Definitions and meanings:
Board of directors comprises of a group of people who administers and governs the activities of an organization. The organization can be a profit seeking, non profit seeking, governmental or a non-governmental organization (mostly termed as Non Government Organization or NGO).
One-tier board of directors (also known as unitary board of directors) is a single body of directors that makes strategic decisions of a company. It includes both executive directors and non-executive directors.
Two-tier board of directors is a system in which a company is governed by two distinct boards of directors, a management board and a supervisory board. Management board is accountable to supervisory board and makes decisions related to operational and tactical direction of the company. The supervisory board makes decisions about long-term strategic direction of the business.
Difference between one-tier and two-tier board of doctors:
The important points of difference between one-tier and two-tier board of doctors are given below:
The unitary board of directors is composed of executive directors (employees of the company) and non-executive directors (independent external directors). Both these directors sit on a single board. In a two-tier system, the supervisory board is directly elected by the shareholders and includes senior board members and/or employee representatives. The supervisory is responsible for the hiring and firing of the management board.
2. Segregation of roles:
In a one-tier or unitary board of management there is no clear separation of duties as both the executive and non-executive directors sit on the same board. While in a two-tier board, two different boards are present, with one clearly responsible for undertaking management roles and the other for the purposes of check and balance and policy making.
The process of decision-making in a unitary board is faster because all the decisions are made and approved by a single board. Whereas, decisions made by the management board in a two-tier system have to be approved by the supervisory board for implementation which, therefore, can take time. This delay can prolong if the management and supervisory board disagree on a certain agenda.
4. Stakeholder Indulgence:
The composition of unitary board of directors does not allow for different kinds of stakeholder representation. This is because a single board cannot accommodate a large number of directors and therefore non-executive directors are the only independent input in a unitary board. However, in a two-tier system, as the management board and supervisory boards are different, it provides a chance to add representatives of more stakeholders especially representatives of employees.
5. Role of chairman and CEO:
In a one-tier board, the Chairman of board and the CEO (chief executive officer) sit on a single board. While in a two-tier board system, the supervisory board is led by the Chairman of the company and the management board is led by the CEO of the company.
6. Communication and supervision:
In a unitary board, the executives and non-executives sit on a single board. Therefore, all the decisions have an ongoing input of both of these directors. In this way, the non-executive directors who are primarily responsible for the supervision of executive directors can actively seek their duty. In a two-tier system as the two boards meet separately, the supervisory board cannot actively hold management board accountable and only gets the information which management board disseminates to them.
The composition of the board of directors depends on the nature and corporate governance risks that a business is facing. It also varies based on the jurisdiction in which a business is established. One-tier or unitary board system is normally adopted in countries like Australia, America, United Kingdom, Hong Kong, Singapore etc. Countries like, China, Indonesia, Russia, South Africa and most of the Europe including Germany have adopted a two-tier system. Some countries like Japan adopt a hybrid system of board, which includes particulars of both systems.