One-tier Board Research Articles

ONE-PERSON LIMITED LIABILITY COMPANY: CONSIDERING COMPANY’S ORGAN GOVERNANCE OF THE INDONESIAN LEGAL ENTITIES FOR MICRO AND SMALL ENTERPRISES

The government continues to strive to improve the ease of doing business, one of which is legitimizing the existence of a new entity intended for micro and small enterprises (MSEs). The entity is a One-Person Limited Liability Company, which is familiar for particular countries with higher ease of doing business than Indonesia. However, this new business form for MSEs is unique and has different characteristics from other countries. The new regulation restricts the founder and shareholders, who can only be natural persons and cannot be more than one. The problem is that the law obscurity of the company's organ emerges not following previous regulations because there is no obligation to have supervisory bodies on it. Being the only different entity can be an advantage, but it can also be a rash act. This normative legal research uses the comparative law method to identify problems in statutory regulation. The result shows a legal vacuum in the new regulation of Indonesian one-person companies’ organs, whether they should implement the one-tier board or have the option to adopt the two-tier board system. The thing to consider is supervisory bodies should remain within an entity with limited liability regardless of its system.

BUSY COMMISSIONERS AND FIRM PERFORMANCE: DO SHARIAH-COMPLIANT FIRMS MATTER?

The empirical literature on a one-tier board system has recently focused on busy directors, defined as directors holding multiple similar positions in more than one firm simultaneously. In the same spirit, this paper investigates the impact of busy commissioners (instead of busy directors) on firms' performance for the case of Indonesia, a country adopting a two-tier board system. We find that busy commissioners do not impact accounting performance but are negatively associated with market performance. The markets tend to react negatively to the presence of busy commissioners, while actually the firms are also not advantaged financially by their presence. Interestingly, we also find that Shariah-compliant firms tend to have better accounting performance but not with market performance. Our analysis further reveals that the negative impact of busy commissioners on market performance diminishes in non-Shariah-compliant firms. Perhaps, the different characteristics of Shariah-compliant and non-Shariah-compliant companies, wherein Shariah-compliant firms tend to restrict leverage and cash level, account for the results. These findings are robust across various regressions. This research calls on policymakers to enforce the regulation regarding commissioners to reduce its detrimental impact on performance. The regulators should also collaborate with relevant agencies to educate and promote the existence of Shariah-compliant firms in Indonesia.

Boards' strategic involvement models: Past, present, and future

Background: The research on boards' strategic involvement has increased dramatically in the last few decades due to the need for improving boards' strategic effectiveness as a mechanism for improving organizational performance. The corporate scandals highlighted even more that boards' strategic decisions have sizable consequences for organizational survival, and long-term implications for organizational development. Purpose: The main research questions in this study are: 1. Which are the main elements of the concept of boards' strategic involvement?; 2. Which models constitute the core of the concept and how we can classify them?; 3. How has the discourse on boards' strategic role changed over time? Our purpose is to provide comprehensive answers to these questions and draft the future research agenda in this area. Study design/methodology/approach: Having in mind that boards' strategic involvement is a multidisciplinary area, we first conducted an integrative literature review, to detect the competing groups of models, and afterwards we conducted a semi-structured literature review in order to identify the most important topics in this area and to draft the future research agenda. Findings/conclusions: This paper contributes to research by identifying the models of boards' strategic involvement, classifying them in three competing groups of models that represent the foundation in this research area, by identifying the most investigated topics in the past five years and finally, by drafting the future research agenda. Our conclusion is that the research in this multidisciplinary area is navigating around these three groups of models and that the most explored topics around which the future research is going to be conducted are boards' involvement in the area of strategic human resource management and decisions regarding organizations' sustainability. Limitations/future research: The study's main limitations are related to the fact that the identified models on boards' strategic involvement have been developed, mostly by authors from the USA and UK, where the one-tier board system is used. In future research, the authors should focus on proposing new framework(s)/model(s) and supporting its insights with empirical evidence.

