The Gazette 1974

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 200

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