Across the globe, there are two dominant models for constructing a board of directors, the dual board structure, and the unitary board structure. The first of these, the dual board structure, is used in countries like China, Germany, and Russia. In a dual board structure, the monitoring and advisory functions of a board are segregated, by breaking the board into two tiers. The lower tier, the management board, is typically made up of executive directors, or directors who actually manage the farm. This tier of the board takes the most active role in strategic guidance. The upper tier, the supervisory board, is typically made up of non-executive directors who represent key stakeholders like employees, shareholders or creditors. The supervisory board takes the most active role in monitoring, and it regularly reviews and evaluates the performance of the management board. In the unitary board structure, there's only one board, and the advisory and monitoring functions of the board are combined. Countries utilizing this structure include the United States and the United Kingdom, Canada, India, and Singapore. In a unitary board, the board includes both executive directors who hold active management roles in the firm, as well as non-executive outside or independent directors. One challenge of a unitary board is that the board's performance is reviewed and evaluated by its own present board members. Another challenge of a unitary board, is that oftentimes the people who offer the best strategic advice, are not the same people as those who would be the most capable monitors. An effective unitary board thus requires careful attention to the mix of people, who are brought together on the board. A unitary board must have members who can act as capable arms-length monitors, who have for example, more prior board experience and financial acumen. It also must have members who can advise on emergent risks and opportunities. An ideal unitary board provides heavier representation and more diversity of thought in areas that are the most important to monitor, as well as those that represent the most critical risks and most valuable opportunities, and it includes members who really understand how to balance the interests of shareholders and other stakeholders. While the dual and unitary approaches to board structures look very different at first glance, there are two ways in which they're converging globally. First, increasingly more and more of the board's work in the United States is done in committees rather than as a full board. This is apparent in the proliferation of many new types of sub-committees within US company boards. Nearly all us boards have three main committees, audit, compensation, and nominating. The auditing committee is tasked with oversight of the firm's financial statements, and in many companies also has oversight jurisdiction over general risk management and compliance. The compensation committee designs the firm's compensation plans for executives, and also determines the compensation package that the board members receive for their service. These vary widely, with board members at some firms like Berkshire Hathaway, receiving no compensation for their service, and board members that other firms receive upwards of half a million dollars in annual total compensation for their service. The nominating committee creates the slate of directors who will be nominated by the board for service each year. In many firms, this committee also has jurisdiction over succession planning and talent development. They determine the conditions under which they'll search for new leadership, and they adopt policies to ensure that they are well-prepared, internal candidates for the CEO position, when it becomes available. But in addition to these three nearly universal committees, it's fairly common today for a board to have numerous specialized sub-committees for things like environment, health, and safety, public policy, mergers and acquisitions, technology, or regulatory compliance. As boards increasingly move to accomplishing their work in sub-committees, they also naturally move toward a dual-board-like model. This is because some of the sub-committees, such as mergers and acquisitions or technology, will naturally be more involved in strategic advisory decisions, and others, like the regulatory compliance, public policy, or investigative sub-committees will naturally be more involved in monitoring. So, even though a board may technically be a unitary board with a combined strategic advisory and monitoring role, its strategic oversight and monitoring functions are often accomplished separately at the sub-committee level in practice. The second way in which US boards are beginning to operate more like a dual board model, is due to trends toward increased independence. Historically, US boards had a few key insiders on the board, including the CEO, CFO and COO or General Counsel. But in recent decades, shareholders have pressured boards to become more independent by removing these insiders. As a result, today the most common board structure in the United States, has the CEO as the only insider who officially sits on the board, and the rest of the board is made up of outside directors, this makes the board as a whole look more like a supervisory board in a dual board structure.