Attributes of The Supervisory Board In Enhancing Innovation Performance

Supervisory board’s attribute as determinants of innovation performance has been investigated by previous research using a one-tier board system, such as in the US and UK. There is limited evidence in such a study in continental European corporate governance systems, such as Indonesia. A study using data from Indonesia with a unique two-tier board system may enrich the corporate governance literature. This study explores the supervisory board’s attributes in enhancing a company's innovation performance by using gender, tenure, and foreigners. The agency theory is applied to this study. The purposive sampling method was used to obtain data from 222 companies listed on IDX from 2014-2018. Using multivariate analysis, the result showed that gender and foreign supervisory board have no significant impact in enhancing better Company's innovation, with the ability to create better performance. However, the supervisory board's tenure has a significant positive relationship with innovation performance. Hence, the company size negatively influences innovation performance. This study has practical and theoretical implications, and they discuss in detail in the paper.

The Effectiveness of Qualified Independent Supervisory Boards : Evidence from Indonesia

The objective of our empirical research is to examine the characteristics of independent supervisory board (SB) on corporate’s risk in dual tier corporate board setting, Indonesia from 2015-2017. This study is different with previous literature in several ways. First, we examine the value of qualified independent SBs in Indonesian dual board setting, while previous studies focus on one-tier board system and developed countries. Second, we also test the effectiveness of several characteristics of qualified independent supervisory board, including size, financial expertise, and tenure on operating and market risks. Based on 1,089 firm-year observations, the results suggest that both independent SB size and financial expertise help company to reduce operating and market risks. Further, we find that independent SB tenure is negatively associated with operating risk. Our results are robust after addressing endogeneity problem.

The Structure of the Board of Directors: Boards and Governance Strategies in the US, the UK and Germany

The chapter continues and advances our earlier research on ‘Board Models in Europe’.** We explore ‘The Structure of the Board of Directors’ with a view to the basic governance structure as provided by a board model vis-a-vis techniques of structuring the decision-making body, which can be used independent of the chosen board model. We focus on boards of large business corporations with a stock exchange listing to secure cross-country comparability. Our three sample jurisdictions are the US, the UK and Germany. France and Italy are also considered to round out the discussion of selected issues. Our key findings are as follows: 1. Board models like the one-tier board, as used in the US and the UK, or the two-tier board, as used in Germany, provide a basic governance structure that enables the use of specific governance strategies. It is the use of specific governance strategies, not the choice of a board model, which determines the role of the board in alleviating agency problems between owners and managers, controlling and non-controlling shareholders, and shareholder and stakeholder constituencies. Based on this finding, the choice of the suitable board model should be left to private parties. 2. The market for corporate control is known as a removal strategy that alleviates the agency problem between owners and managers of potential target companies. To achieve this effect, it must be ensured that takeover defenses are adopted in the interest of shareholders rather than as a means to shield the incumbent board from removal by the acquirer. The governance options include focusing the board structure through the allocation of decision-making power to independent directors (US) or to the supervisory board (Germany), and, as an alternative, reinstalling shareholder decision-making and thus removing the board from its coordination task (UK). Counter-intuitively, one might group US and German law together, despite differences in their basic board structures and despite the European Union’s adoption of UK-style control shift regulation. 3. The three sample jurisdictions follow a similar pattern for securing fairness of related party transactions (RPTs). The UK relies on a structuring of the shareholder body, requiring ex-ante approval of the disinterested shareholders (MOM approval), a strategy that is also used in France but in a weaker form due to the possibility of ex-post authorization. In the US, the predominant choice seems to be structuring the board so as to leave the decision to independent directors, a strategy that Italy has, on one hand, sought to enhance with the obligatory involvement of a minority appointed director but, on the other hand, has weakened by allowing the board to override a recommendation of the independent directors. Germany also relies on board structuring in that it requires supervisory board approval of RPTs, but compared to the use of independent directors, the cooperation between the two boards provides a basis for manager-friendly results one would expect only from a jurisdiction that openly promotes board empowerment. 4. The most far-reaching advance of the corporate purpose debate relates to a further structuring of the board so as to provide employee representatives with a voice, as known from German co-determination. Proposals to reallocate a proportion of the appointment rights from shareholders to employees have not found their way into legal reform in the US or the UK. Out of the governance strategies discussed in this chapter, it is only employee co-determination that calls for a basic governance structure which solely a two-tier board model can provide.

