Letting Companies Choose between Board Models: An Empirical Analysis of Country Variations

Many private companies are simply managed by a single person. Yet, for public companies (joint-stock companies), having a suitable board structure is a key aspect of corporate governance. But how should such board structure be designed? From a comparative perspective, scholars often distinguish between a one-tier (or monist) model with a single board of directors and a two-tier (or dualist) model with a supervisory board and a management/executive board. Traditionally, the law of public companies only provides for one of these models, typically making it mandatory. However, there is also a trend to let companies freely choose their board model. This can be observed in most parts of the world: for example, a choice of board models for which the law provides two sets of templates is possible in countries as diverse as Algeria, Japan, Russia, Vietnam and, to some extent, also Brazil.

In the European Union (EU), more than half of the Member States allow board choice in their laws of public companies today, and there is also such a rule for the special legal form of the European Company (SE) which can be chosen in all countries of the European Economic Area (EEA). How companies actually make use of this availability of board choice is, however, largely underexplored; in particular there has not yet been an empirical exploration of all EU countries that allow such board choice today. The authors of this blog post aim to fill this gap as they have collected original data about the choice of board models from the 14 Member States that permit a choice between two models (Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Hungary, Lithuania, Luxembourg, Netherlands, Romania, Slovenia) or three models (Italy, Portugal). 

The first paper from this project on ‘Letting Companies Choose between Board Models: An Empirical Analysis of Country Variations’ focuses on the variations of popularity of particular models at the country level—and thus a topic of comparative corporate law—while companion papers will analyse the firm level data in detail. In doing so, this paper also contributes to the more general comparative question of how both the design and the application of the same legal idea (here: enabling choice of board models) may be very different across countries, for example due to reasons of path dependence.

A further innovation of this paper is that it applies new formal techniques of empirical comparative law in order to understand different preferences in the use of the board models across countries. Given that the number of units is relatively small (n = 14, ie the 14 Member States that allow board choice), it would not be feasible to use econometric tools which have been the main focus of discussions about the benefits and shortcomings of using methods of empirical legal studies in comparative law. By contrast, ‘correspondence analysis’ and ‘qualitative comparative analysis’ can be applied to this type of data. These techniques have so far been rarely employed in comparative legal scholarship. Thus, this paper also aims to show that comparative law can benefit from such formal methods, not least since it is often concerned with comparisons between a small number of units.

In substance, our data show that there are profound country differences in the prevalence for one of the board models: in general, the one-tier model is more popular, but there are also some countries with a preference for the two-tier model, while in Italy and Portugal the model with a board of auditors has remained the dominant one. Exploring possible reasons for these different country preferences, we find that path dependence is the main determinant for country differences in the preference for a particular board model. Yet, legal differences also had some impact: here we mainly find that leaving flexibility in the one-tier model about the appointment of executives fosters its use. There is also some evidence that the use of the two-tier model is more pronounced if a country has low minimum requirements for number of two-tier board members and if shareholders retain the power to dismiss management board members in the two-tier model.

Martin Gelter is a Professor of Law at Fordham University, USA.

Mathias Siems is a Professor of Law at the European University Institute, Italy, and Durham University, UK.