Mahmudur Rahman University of Central Lancashire MSc International Business and Management Email:
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES The corporate governance is the system that regulates how a corporation is organised and controlled (Jungmann, 2006). More importantly, it is based on a great number of institutional aspects, for instance, board structure, ownership principles as well as harmonisation of stakeholder’s interests (Millet -Reyes and Zhao, 2010). Through globalisation and technical revolutions, business environment increasingly has become complex which drives enterprises to consider and involve stakeholders into their boardrooms more to improve the firm’s performance as well as to deal with social responsibilities better. This study discusses the relative advantages and disadvantages of monistic and pluralistic corporate board structure as well as examines how these may impact differently on both the short-term and long-term strategies. To understand the basic concept of monistic and pluralistic system, first, we need to understand the structure. It is a well-known characteristic that there are two main corporate structure board systems- one-tier and two-tier board structure. The one-tier board structure, also known as unitary or monistic, that has only one board of directors with executive and non- executive directors, is mostly used in “common law countries” (Millet Reyes and Zhao, 2010) such as the UK and the USA. The two-tier board structure, also known as dualistic board system where the management and control bodies are completely separated, is usually adopted in “civil law countries” (Millet -Reyes and Zhao, 2010) like
Germany and Austria. Furthermore, there are other corporate board systems that represent more pluralistic aspects where essential stakeholders are more involved in boardrooms such as the corporate system in Japan (Hayashi, 2013). As already mentioned, the monistic board structure is generally or even compulsorily used in common law countries, i.e. the UK and the USA. As all the board members, executive and non-executive directors are sitting in the same “Board of Directors” (Bohinc, 2011), it makes the structure simple and provides a greater information flow as well as the availability of this for everyone in the boardroom (Allen and Zhao, 200 7; Jungmann, 2006). Furthermore, the one-tier board system allows firms to make quicker decisions and put these into practice faster since no approval from another instance is needed (Jungmann, 2006). For example, for financial reasons the management has decided to lay off workers. Such a decision is easier to implement in the monistic structure. Block and Gerstner (2016)
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES argue that this advantage presents less administrative concerns which in turn provide cost effective process. Moreover, all the directors are involved in the decision-making process which helps well understanding and participation in the business by the board (Block. and Gerstner, 2016, Bohinc, 2011; Jungmann, 2006). The shareholder model of governance provides sufficient motivation for investment since the shareholders get a higher rate of return on their investment and dividend as the major target of this system is to maximise the profit (De Moor, 2014; Letza, Kirkbride, Sun and Smallman, 2008). Despite these advantages, however, the unitary board structure has a key detriment when it comes to the practice. Since the management and control are in the hands of the same board where no clear separation takes place, it is hard to make decisions and at the same time monitor and control them (Allen and Zhao, 2007; Jungmann, 2006). Moreover, the monitoring role is less isolated as the relationship between board members are very close (Allen and Zhao, 2007; Ghezzi and Malberti, 2008). The main reason behind it is the “interlocking directorships” (Millet -Reyes and Zhao, 2010) where an “independent director is an executive director on another board” (Allen and Zhao, 2007).
In a monistic corporate board structure, there is an issue about independence and separation of responsibilities. Jungmann (2006) criticised in his paper that there is a “monitor-colleague-dilemma” which a non -executive director must face since they should
monitor others in the boardroom and are their colleagues at the same time. This environment leads to less independence. Further, Jungmann (2006) argues that “by clarifying the roles and responsibilities of each director” it would be possible to decrease this
difficulty as well as that the chairman of the board should create and maintain an atmosphere where board director can discuss complications and enquiries “frankly and openly” (Jungmann, 2006). Nevertheless, often the CEO of the company is also the chairm an
of the board at the same time which makes it difficult to separate the boardroom internally to make it more effective (Allen and Zhao, 2007; De Moor, 2014). Coupled with this argument, Jungmann (2006) discusses structural shortcoming and claims that the effectiveness of corporate control “depends not only on the p ersonality of the non-executive
directors but foremost on the personality of the chairman”.
