10.3.1 Board structure and composition

In general two board structures can be distinguished: unitary and dual board structures. The Dutch situation can be categorised as a pure dual board structure, with the recent introduction of the possibility to establish a unitary board as well. The United Kingdom and Sweden both have a unitary board structure, but the details in these two countries are quite different.

In the Dutch dual board structure, the supervisory board monitors and advises the management board, in which respect no overlap between members of both boards is possible. In the United Kingdom the standard board structure is a unitary board structure with a distribution of tasks between executive directors and NEDs. The unitary board structure in the Netherlands is almost an exact copy of the unitary board in the United Kingdom. The Swedish unitary board comprises almost solely SNEDs (special type of NED) and at most one member of the executive management. In 61 per cent of the companies the managing director holds a position on the board, but the other members are NEDs.

The physical separation of people with executive tasks and people with monitoring tasks is regarded as a benefit of the dual board structure with respect to independence. However, the limited number of separate meetings diminishes this benefit. In dual board structures, supervisory boards and management boards tend to have combined meetings, whereas in unitary board structures NEDs tend to have meetings without executive directors. In practice the physical separation seems to be less pronounced. In the Netherlands, the supervisory board holds on average 1.9 meetings with exclusively the supervisory board and 8.8 together with the management board. In a unitary board structure on average 8.6 meetings are held with the whole board and 2.0 with exclusively NEDs. This does not only apply to the Dutch unitary board structure, but also to its British equivalent. The convergence in practice between these two board structures makes the theoretical advantage of independence less pronounced and therefore the term one-and-a-half-tier structure is sometimes used.

The Swedish board is different, because there is no distribution between people with monitoring tasks and executive tasks. The board of directors may appoint the managing director, issue directives to him and may monitor the managing director and the executive management of which the managing director is a member. The board of directors therefore has considerable power over the managing director and the company’s executive management. This is an undesirable practice from an independence viewpoint, because supervising the execution of tasks you have ordered does not contribute to healthy checks and balances within a company.

(Consideration 10.2) In order to have a strong composition/structure building block, there must be a balanced distribution between directors with executive tasks and monitoring tasks. This balance is much better in the British and Dutch unitary boards and Dutch dual board, than in the Swedish unitary board. With respect to independence, the British and Dutch board structures are to be favoured over the Swedish unitary board.

The composition within the different board structures also contributes to the strengths and weaknesses of the composition/structure building block of independence. The majority of the British unitary board structure, excluding the chairman, must comprise a majority of independent NEDs. Although a majority of independent NEDs is required, the balance between executive directors and NEDs must be appropriate, such that no individual or small group can dominate the board’s decision-making. The DCGC requires that at most one member of the supervisory board is non-independent. This means that all the members of the supervisory board must be independent, with the exception of at most one member. For unitary board structures the DCGC requires having a majority of independent NEDs. Especially the requirement for dual board structures is very stringent in the Netherlands.

The situation in Sweden is different. First, at most three employees may have a position on the board in Sweden. They are non-independent due to their employment and therefore the independence requirements do not apply to them. Second, a majority of the other members must be independent of the company and its executive management. Third, of this group of independent board members, two should also be independent of the major shareholders. Therefore, there are at most three board members who are not independent due to their employment, there are non-independent board members and there are board members who are independent of the company and its executive management, but not of major shareholders. Actually, therefore, only two board members have to be independent of the company and its executive management and of major shareholders. However, research shows that the majority of Swedish boards are doubly independent (independent of the company and its executive management as well as of major shareholders), even if the employee representatives are taken into account. And on average only 1.5 employee representatives have a seat on the board. In practice the companies have independent boards, but this practice should be codified in the Companies’ Act and the SCCG in order to contribute to a strong composition/ structure building block of independence in Sweden.

(Consideration 10.3) It is a good practice to ensure that a majority of the board or supervisory board is independent. The United Kingdom and the Netherlands require a majority on their unitary boards. The Swedish SCCG does require that as well, but employee representatives and different sorts of independence may lead to the possibility of non-independent boards at this time. The SCCG should reconsider its independence requirements to increase the Swedish composition/structure building block of independence. The DCGC requires for a dual board structure that at most one member of the supervisory board is non-independent, which is rather stringent in comparison with the situation for unitary boards.