HOUSTON--(BUSINESS WIRE)--The following is an opinion editorial provided by Dr. Hans W. Gutsch, Chairman, Sensomotion Inc:
The current system in the western hemisphere works, for now. However, in order to stay competitive, leadership structure must adjust. It starts at the top. In order to maintain our competitive advantage in the US, the board structure of large corporations must change and implement a completely different leadership structure. To describe the situation and the proposed change, I have selected two controversial structures- USA and Germany.
The conflict is built in. Employees and major shareholders are automatically insiders.
In the United States, a corporation is regulated by the Secretary of State where that corporation is located. The corporate charter, which is granted by the state, describes the corporation's purpose, place of business and officers. At the initial meeting of the corporation, the officers and the board of directors will draft and present the company's bylaws. The bylaws are written mandates stating how the company will operate. After the charter is authorized, the corporate officers will then ratify the bylaws creating the document that contains the goals and objectives of the company.
In a publicly traded company, the board is elected by the stockholders and functions as the highest authority in the management of the corporation.
An inside director is a director who is also an employee, officer, major shareholder, or someone similarly connected to the organization. Inside directors represent the interest of the entity`s stakeholders, and often have special knowledge of its inner workings, financial or market position.
An outside director is a member of the board who is not otherwise employed by or engaged with the organization, nor represents any of its stakeholders. A typical example is a director who is the president of a firm from a different industry.
A Two–tiered System. External Union Bosses and Labor Councils sit on the board together.
In Germany, as well as in some other European and Asian countries there are two separate boards, an executive board for day-to-day business; and a supervisory board (elected by the shareholders) for supervising the executive board. The CEO presides over the executive board and the chairman presides over the supervisory board, and these two roles will always be held by different people. This ensures a distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person. There is a strong parallel here with the structure of government, which tends to separate the political cabinet from the management of civil service. In the United States, the board of directors (elected by the shareholders) is often equivalent to the supervisory board, while the executive board is known as the executive committee (operating committee or executive council) composed of the CEO and their direct reports (other C-level officers, division heads, subsidiary heads).
The supervisory board of large German corporations is composed of 20 members, 10 of which are elected by the shareholders, the other 10 being employee representatives (3 external union officials included). The chairman has 2 votes in case of a draw. This type of board construction is part of the democratic participation in capitalistic economies. It actually goes much further than board seats. The Labor Management Relations Act states that the employer has to work with trade unions represented in the company and labor councils. Labor councils are to be established in every company normally employing at least five permanent employees. The form of cooperation between the labor councils and the employer reaches far from the simple right to be informed, extending beyond to the right to a hearing, right to demand, right to take the initiative, right to veto, all the way to full codetermination.
The discussion as to whether a one-tier or a two-tiered board system leads to better corporate governance has already begun in many countries. The one-tier system has the advantage that the board is better connected to the company. On the other hand it has the potential of misusing internal information or to creating a culture such as the one that lead to the Enron debacle and ultimately to its demise.
The two-tiered system works in Germany because laws and regulations, especially the Labor Relations Act, are not taken literally. Instead, union board members and labor councils practice common sense, accepting a compromise or striking a “deal”. They make the system work.
However, neither a one-tier board nor two-tiered board can prevent all incidents such as what was widely publicized regarding Volkswagen. The auto-maker was reviled in a conflict that took the deal too far. Personal favors in return for flexibility tainted the reputation of a successful company. Siemens and MAN also received negative press because of corruption as well.
There is no perfect board structure. However, taking all into consideration, I am advocating a two-tiered system with external board members for the supervisory board. One exception, the internal CEO would be the only internal member of the supervisory board. This position represents the link to the operating organization. The CEO cannot be the chairman. Introducing this type of structure would reduce the “club” image considerably. It would foster greater clarity and simplification in our corporate structures. Greater transparency in our structures plus practical, meaningful regulations and laws would strengthen our competitive position in a global environment.
We are hurting well managed companies, in fact hurting many industries, by implementing complicated laws because of one company violating good corporate governance. With unhealthy bureaucracy we cannot compete in a global environment. We wonder why jobs move to China.
US technology is first class. The US labor force is first class. Even our cost structure is competitive. But we are too slow, not flexible and too complicated. Over the last few years US politicians and regulators have introduced over 4000 new regulations. Let’s start the reduction in this area (less is more) instead of reductions in force. Also, who wants to be a board member if the job is full of personal risks and personal liability? The workload and the level of responsibility is not the same as 20 years ago. I am urging shareholders to select the best individuals for the board. Shareholders are ultimately responsible for success or failure through their representation – the board of directors, the supervisory board. What we urgently need in corporate America is political support and more activity to promote entrepreneurship from employers’ associations in order to get our speed and flexibility back. Why? We have to stay attractive and high performing as employers. Employers are the job creators.
Dr. Hans W. Gutsch
Hans Gutsch is the former Senior Vice President of Compaq Computer Corporation. Gutsch has sat on the Board of various companies worldwide and now serves as a consultant to top level executives.