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES From the shareholder perspective, one complication can be seen promptly. In a unitary corporate structure, shareholders must accept that usually there are no representatives on the board of directors to put forward their concerns (Bohinc, 2011). Further to this, there is a risk factor since individual shareholders and minority interest might be overlapped. Another key aspect to remember is that the trading shares takes place more often in this type of corporate system than in a pluralistic one. The leading reason for this occurrence is the ignorance of shareholder’s interest while making strategic corporate decisions (Millet-Reyes and Zhao, 2010). If shareholders are not happy with board’s decisions, they will sell their
shares as there are no other possibilities left for them. On this account, the board members focus on short-term corporate strategies as the needed resources for long-term business approaches have less availability (Letza, Kirkbride, Sun and Smallman, 2008). For instance, a manufacturing company would like to buy properties as the value has fallen, although they are not needed for the business immediately. But for a long run strategy it could be remunerative, nevertheless, it is difficult to get through the board of directors. Moreover, it is also possible to claim that because of this, it is difficult to persuade foreign investors and shareholders to invest in stocks (De Moor, 2014; Millet-Reyes and Zhao, 201 0). Nevertheless, one of the most significant matters is that the monistic system does not allow any important stakeholders for instance employees and suppliers to get involved in the boardroom which results in less involvement in the decision-making process (Bohinc, 2011). Low or even no participation and encouragement of stakeholders leads to low performance in the daily operational business where stakeholders translate the corporate strategy into action, as well as the knowledge of day-to-day business, is missed both on the board and in the decision-making process (Westphal and Bednar, 2005). At the same time, the responsibility and accountability for non-executive directors are high as they should act as independent advisors (Millet-Reyes and Zhao, 2010). When we look at other corporate systems, as mentioned above, although the pluralism on the board structure can have some improvements, this system is not much superior either. Historically, the pluralistic view of the corporate board system has been implemented in Germany with their dualistic board structure. The main purpose of this model is to separate the controlling body from the management body to protect the interest of shareholders as
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES well as having public confidence (Jungmann, 2006). Another key point to remember is that the separation of ownership, management and controlling which allows companies to avoid agency problem and it provides a strong dissection of the executive’s respo nsibilities
between management board and supervisory board (Choa and Rui, 2009; Glinkowska and Kaczmarek, 2015; Jungmann, 2006; Lawriwsky, no date, p41-46; Millet-Reyes and Zhao, 2010). Jungmann (2006) argues in his paper that this structural benefit is no ticed as “one of the major advantages of the two- tier system”. One of the significant advantages is the influence of shareholders that includes shareholders and employee representatives through contribution and involvement in the supervisory board (Hayashi, 2013; Jackson, 2009; Millet-Reyes and Zhao, 2010). The fact that this separation and diversity in the board structure produces favourable publicity and therefore helps corporations to attract foreign investments (Millet-Reyes and Zhao, 2010) as well as it is easier to design long-term corporate strategies as shareholders or their representatives are involved in the strategic business planning. On the other hand, in this corporate board system, there are fewer share trades than the monistic system. The main reason, as is already mentioned above, is the greater and active involvement of shareholders in the boardroom (Millet-Reyes and Zhao, 2010). Diversity in the boardroom conceives new ideas; management board makes fewer mistakes as stakeholders provide their imperative inputs, therefore, the performance both in financial and CSR (Corporate Social Responsibility) sectors improve (Choa and Rui, 2009; Harjoto, Laksmana and Lee, 2015; Hayashi, 2013; Millet-Reyes and Zhao, 2010; Molz, 1995). Moreover, motivation and productivity of employees are better as their voices are heard on the board via representatives. Another key aspect is that “non -traditional-candidates”
(Millet-Reyes and Zhao, 2010) such as team leaders or head of departments of the company could get promoted to the boardroom which makes the management board more diverse (Millet-Reyes and Zhao, 2010). Furthermore, the size of the management board plays an important role in the decisionmaking process. Choa and Rui (2009) argue that the small size of management board in the pluralistic board system allows for quick decision-making as well as produces a greater performance. However, the implementation of the decisions that are taken by the
