

Executive and non-executive directors in a one-tier board structure constitute a single corporate entity, which may improve the directors' feeling of shared responsibility and boost the engagement of non-executive directors in company operations.

In order to speed up the information exchange between everyday administration and monitoring, a single corporate entity may be beneficial. There is, however, a danger that the non-executive directors' increasing participation in the company's business may imply that they function less independently from the executive directors.

Non-executive directors have the same responsibilities and liabilities as executive directors because they are part of a same body. Under the right conditions, this might pose a higher level of danger for them than for those on an independent oversight committee (e.g liability in the event of a bankruptcy or if after a distribution the company is not able to meet its financial obligations).

Since just one body must approve actions that would have required approval from the supervisory board, decision making is likely to be less time consuming.

What is Two-Tier Board of Directors?

Like the one above, an organization's two-tiered board of directors is the highest level in the organization's hierarchy. The Two-tier Board of Directors has two different committees, one for supervisory and one for management, unlike the One-tier Board of Directors. They each have specific responsibilities and contributions to make to the business.

The executive board is responsible for making decisions on the company's management. In contrast, the supervisory board is responsible for implementing the company's policies and recruiting and discharging members of the management board. According to some interpretations, the Supervisory Board has more power than the Managerial Board.

Advantages of Two-Tier Board Structure

The advantages of a dual-board system can't be overstated. In a two-tier system, the supervisory role is completely independent. Managerial decisions must be reviewed and approved by the members of the supervisory board prior to implementation, and their implementation is then monitored. Under contrast, the non-executive director obligations in a one-tier arrangement may be ambiguous. It might be difficult to distinguish between members' management and supervisory roles in practise. There's no need to make and supervise their own decisions under a two-tier system since it avoids this conflict.

Due to its few and irregular meetings with management, the board of directors has less opportunities to form deep working connections. As a result, supervisory boards are more likely to discuss topics objectively and make more objective conclusions.

The more a firm expands, or if it goes public, the more likely it is that a dual board structure will become the preferred option

Scale-ups in the IT industry

However, in fast-growing technology companies, these human factors are likely to take precedence over other considerations, such as one-tier vs. two-tier board structures. The speed of information flow and the speed of decision making may be particularly critical in these firms because of the quick changes in the environment and the necessity to continually alter the strategy. Even more common are informal investors or venture capitalists, who may or may not be independent, but are usually experienced board members and mentors.

Thus, it appears that the advantages of one-tier boards (better/faster information and decision making) outweigh the disadvantages (few independent directors) in tech scale-ups. This suggests that a one-tier structure would be a better fit for a firm with as rapid growth as ours. The drawback of having non-executive directors is that they may be held more liable, however this can be lessened with adequate directors and officers (D&O) insurance.

Pros and Cons

There are several advantages to having a one-tier board, the most significant of which is that non-executive directors on a one-tier board get information and have the ability to make decisions earlier and more effectively than supervisory board members.

Additionally, the contact and collaboration between the board's executive and non-executive members may be improved if they were all on the same board. Non-executive directors are seen to be less independent than supervisory board members under a one-tier board structure, which might reduce their efficacy as supervisors and limit their capacity to serve as a mentor to the company's executive directors.

The possibility for directors' liability is a significant disadvantage for non-executive directors. Traditionally, under a two-tier structure, all members of the board of directors have equal responsibility for the company's performance.

There is no accountability for the actions of a supervisory board's members. A one-tier board means that all members, executive and non-executive, are liable as a collegial body for the fulfilment of the board's obligations, but there is some defence for the non-executive directors' monitoring responsibilities.

There is no clear winner when it comes to one- or two-tier boards, according to university researcher Charlotte de Moor's qualitative study on board effectiveness3, which points out that the differences between the one- and two-tier structures are often smaller than theoretical predictions would suggest.

In order to have a well-functioning board, the skills, competence, and experience of the board members, as well as the board culture and interpersonal interactions, are deemed more vital.

Main Difference Between One-Tier and Two-Tier Board of Directors in Points

  • The number of committees separating the two is the most significant distinction. Only the Board of Directors is responsible for making all decisions and policies for the firm in a One-Tier Board of Directors. There are two different committees in a Two-tier Board of Directors, each of which has a specific job and jurisdiction for the organization.
  • The Chairman of the Board of Directors oversees the One-tier Board of Directors. In contrast, the CEO of the organization and the Chairman of the Board of Directors tend to the Two-Tier Board of Directors.
  •  The One-tier Board of Directors makes decisions more quickly than the Two-tier Board of Directors since fewer persons are engaged. Only one committee must approve a decision in the Two-tier Board of Directors.
  • The One-tier Board of Directors does not have a substantial role for shareholders, but the Two-tier Board of Directors provides for shareholders' participation and inclusion.
  • Everyone has equal authority in a One-tier Board of Directors; however, in a Two-tier Board of Directors, the supervisory committee holds more power than the Managerial Committee.
  • Executives and non-executives sit together on a single board under a unitary council. As a result, both of these directors are constantly involved in making choices. These directors, who are primarily responsible for overseeing executive directors, will be able to carry out their responsibilities more effectively. The supervisory board can't hold the management board accountable under a two-tier structure, as the two boards meet separately.

Conclusion

The number of committees in a Two-tier organization distinguishes it from a One-tier organization. One tier has one committee, whereas Two-tier has two committees. Each committee has a unique job to perform, and each committee, whether one-tier or two-tier, is chaired by a different individual.

Furthermore, they each have varying degrees of control over the other and the organization. The policymaking and its execution are a bit more difficult in the two-tier board of director’s system than in the One-tier Board of director’s system.

The board of directors' membership relies on the kind and corporate governance issues that a corporation is facing. It also differs depending on the jurisdiction in which a firm is created. One-tier or unitary board systems are standard in nations like the United Kingdom, the United States, Australia, Hong Kong, and Singapore. Countries such as China, Indonesia, Russia, South Africa and most of Europe, including Germany, have embraced a two-tier structure. Some nations, like Japan, use a hybrid board system that incorporates elements of both approaches.

References

  • https://www.quora.com/What-are-the-differences-between-a-one-and-two-tiered-board-of-directors
  • https://landing.directorpoint.com/blog/two-tier-board-structure/
  • https://www.termscompared.com/difference-between-unitary-and-two-tier-board-of-directors/

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