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another draft Directive that would introduce into the
national legislations of the nine common rules on
groups of companies.
The Fifth Directive
If adopted without change, this Fifth Directive, as
proposed in 1972, would replace the traditional board
system existing at present in a majority of Member
States, by a two-tier board system based on the Ger-
man model, and with employee representation on the
Supervisory Council.
This is a collegial organ which supervises, hires and
fires the executives who run the company, that is the
members of the management board. Since the Super-
visory Council members cannot be themselves salaried
executives, they are in a position to take an independent
view of how the company is being operated. Several of
them are the chosen representatives of large investors,
or of banks which represent investors. They are likely to
represent faithfully and vigorously the interests of these
groups.
The most obvious advantage of this institution is said
to be that it provides a group of independent observers
to decide how well the managers are doing. "Outside
directors" are likely to be much more effective in this
separate council than when compelled to meet always
with the very persons whose acts they ought to appraise.
The bigger the company and the more successful the
chief executive, the more difficult it is for anyone on the
board to stand out against his decisions. In fact the
only effective way a non-executive director can mark
his disapproval of the board's action is by resigning,
but this is no safeguard against the erroneous use or
abuse by the chief executive of his very considerable
power. In large companies this is difficult to accept
given that company actions may have a powerful effect
on the employees and the community in which they
operate.
The Two-Tier Structure
The two-tier structure frees non-executive directors
from responsibility for the ordinary management deci-
sions which are the proper business of the full-time
executives. Outside directors cannot often judge wisely
in these matters, and are likely to become "yes-men"
when they sit on a board that discharges management
functions. Thus, the two-tier system would introduce a
clear-cut division of functions and responsibilities. In
providing for management control, it could help to
make management more efficient. The Supervisory
Council will not only have the right to appoint and
remove the members of the management board but
will have to be consulted on all major issues. It will also
receive regular reports at short intervals on the financial
status of the company from the management board.
The Supervisory Council will thus form a kind of perm-
anent shareholders' committee.
Whether Supervisory Councils for public companies
include members who represent employees or not, the
presence of members who are appointed to supervise
the executive directors in the interest of the shareholders
will do much to strengthen their position. At present
the law usually intervenes to give relief to shareholders
in respect of abuses of power by directors only after
harm has been done to the company and the value of
shareholders' investments has fallen in consequence.
Proper supervision of management should ensure that
shareholders are warned before their interests have been
damaged. History has shown that it is futile to expect
the shareholder to take a managerial interest in the
affairs of his company unless these affairs are in a
very bad way.
A Supervisory Council, although by no means an ideal
solution, provides at least some control of the manage-
ment and is better than none. The large institutional
investors who sit on the Supervisory Council would be
compelled to take a closer interest in the management
of the company than hitherto. At present, when they
notice that the management of a company in which
their institutions hold a substantial share interest is not
satisfactory they are often inclined to scuttle rather than
to fight, i.e., to sell the shares rather than to insist on
changes in the management.
The view of the Company Affairs Committee of the
Confederation of British Industry that "the sense of
collective responsibility for the conduct of business is
best preserved where all the directors meet in a single
board", is no valid argument against the dual board
system. It does not prevent the directors, supervisory
and executive, from sitting as a single board if the
occasion demands it.
Supervisory directors can thus exactly like non-execu-
tive directors bring a breadth of experience and knowl-
edge of commerce, industry or finance generally to
discus, ions of major matters of policy at joint meetings
of the two boards. But the dual board system admits
the division of the legal and business responsibility
between executive and non-executive directors according
to their function in the company; it avoids the conse-
quence which would logically ensue if they were both
members of a single board, as the Confederation sug-
gests, that, on principle, they should bear the same
responsibility although their functions in the company
are different.
Participation of workers
The second distinctive feature of the proposed Fifth
Directive is participation of workers in the Supervisory
Council. For public companies employing more than
500 workers, the Member States could choose between
the introduction of two systems.
First system: At least one-third of the members of
the Supervisory Council are appointed by the workers or
by their representatives. The other members are appoin-
ted by the general meeting of the shareholders (German
system).
Second system: The Supervisory Council appoints its
own members. However, the general meeting or the
workers' representatives can object to the appointment
of a proposed candidate. In such a case the appoint-
ment can only be made after an independent body in
public law has declared the objection unfounded (Dutch
system). Thus the Commission does not aim at pro-
moting one specific type of workers' participation.
In 1972 there existed only two models in the Commu-
nity. I n the meantime Denmark introduced its proper
system with at least two employees on the Directorate,
an organ which accomplishes predominantly super-
visory functions. Presently, Luxembourg is engaged to
introduce workers' participation in the framework of its
traditional board system, close to the French system.
Perhaps other Member States will follow later and de-
velop their proper type of workers' participation linked
with their respective historical and social environments.
What the Community will then have to do is to make
sure that the different solutions are being adapted so
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