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES management board could take longer than in the monistic system. Millet-Reyes and Zhao (2010) describe in their study that “larger boards lead to lower performance” as it is difficult
to get an unequivocal agreement in the board. Notwithstanding these, in practice, the use and implementation of the system look a bit different than the theory appears to be. Firstly, in the real business, the management board chooses the members of the supervisory board, excluding employee representatives and the supervisory board is officially elected at the annual general meeting only (Jungmann, 2006). Since more power is vested in the management board, it can easily be misused by the board , especially the CEO, to pick members according to their own wish who might not be the best choice for the interest of the company. Henceforth, it could be a problem for the management board to address critical questions and issues while maintaining corporate responsibilities and private relationships at the same time (Bezemer et al., 2014). One of the major structural weaknesses of pluralistic board structure is the dependence on both sides (Jungmann, 2006). The management board requires the approval of the supervisory board regarding corporate strategic decisions but the supervisory board itself is not allowed to take any strategic decisions. But the major dilemma is that the supervisory board is not briefed or inquired for consultation as well as they are not implicated during the decision-making process (Jungmann, 2006). Further, Jungmann (2006) argues that this weakness threatens the quality of control and more mistakes could be made since fewer inputs are yielded from the supervisory board. In addition, because of less communication with the management board, there is greater need of information for the supervisory board (Bezemer et al., 2014; Jungmann, 2006). It is arguable that management board does not provide the information that is needed or the supervisory board does not collect the data, however, the responsibilities of the board members should be defined clearly (Ghezzi and Malberti, 2008). Likewise, in this board system, there is an issue concerning “interlocking directorships” (Millet-Reyes and Zhao, 2010) which mean that often members of supervisory board sit on the management board of another company and vice versa. It is precisely for this reason that a convenient controlling mechanism cannot take place in the board structure. According to Millet-Reyes and Zhao (2010), not only is the “interlocking directorships” seen as a
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES relationship and/or external obstacle but also the internal misuse of the supervisory board can take place as it allows a member of management board who has resigned to join the supervisory board in consideration of the agreement of shareholders on annual general meeting (Millet-Reyes and Zhao, 2010). On the other hand, in some pluralistic board structures, institutional shareholders can take advantage of the system to serve their own interest and concern (Anderson, 1984; Yoshikawa and Phan, 2005). Some of the common systems related to this issue are the French and Japanese board systems where “banks provide long -term financing to the firm
and are often some of its dominant sh areholders” (Millet -Reyes and Zhao, 2010) which results in the Principle-Principle problem in the boardroom (Suzuki, 2016). Nevertheless, one of the main weaknesses of the two-tier or pluralistic board structure is that a shareholder or block holder can sit in the supervisory board that in turn causes the agency-problem again (Jungmann, 2006). In conclusion, all things considered, it has been shown that both the monistic and pluralistic corporate board structures have their strengths and weaknesses. However , in today’s complex and dynamic business environment, it is important to involve stakeholders to improve both corporate and CSR performance. Letza et al. (2008) describe the corporate governance rather social than purely economic or mathematical reality as well as processual rather than fixed and relatively enduring reality. Moreover, it was also described as a corporate process that the governance cannot isolate from social and other non-economic conditions; besides, factors such as power, legislation, culture, social relations, and institutional contexts can also not be segregated. Both structure systems have their merits and demerits and a lot of potential for improvement but at the end of the day the individual companies must figure out which board structure would be more suitable for them based on the selection of the systems, if possible.
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC P LURALISTIC CORPORATE CORPORATE BOARD STRUCTURES
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