How two-tier boards can cut corporate confusion: Jane Simms looks at where company structure might go after Cadbury

WHEN the Cadbury Committee on corporate governance published its draft report in May it was criticised for attempting to separate the executive and non-executive parts of a board - by implication advocating a two-tier structure. Critics said that elevating non-executives would rob an organisation of a powerful strategic and management contribution.

So the final report, issued last week, emphasised that the proposals should be seen in the context of the unitary board, which it supports. But the business climate is changing. As Sir Adrian Cadbury said: 'Twenty years ago UK companies were not very international, and there was far less concern about the environment, for instance.' That change should be reflected in flexible board structures.

The idea has been around a while. In 1977 a government report on industrial democracy discussed the Continental-style supervisory board. and judged that UK companies should consider some sort of two-tier board structure. No one really did, the main sticking point being worker representation.

John Rogers, secretary to the investment committee of the National Association of Pension Funds, said: 'Maybe Cadbury is asking too much of non-executives.' He suggests this will force a look at different structures sooner rather than later.

Of course, there is no law that stops companies adopting different board structures if they wish.

Proponents of two-tier boards argue that the role of directors is confused at present. The unitary board, they say, has three distinct functions: supervision; control (implementation of management policies); and management (the actual conduct of the business). Separating the operational and stewardship functions would focus people's responsibilities, they say.

Ray Hinton, technical partner of Arthur Andersen, the accountants, suggests that UK boards could become more oriented towards supervision. This would be done by passing down management functions to operating committees.

Supervisory boards are more common on the Continent. Derek Jenkins, finance director of the aggregates group RMC, sits on those of RMC joint-ventures in Germany and Austria. In each case the supervisory board comprises shareholders and workers, elected by and responsible to shareholders and workers. It is responsible for the conduct of the company, and it hires and fires management and defines its responsibilities. Management board members are appointed for five years, and often their contracts are not renewed.

Mr Jenkins says that worker representatives are a far cry from the radical uncooperative element that many expect. It is not uncommon for an employee representative to be voted off the board by the workers.

Mr Jenkins believes the system instils discipline into the management board. Moreover, he says, because the structure is enshrined in law the supervisory board members cannot be shut out of decision-making, as they can in the UK. But Mr Jenkins accepts that the continental system is bureaucratic and time-consuming. 'Because of this,' Mr Jenkins says, 'the unitary system, if properly handled, is better.'

Jonathan Moynihan, group chief executive of PA Consulting Group, argues that two-tier boards would bring no real improvement in corporate governance. 'The most effective capitalist companies were developed by the chief executive owning the whole company,' he says. 'That provides the hint as to which way we should go. If you make managers serious owners, and tie their rewards solely to the value of the company, you need minimal external intervention.'

(Photograph omitted)

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