The value of political independent supervisory boards: Evidence from Indonesian dual board setting

We investigate whether political independent supervisory boards (political I-SBs) help companies to reduce their corporate risks in the setting of Indonesian two-tier board system. This study is different from other studies in several ways. First, while most prior studies examine the effectiveness of independent boards in one-tier board setting, we use dual board system. This system promotes the strategic role of political I-SBs. Second, we use two measures of corporate risks: operating and market risks. Based on 1,176 firm-year observations for operating risk analysis and 1,254 firm-year observations for market risk analysis, we find that firms with political I-SBs have lower operating and market risks than firms with non- politically connected independent SBs. We also control for endogeneity problem using GMM (Generalized Method of Moments) method, and the results are still consistent.

Corporate governance mechanism and comparative analysis of one-tier and two-tier board structures: evidence from ASEAN countries

The study investigates and compares the determinants of disclosure quality of one-tier and two-tier board structures in selected ASEAN countries. We measure the significance of different corporate governance mechanism of top 50 companies from Malaysia, Indonesia, Thailand, and Singapore from 2011 to 2015. The results of independent sample t test prove that the variances of the disclosure quality scores of one-tier and two-tier board structures are different. In order to avoid problems of omitted variable bias, unobserved heterogeneity and endogeneity, we use the Tobit regression model with random effects. The results confirm that the disclosure quality has a dependence on board size, board expertise, board meetings, board diversity, the timeline for both one-tier and two-tier board structures. The female board members and free cash flows have sole dependence on the one-tier board, whereas board power and block holders have sole dependence on two-tier boards. The study also establishes the relationship between board independence with disclosure quality of board structures.

ASEAN Countries CG Disclosure Practices: A Comparative Analysis of One-Tier and Two-Tier Board Structures

Study focal point is to access the influence of CEO characteristics and audit quality on disclosure quality in the comparison between one-tier and two-tier board structures. Tobit regression model with the random effect is used to access influence on disclosure quality by using the sample of 200 non-financial firms of Indonesia, Malaysia, Thailand, and Singapore for the period from FY 2011 to FY 2015. The study empirically analyses the various characteristics of one and two-tier board structures. Findings of the study observe CEO dual role inversely and audit committee expertise directly impact disclosure quality for both structures. Further, observed audit committee size and firm size directly impact disclosure quality for one-tier structure and CEO age and leverage inversely impact two-tier structure. Finally, CEO tenure, audit quality and audit committee independence having no impact on disclosure quality for both board structure.

Do corporate governance and disclosure tone drive voluntary disclosure of related-party transactions in China?

I investigate three important questions that are under-researched. First, do state ownership and foreign ownership via qualified foreign institutional investors programs (QFIIs) influence the extent of voluntary related-party transactions disclosure? Second, do independent directors and professional supervisors of China’s two-tier board system improve the extent of the voluntary disclosure? Third, does the positive disclosure tone promote the extent of the voluntary disclosure? Using a hand-collected data set comprising 1,118 firm-year observations, the results reveal that foreign ownership via QFIIs, the proportion of independent directors, disclosure tone, and firm age have a significantly positive impact on the extent of voluntary related-party transactions disclosure, whereas firm size is negatively correlated. Other factors including state ownership, the proportion of professional supervisors, firm performance, Chief Executive Officer (CEO) duality, Big 4 auditor, and the ratio of related-party transactions to total assets are found to have no impact. Three key implications can be drawn from this study. First, China should carry out and strengthen its privatization program and promote QFIIs. Second, the one-tier board system should be considered for implementation when privatization reform is achieved and the roles and duties of independent directors are emphasized by law. Third, Chinese accounting convergence practices should be continued.

One-Tier Model and List of Candidates from the Outgoing Board: Better Corporate Governance for Italian Market or Just Xenophilia?

