Financial Reporting & Accounting

• SEC Enforcement Of Accounting Requirements

• Earnings Management: Swept Away?

• Financial Reporting For International Joint Ventures

M&A

• Applying The New M&A Filing Rules

• How To Succeed In Selling Your Business

Securities Offerings

• What To Do Now That Our Offering Has Aborted

Executive & Directors

• Delaware Cases Affecting Executive Compensation

• Dual Role Of Non-Executive Directors

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Examines the conflicting roles of directors in unitary board systems. Considers reform measures to enhance the monitoring functions of outside directors. Contrasts the Anglo-American unitary system with European two-tier directorates, and detects no inherent advantage in either.

So much to do, so little time. In the Anglo-American structure of unitary corporation board, all directors, whether inside or outside directors, stand responsible for both managing the company’s business and monitoring the performance and good conduct of the hired management. Outside directors, who typically hold senior positions in other corporations, have only limited time to devote to the board of their non-employer. The dual legal roles thus in practice shortchange the supervisory function, so reformers have placed great weight on encouraging these outside directors to concentrate on the oversight functions. In the UK, several self-regulatory committees have issued reports, which the London Stock Exchange has appended to its Listing Rules under the heading of The Combined Code. The LSE requires listed companies to comply with the Combined Code or explain why they do not; the New York Stock Exchange’s rules achieve similar results.

Reforms focus on outside directors. The reports comprising the Combined Code recommend that public corporations have outside directors, that companies declare which outside directors are truly independent, that directors submit to at least triennial election, and that the task of nominating directors fall to a committee of outside and mostly independent directors. Other suggestions include the formal qualification and chartering of independent directors and an explicit annual board review of internal control systems. In the US, many of these reforms have already been adopted, whether through the exchanges’ rules, the ALI Principles of Corporate Governance, or otherwise as a result of litigation.

Structural impediments to monitoring. All the US and UK reform efforts retain to the unitary board system. Within that system, even given its reliance on outside directors, informal forces—appointment by managers, social and professional ties between directors, and the concur-or-resign method of handling policy differences—impede the forceful exercise of monitoring functions. Even otherwise-independent directors are hamstrung by these informal influences. Another limiting factor is the control that management exercises over what information the board receives. The European-style two-tier board would, upon first examination, seem to offer an antidote to these deficiencies. A board of managers or an executive committee exercises sole control over the daily operations, while a supervisory board, consisting of outside directors, performs the monitoring functions. Because of limited powers over the executive committee and a highly inbred pool of supervisory members, however, the two-tier system has not shown any notable difference from the unitary system in controlling management, preventing abuses, or improving corporate performances.