2.4.2 Choice of one-tier board

Before turning to the composition of the board, let us look at its structure.

The UK differs from most countries in that the division of powers between the board and the shareholders is a matter for private arrangement by the members of the company rather than something regulated by law. This may reflect the partnership origins of British company law (onder partnership law the partners have the freedom to arrange the interaal affairs of the partnership very much as they wish), and it certainly facilitates the use of a single act to regulate all manner and sizes of company and give the members complete freedom to arrange the company as they wish and to choose whatever structure they consider appropriate.

This is also a point of some theoretical (even ideological) importance: the directors' authority is derived from the shareholders through a process of delegation via the company's articles of association and not from being separately granted in an act. Furthermore, this helps to underline the shareholder-centred nature of British company law and the freedom regarding the division of powers as well as regarding appointment and dismissal.1

The Companies Act 2006 only provides that a company must have one or more directors, but describes directors' duties in great detail (see section 2.6). It does not mention the board or its composition. In theory, UK companies can therefore choose between a one-tier and a two-tier board.2 These options are also available in France, Switzerland and Italy. Most companies in those countries opt for the unitary board.3 Domestic UK law does formally recognize the possibility of a two-tier structure as an option instead of a onetier board for Sociétés Européens (SEs) (European Companies) that register in Britain.4

In the 1970s, 1980s and even the 1990s there was debate in the UK whether a two-tier board system should be adopted, possibly even with employee representation5 in keeping with the German model. This debate was prompted by the perceived weaknesses of the UK practice of NEDs, usually chosen by the CEO.6 However, even the UK unions did not want employee representation on boards. Moreover, the UK was not, in general, impressed by the German board system. The German economy was not strong in the 1980s and there were many examples of unduly strong CEOs dodging everything, such as giving very sparse information, to keep the supervisory directors at a distance.

In the 1990s, the debate initiated by the Cadbury Committee about finding ways of curbing the power of an imperial CEO resulted in a decision to create a balance by ensuring that a board had a majority of committed and independent NEDs.7 This decision made sense only for one-tier boards. In 2009, the Walker Review also assumed that a company has a one-tier board. But interestingly, the Walker Review recommends that there should be separate meetings of only NEDs to consider alternative strategies in a free debate.8 This comes close to creating a two-tier system ad hoc. It is, indeed, close to the US system of executive sessions, i.e. separate meetings of only non-executives.

It is my view that the US idea of executive sessions before or after each board meeting is a good idea, also in the two-tier system.9