The anatomy of Corporate Law - Chapter 3
THE BASIC GOVERNANCE STRUCTURE: THE
INTERESTS OF SHAREHOLDERS AS A CLASS
Introduction
This chapter deals mainly with how the legal strategies employed in corporate governance mitigate the
manager-shareholder conflict in the analyzed jurisdictions.
We will analyse the relations between legal strategies and the two important assumptions of corporate
firms:
Investor ownership
Delegated management
The two ways to solve conflicts between management and shareholder are:
Appointment and decision rights: are used in countries where controlling shareholders are
common, and usually shareholder have strong influence over the management.
Agent incentives: are used were share ownership is dispersed in the hands of passive and
uninformed investors and consist of rewards for managers and trusteeship role for non-
management directors.
All these strategies are supported by standards of conduct, affiliation rights (as disclosure rules), exit rights.
3.1 Delegated management and Corporate Boards
Different jurisdictions lead to different choices in formal board structure:
“one tier boards”: (UK, US, Japan, Australia) the board has the power to manage and supervise the
management, either directly or through the board’s committees.
Supervisory board is elected by the management between his members.
In theory, it concentrates the decision making power in the hands of directors (combination of
managerial and supervisory roles).
At the top of the management structure, there is one single board of directors, comprised of
executive and non-executive directors
– It performs both managerial tasks and a supervisory role at the same time.
Within the same, unitary board, some board members are delegated direct management roles as
executives, while the other non-executive board members are assigned supervisory functions over
the former.
“two tier boards”: (Germany and Brazil) there is a separation between the management and
monitoring functions. The latter is allocated to elected supervisory board of non-management
directors, which then appoint and supervise management boards.
Supervisory board is not only devoted to shareholders’ ideas but also to employees (facilitation of
labor participation in the governance).
A management board comprised of executive directors
– It directly exercises managerial powers and
A supervisory board comprised of non-executive directors
– Tasked with overseeing the management board
, – But also entitled, if the charter so provides, to resolve, jointly with the managing board, on
some major, strategic business decisions, such as: mergers, divisions, large acquisitions or
sale of strategic assets; approval of business plans and financial budgets
Mixed board structure: A board of directors, comprised of executive and non-executive directors
- Tasked with managing the firm
A board of statutory (or internal) auditors
It is assigned supervisory functions, which however are more limited compared to the German
model
It checks that the management of the company is in compliance with the law and the charter of the
company, that it is carried out diligently and loyally and that the internal organization of the
company is adequate to its mission
Italy and France, as well as EU for European Company offer a choice between one tier and two tier board.
However, board practices can blur this distinction: informal leadership coalition can short cut the legal
separation between management and supervisory board.
In the case of Germany, which has labor codetermination, a two tier board has the function of lowering the
costs of coordination between shareholders and employees. Codetermination also imposes a minimum
number of supervisory board members, that is 20 for the largest companies.
3.2 Appointment and Decision Rights
Shareholders have two main rights:
Appointment rights: shareholders retain power to appoint and remove members of the board of
directors
Decision rights
Shareholders want to be informed, coordinate among themselves, and be able to make collective choices in
order to maximize their welfare and reduce agency costs, that is, bringing easier coordination. But also it
might increase shareholder-shareholder agency costs: by permitting a faction to gain control to the
detriment of the shareholder as a group.
Shareholders could also suffer from the control by a faction of them.
3.2.1 Appointing directors
It is the core of appointing rights and it consists in the power to vote on the selection of directors,
sometimes shareholders may also have the power to nominate the candidates for election. The most
common practice in many jurisdictions (beside Italy and Brazil) is that the board proposes a slate of
nominees at the annual shareholders meeting. As a check on agency costs in almost every jurisdiction is
permitted to shareholders to add some candidates if they do not agree on the ones chosen by the
management. In US there is a more complex and peculiar situation that is, a plurality voting rule meaning
that is if the number of candidates equal the number of directors to be elected, any number of votes
suffices to elect a nominee to a board seat. The tool for shareholders to obtain a representation on the
board is proxy: consisting in placing nominees on the company proxy materials so all shareholders will have
a choice between the board candidates and the insurgent’s.
3.2.2 Removing directors
It is more powerful than the previous since it can result in a better control of agency costs. Many
jurisdiction accord shareholder majorities a non-waivable right to remove directors at any time, regardless
of the cause or the nominal duration of their term. This is coupled with power to requisition a shareholder’s
meeting.
Board recognize this possible threat and will often accommodate shareholder demand for change in the
boardroom without calling the shareholder’s meeting.
