One and two-tier governance systems

In January 2014, the Singapore Manufacturing Federation (SMF) inaugurated a board of governors to sit above a (largely) elected council in order “to enhance the federation’s corporate governance and accountability”.

More specifically, the role of this board of governors is to “mediate and resolve issues, in the unlikely though possible event of serious council disagreements, or in the event where there is an unjustifiable draw on the past accumulated reserves of the federation”.

The SMF’s move to a two-tier governance structure took the sector somewhat by surprise because it runs against the preference in Singapore, the US and most Commonwealth countries for a one-tier governance model.

Two versus one-tier

A two-tier or dual board structure is adopted in quite a few other countries such as Germany, the Netherlands, Finland and China.

The German model, ensconced in German corporation law, comprises an executive board (made up entirely of executive directors) and a separate supervisory board (all non-executive directors). The CEO helms the executive board, and a chairman the supervisory board. Such an arrangement seeks to avoid conflicts of interest and too much power concentrated in the hands of one person.

In contrast, both executive and non-executive directors sit together on the same board in the one-tier board structure. The risk of an over-concentration of power is usually mitigated by a separation of powers between the CEO and a non-executive chairman, and a sufficient number of independent directors on the board.

The argument for a two-tier structure is that the formal separation of non-executive and executive directors achieve a better state of checks and balances; there is less likelihood of abuse of power.

The argument against a two-tier structure is that it can be cumbersome for decision-making, especially where organisations need to be nimble and react quickly to market forces. Supporters of the one-tier system also point to studies that have found greater interactions between the executive and non-executive board members on essential matters of strategy, performance, standards of conduct, and communication with stakeholders – all of which ultimately benefit the company.

Tiering in Singapore

SMF’s new structure does not exactly follow the two-tier German model. As it stands, the members of its governing board and council are all non-executive, with only certain matters being referred to the former.

Although the SMF had initially said its move was the first of its kind, there already exist elements of such two-tier governance in Singapore.

Many country clubs, for example, adopt a two-tier governance structure. Typically, a general committee, comprising a president, captain and other committee members, provides oversight of the club’s executive management, which runs the club’s day-to-day operations. In addition, there are often a chairman and deputy chairman (who may be appointed by the land-owner or lessor of the club) who have limited veto powers over material financial and other decisions of the general committee.

A two-tier governance structure can be beneficial and pertinent in the case of the country clubs. That’s because a very low percentage (usually less than 10 per cent) of the members turns up at the annual or extraordinary general meetings. The decisions made are therefore not necessarily representative of the will of the majority of members.

The result is that a very small group of people elect the office bearers and make resolutions on matters that significantly impact the club. In such a scenario and with the negative politics seen in some of the clubs, it is useful to have a chairman and deputy chairman who can objectively assess and veto decisions that could adversely impact the club’s long-term interests.

In SMF’s case, there may have been good reasons for the second tier of governance. After all, it has a large council, currently 33 members (with its constitution allowing for a maximum of 38), and an even larger pool of committee members in its eight function committees and 10 industry groups, all of whom are part of the governance layer above the secretariat. More pertinently, SMF has significant reserves of S$20 million, an amount that, in its view, calls for more stringent safeguards.

A notable characteristic of the SMF and the country clubs is that they are non-profit organisations without the pressures of bottom-line accountability, speed of market response, and the regulatory regime of commercial, especially listed, companies, for which a one-tier governance system might be more appropriate.

While the SMF is to be commended for taking the road less travelled to improve its governance, in my view, it is unlikely that companies or even other non-profit organisations – SID for one – will likely choose to go down the same route.

This article was first published on 14 April 2014 in The Business Times under the column “Boardroom Matters” by the Singapore Institute of Directors.