What is a two-tiered board structure?

The two-tiered board structure is the basic governance model in many jurisdictions worldwide.

While widespread, it’s less common in English-speaking countries. So, if you’re reading this from one, you might not be familiar with a two-tiered board. Still, it’s incredibly relevant in today’s business world that’s heavily dependent on cross-border activity. 

Let’s break it down.

It’s a model that breaks a company’s governance into two distinct boards. Usually, these are known as the supervisory board and the management board. 

Each one has pre-defined responsibilities with limited overlap to ensure they work in tandem and aren’t just two teams doing the same job.

Generally, the management board oversees the running of the business and financials. The supervisory board oversees the long-term strategy, reputation and direction. It also assesses the actions of the management board.

In the two-tiered system, this board represents company stakeholders. Not being concerned with day-to-day management, non-executive directors usually make up the bulk of this board or dominate it entirely. 

The supervisory board’s main job is to ensure that the company’s operations are conducted in the best interests of shareholders and in accordance with legal and ethical standards.

It also conducts regular reviews of the actions and decisions of the management board, which it is in regular communication with.

In the two-tiered system, the management board looks after the company’s day-to-day. In contrast to the non-executive nature of the supervisory board, the management board features executive directors. 

This board has the power to manage resources, oversee the workforce and implement strategy decisions set by the supervisory board.

The management board will also offer feedback to the supervisory board on what elements of strategy work and what needs attention.

It separates roles. This gives specific professionals the room they need to focus on their area. The lines can get more blurred in a unitary board with both executive and non-executive directors. 

It combats groupthink. Good boards will have diverse experience and opinions, which usually fosters independent decision-making. But even the best boards can fall to group-think given enough time. A whole separate board will help negate this. 

Employees get more airtime. Traditionally, unitary boards allow very little employee feedback or influence. The two-tier model has developed a much stronger cultural tradition of employee engagement over the years. 

The greater numbers. As you might expect, two-tier boards carry more members – sometimes above 20. Compare that to the 8-13 you would find on unitary boards. With greater numbers, there is more room for diversity of opinion and background – things which critics highlight are the makings of a modern, strong board.

Many companies don’t like the idea at all. Reasons include:

• The greater numbers. Yes, this was an advantage too, but having more people can often increase the volume with few results. It depends on how the groups work together. 
• The separation of execs and non-execs. Having both on the same board means they can easily communicate priorities. If they’re on separate boards, this process can take longer.
• The increased stakeholder voice. Groups like employees will relish having more of a say at the board level, but for directors from a unitary board background, it can be frustrating to have these extra layers of bureaucracy when they’re just used to a single priority: do what’s right for the shareholders.

Continental Europe is your best chance of finding a two-tier culture. Nations such as Germany and the Netherlands are hotbeds, as are Scandinavia, Finland and Switzerland. Remember, though, that every country and industry will have their own interpretation of how a two-tiered board system works. The above is only a generalisation.