THE BASIC GOVERNANCE STRUCTURE: THE
INTERESTS OF SHAREHOLDERS AS A CLASS
Introduction
This chapter deals mainly with how the legal strategies employed in corporate governance mitigate the
manager-shareholder conflict in the analyzed jurisdictions.
We will analyse the relations between legal strategies and the two important assumptions of corporate
firms:
Investor ownership
Delegated management
The two ways to solve conflicts between management and shareholder are:
Appointment and decision rights: are used in countries where controlling shareholders are
common, and usually shareholder have strong influence over the management.
Agent incentives: are used were share ownership is dispersed in the hands of passive and
uninformed investors and consist of rewards for managers and trusteeship role for non-
management directors.
All these strategies are supported by standards of conduct, affiliation rights (as disclosure rules), exit rights.
3.1 Delegated management and Corporate Boards
Different jurisdictions lead to different choices in formal board structure:
“one tier boards”: (UK, US, Japan, Australia) the board has the power to manage and supervise the
management, either directly or through the board’s committees.
Supervisory board is elected by the management between his members.
In theory, it concentrates the decision making power in the hands of directors (combination of
managerial and supervisory roles).
At the top of the management structure, there is one single board of directors, comprised of
executive and non-executive directors
– It performs both managerial tasks and a supervisory role at the same time.
Within the same, unitary board, some board members are delegated direct management roles as
executives, while the other non-executive board members are assigned supervisory functions over
the former.
“two tier boards”: (Germany and Brazil) there is a separation between the management and
monitoring functions. The latter is allocated to elected supervisory board of non-management
directors, which then appoint and supervise management boards.
Supervisory board is not only devoted to shareholders’ ideas but also to employees (facilitation of
labor participation in the governance).
A management board comprised of executive directors
– It directly exercises managerial powers and
A supervisory board comprised of non-executive directors
– Tasked with overseeing the management board
, – But also entitled, if the charter so provides, to resolve, jointly with the managing board, on
some major, strategic business decisions, such as: mergers, divisions, large acquisitions or
sale of strategic assets; approval of business plans and financial budgets
Mixed board structure: A board of directors, comprised of executive and non-executive directors
- Tasked with managing the firm
A board of statutory (or internal) auditors
It is assigned supervisory functions, which however are more limited compared to the German
model
It checks that the management of the company is in compliance with the law and the charter of the
company, that it is carried out diligently and loyally and that the internal organization of the
company is adequate to its mission
Italy and France, as well as EU for European Company offer a choice between one tier and two tier board.
However, board practices can blur this distinction: informal leadership coalition can short cut the legal
separation between management and supervisory board.
In the case of Germany, which has labor codetermination, a two tier board has the function of lowering the
costs of coordination between shareholders and employees. Codetermination also imposes a minimum
number of supervisory board members, that is 20 for the largest companies.
3.2 Appointment and Decision Rights
Shareholders have two main rights:
Appointment rights: shareholders retain power to appoint and remove members of the board of
directors
Decision rights
Shareholders want to be informed, coordinate among themselves, and be able to make collective choices in
order to maximize their welfare and reduce agency costs, that is, bringing easier coordination. But also it
might increase shareholder-shareholder agency costs: by permitting a faction to gain control to the
detriment of the shareholder as a group.
Shareholders could also suffer from the control by a faction of them.
3.2.1 Appointing directors
It is the core of appointing rights and it consists in the power to vote on the selection of directors,
sometimes shareholders may also have the power to nominate the candidates for election. The most
common practice in many jurisdictions (beside Italy and Brazil) is that the board proposes a slate of
nominees at the annual shareholders meeting. As a check on agency costs in almost every jurisdiction is
permitted to shareholders to add some candidates if they do not agree on the ones chosen by the
management. In US there is a more complex and peculiar situation that is, a plurality voting rule meaning
that is if the number of candidates equal the number of directors to be elected, any number of votes
suffices to elect a nominee to a board seat. The tool for shareholders to obtain a representation on the
board is proxy: consisting in placing nominees on the company proxy materials so all shareholders will have
a choice between the board candidates and the insurgent’s.
3.2.2 Removing directors
It is more powerful than the previous since it can result in a better control of agency costs. Many
jurisdiction accord shareholder majorities a non-waivable right to remove directors at any time, regardless
of the cause or the nominal duration of their term. This is coupled with power to requisition a shareholder’s
meeting.
Board recognize this possible threat and will often accommodate shareholder demand for change in the
boardroom without calling the shareholder’s meeting.
