Types of boards of directors

To prevent the concentration of power and information in one or a few individuals, boards are advised to have a balance of executive and non-executive directors, some of whom are independent (see definition). Experts differ over the number of independent directors a board should have, but it is generally accepted that one-third to one-half of a board’s directors should be independent.

Journalists covering boards need to understand the definitions used to describe directors and the boards themselves.

An executive director is also an executive of the company, such as a CEO or CFO. A non-executive director is not part of management and is valued for external perspectives and unique expertise.

“Non-executive” directors should meet in private regularly, without the presence of “executive” directors, according to governance experts.

The independent director

Definitions of what “independent” means vary, but usually require the person to be free of financial, family and employment ties, or any other meaningful relation with the company, its directors and employees. Other criteria include:

  • Not a recent employee

  • No recent material business relationship with the company

  • No recent or current compensation from the company, other than director’s fee, share options, performance-related pay or pension

  • No close family ties with any of the company’s advisers, directors or senior employees

  • No cross-directorships or significant links with other directors through involvement in other companies or bodies

  • Not a significant shareholder

  • Not a long-term member

Source: “Corporate Governance Board Leadership Training Resources,” Global Corporate Governance Forum, International Finance Corporation, World Bank Group.

In many countries, boards must have a specific propor-tion of independent directors. Boards of directors can be either one-tier or two-tier.

  • A one-tier, or unitary, board delegates day-to-day business to the CEO, management team, or executive committee, and is composed of both executive and non-executive members. This structure is most often found in countries with a common law tradition, such as the United States, the United Kingdom and Commonwealth countries.

  • A two-tier, or dual, board divides supervisory and management duties into two separate bodies. The supervisory board oversees the management board, which handles day-to-day operations. This structure is common in countries with civil law traditions, primarily in Germany, but also in some companies in France and in many Eastern European countries.

Tip for journalists: In a two-tier system, do tensions exist between the two boards? These conflicts may lead to news stories exploring a company’s ability to perform well.