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Board structure in Dutch corporate governance
In the Netherlands, corporations are historically governed by a so-called ‘two-tier board’ structure: a management board which is responsible for the policy and management of the company and a supervisory board which is responsible for the supervision of the management board. This is different from the system used in most other jurisdictions1, including the US, UK and Belgium where corporations are governed by one board with executive and non-executive directors (‘one-tier board’). Since 1 January 2013, it has been made possible under Dutch law for companies to be governed by a one-tier board, as alternative to the standard two-tier board structure. The main reason for introducing this alternative to Dutch corporate law was to give
flexibility to the large number of foreign shareholders of Dutch companies, as many of them are used to, and favour, a one-tier board. A Dutch corporation that wants to create a one-tier board structure, should describe the board structure and the separate roles and responsibilities of executive and non-executive directors in its publicly available articles of association. This can be done at high level with more detailed governance rules described in a separate board protocol, which is not public. Non-executive directors perform a monitoring role, determine the remuneration of the executive members and one of them holds the position of chairman of the Board.

Pros and cons
There are various studies and articles on the differences in governance between one-tier and two-tier boards and potential effects on effectiveness. Lawyer Janou Briaire2 writes that the main advantages of a one-tier board are that the non-executive directors in a one-tier board are informed earlier and potentially better than supervisory board members, can decide faster, requiring less paperwork and therefore could actually be more effective in both strategy development and oversight. Also the cooperation and interaction between executive directors and non-executive directors could become more effective with them being in one board. A key disadvantage of a one-tier board for the company is that non-executive directors are considered to be less independent than supervisory board members, which could potentially harm effectiveness of supervision, and might also hurt the ability to be a coach to the executive directors of the company. A big disadvantage for the non-executive directors is the potential directors’ liability. In the traditional two-tier system, all members of the management board are jointly responsible for the performance of the company. The members of a supervisory board are only responsible for their supervising tasks. In a one-tier board, all members, executive as well as non-executive, are again responsible for the performance of the board’s duties and carry liability as a collegiate body, although there is some defence possible with regard to the monitoring tasks of the non-executive directors. In her qualitative study on board effectiveness3, university researcher Charlotte de Moor sees the same advantages and disadvantages of one-tier versus two-tier boards and concludes that one system is not really superior to the other, and that in practice the differences between the two structures are often smaller than theory would suggest. Skills, competence and experience of board members and board culture and interpersonal relationships are considered a more important factors to establish a well-functioning board.

For tech scale-ups
In fast-growing technology companies these human factors will likely also be most important, but it could be the case though that the mentioned advantages and disadvantages of one-tier boards versus two-tier boards might weigh differently. In these companies, because circumstances rapidly change and the strategy needs to be constantly adapted, the speed of information flow and the speed of decision making are probably more important than in other, less rapidly changing companies. Furthermore, informal investors or venture capital investors, who are by definition not independent, but are often experienced board members and coaches, often take a number of board seats. Therefore, it seems that in tech scale-ups the advantages (better/faster information, decision making) of one-tier boards weigh more and the disadvantage (less independent directors) weighs less. This indicates that a one-tier structure could actually be a more preferred model for such a fast-moving company. Remains the disadvantage that non-executive directors potentially carry more liability, which might be mitigated by a good directors and officers (D&O) insurance policy.

1 All former Commonwealth countries, North and South American countries, Spain, Sweden, Switzerland, Belgium and Luxembourg have one-tier boards. France has the alternatives of one-tier and a two-tier system,
but mostly uses one-tier boards. Italy traditionally has one general director and statutory auditors and has added one-tier and two-tier alternatives, but usually practices the traditional system. The Netherlands, Germany, Norway, Denmark, Finland and the Middle European countries (some, like Hungary and Romania have introduced the alternative one-tier) and China and Russia have two-tier boards, see Alexander Loos, Directors Liability: A World Wide Review (2010).

2 Boels Zanders: How to do business in The Netherlands: the one-tier board as an alternative governance model for international companies/

3 ‘Board effectiveness: one-tier versus two-tier boards’ (Charlotte de Moor, University of Ghent, 2014)

Categories: Research