Statutory Requirements for Board Composition in Different Countries

Different countries use different forms of organization of the board of directors. This article will analyze the statutory requirements for board composition in various countries.

The place of the board of directors in the corporate structure

The functioning of the corporate governance system in individual countries leads to different approaches to implementing corporate governance, arising from specific economic, political, legal, historical, and cultural conditions. The board of directors acts as an intermediary in relations between the management, headed by the company’s general director, and the company’s shareholders (owners). It can also be called one of the main mechanisms of corporate governance, understood as a system of relationships, processes, and structures in connection with the organization and exercise of power in the corporation and aimed at protecting the interests of shareholders and taking into account the interests of the company’s stakeholders. The boards manage almost all companies appointed or elected by shareholders to manage the company on their behalf. It would seem that this gives shareholders maximum power, but in most areas of activity, it is recognized that results can only be measured in the medium and long term.

The structure of an efficient board of directors

Board structures and procedures vary between and within countries. When forming the composition of the members of the boards, as international practice shows, the following should be taken into account:

  • the share of independent directors in the board of directors must be at least one-third;
  • fixing in the charter such a procedure for determining the quorum for making the most important decisions at meetings of the boards, which provides for the participation of independent directors.

In countries with the most developed corporate governance system, it is widely recognized that a necessary condition for the effective implementation of the functions of the board of directors is the creation of committees, which assume some of the most significant functions of the board of directors.

American and German models of the board’s composition

In analyzing the most significant differences in the main components used in the formation of the Board of Directors, two models can be distinguished: American and German. What are the differences between these models?

Under American law, a corporation is managed by a unitary board of directors. It means that it includes both independent directors and executive directors. Simply put, there is a union of the governing body and the executive body. At the same time, there is no differentiation of functions between them. 

The German model, on the contrary, is characterized by a clear distinction between supervisory and executive functions; that is, a clear line is drawn between the direct management of a corporation and supervision over the quality of this management. Thus, if in the American model there is equality between independent and executive directors, then in the German model, the subordination of the executive body to the supervisory board is visible.

State representatives in the board of directors

Concerning the composition of the board of directors in companies with state participation, in contrast to private companies, some features are characteristic. The number of state representatives on the board of directors at enterprises in different countries ranges from zero to almost the entire composition of the board. For example, in Denmark, Norway, the Netherlands, and Great Britain, there are no government representatives on the board of directors of state-owned enterprises. Many countries have only one or two representatives on the board, regardless of the state’s stake in the enterprise. Such a scheme operates in Sweden, Germany, and most of Finland’s state-owned enterprises.