Tigers

Blog

12 November 2019

According to an old Chinese proverb, two tigers are too many for one mountain. We would say: two captains on one ship are too many. That also applies to good corporate governance. For small organizations (only) one director is usually sufficient. He or she runs and oversees everything. At medium-sized businesses you often notice that the board (the director) is expanded by a second director. This is usually a person with financial expertise. There are then two directors. The big problem is then: who is the boss? What to do if they differ of opinion?

An obvious solution is that one of the two is appointed by the stockholder as chairman and that he or she has a decisive vote in case of a difference of opinion. According to the model articles of incorporation for the country of Curacao, the solution to this problem is that in case of a difference of opinion between two directors the chairman of the supervisory board decides. It can certainly be said that this is a highly ill-considered if not, from the perspective of corporate governance, stupid provision. Yet this provision can be found in almost all articles of incorporation of Curacao entities that are related to the government. What is wrong with it? At least three things.

“By giving, as in the Curacao model articles of incorporation, the decisive vote to the chairman of the supervisory board in case of a difference of opinion between two directors then the chairman is going to sit directly on the seat of the board”

First of all, this provision wrongly suggests that the supervisory board is a body with higher powers than the board. This is not the case. The supervisory board does, indeed, perform the role of employer vis-à-vis the board, but it is not the employer. For instance, there is no relationship of authority. The supervisory board cannot give instructions to the members of the board. The supervisory board has its own function pursuant to the articles of incorporation in the system of checks and balances, however it is not higher or heavier than that of the board.

Secondly, this provision wrongly suggests that the chairman of the supervisory board has a special authority in respect of the other members of the supervisory board. This is not the case. Our law departs from collegiate management. This also applies to the supervisory board. They are jointly responsible for their decisions. The chairman of the supervisory board is, in this respect, nothing but an ordinary supervisory director. Independently the chairman of the supervisory board has no authority at all pursuant to the articles of incorporation. Yes, he can usually preside the meeting of stockholders. This is, however, a neutral function that does not affect the other supervisory directors. And this brings me to the third, the most principal point.

By giving, as in the Curacao model articles of incorporation, the decisive vote to the chairman of the supervisory board in case of a difference of opinion between two directors then the chairman is going to sit directly on the seat of the board. He becomes a director. At the same time he is also exercising supervision on the same act of management. That is a serious conflict of interests. What to do if the relevant board resolution where the opinion of the chairman of the supervisory board was decisive because the directors could not reach agreement together is subsequently dismissed by the supervisory board? Or even worse, what to do if the relevant board resolution inflicts damages on the organization? The potential directors’ liability is for the chairman of the supervisory board then the same as that of each and every other director. Hence, his liability is expanded considerably. All the more so, the other supervisory directors may in that case also be liable.

The conclusion is that this provision in the model articles of incorporation is blatantly incorrect. Hence, better remove it! And those two tigers? Simply include a provision in the articles of incorporation that the chairman of the board is designated by the general meeting of stockholders and that in case of a difference of opinion his or her vote shall be decisive. The chairman of the supervisory board himself is not a tiger. But he does supervise the tigers with his colleagues.

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Do you have a question about corporate governance? Please email it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.