The superiority of the one-tier board model, over others, has recently been argued in Italy by a study published by the Research Center of Consob, the Italian Stock Exchange Authority by bringing forward two main arguments: i) the need to simplify and rationalize the system of internal controls for listed companies; and ii) the need to foster competitiveness of Italian listed companies in order to attract foreign capital by encouraging standardization and convergence, as the one-tier board model is the most common in the world. Some important Italian listed companies have recently switched their board model to the one-tier, in particular, by providing justification of a need to attract foreign investment since institutional investors prefer the one-tier board, being the model they know better. Another recent trend in Italian corporate governance is the amendment of bylaws by certain companies, allocating power to the outgoing board to file its own list of candidates to renew the board of directors. This is actually the rule in many jurisdictions, but it has not been the case under Italian law, where the right to file one or more lists of candidates for in the event of board renewal, is expressly granted to shareholders. Also, in this case, some important Italian listed companies have recently amended their bylaws to introduce such power by explaining that this is common practice in other jurisdictions and therefore it is favored by foreign institutional investors. Based on these two issues – that are at the core of the most recent Italian corporate governance debate and practice – the research questions of this paper are: 1. Do institutional investors really prefer the one-tier board in Italian investee companies? 2. Do institutional investors show preference with reference to the power to file a list of candidates? After having examined the theoretical background, also under the legal perspective of both corporate governance set of rules, institutional investors’ actual preferences regarding structure of the board of directors and power to file a list of candidates in case of renewal of the board will be explored and final considerations will be drawn. Providing an answer to these questions seems particularly important in both academic and practitioner fields as some important Italian listed companies started to adopt or to think whether adopting one or both of the above-mentioned rules with general support in the public opinion. After the Introduction, Section 6.2 compares the traditional model and the other two models of corporate governance in Italy, and deals with the main features of the recent trends in Italian corporate governance. Subsequently, we review the applicable theory and main literature in section 6.3. We present our methodology in Section 6.4. Finally, we present the results of the analysis in section 6.5 and provide concluding discussions and comments in the last two sections.

Board and corporate social responsibility disclosure of multinational corporations

PurposeThis paper aims to investigate the effects of board model and board independence on corporate social responsibility (CSR) disclosure of multinational corporations (MNCs).Design/methodology/approachThe authors developed an empirical model in which CSR disclosure is the dependent variable and board model (two-tier vs one-tier), board independence (a proportion of independent directors on a board) and the interaction variable of board model and board independence together with several variables conventionally used as control variables are independent variables. The authors collated the panel dataset of 244 Fortune World’s Most Admired (FWMA) corporations from 2005 to 2011 of which 117 MNCs use the one-tier board model, and 127 MNCs use the two-tier board model from 20 countries. They used the random-effect regression method to estimate the empirical models with the data they collated and also ran regressions on the alternative models for robustness check.FindingsThe authors found a significantly positive effect of a board model on CSR disclosure by MNCs. Two-tier MNCs tend to reveal more CSR information than one-tier MNCs. The results also confirm the significant moderating impact of board model on the effect of board independence on CSR disclosure. The effect of board independence on CSR disclosure in the two-tier board MNCs tends to be higher than that in the one-tier board MNCs. The results do not support the effect of board independence on CSR disclosure in general for all types of firms (one-tier and two-tier board). The impact of board independence on CSR disclosure is only significant in two-tier board MNCs and insignificant in one-tier board MNCs.Practical implicationsThe authors advise the MNCs who wish to improve CSR reporting and transparency to consider the usage of two-tier board model and use a higher number of outside directors on board. They note that once a firm uses one-tier model, number of IDs on a board does not matter to the level of CSR disclosure. They advise regulators to enforce an application of two-tier board model to improve CSR reporting and transparency in MNCs. The authors also recommend regulators to continue mandating publicly traded companies to include more external members on their boards, especially for the two-tier board MNCs.Originality/valueThis paper is the first that investigates the role of board model on CSR disclosure of MNCs.

EFFECTIVENES OF THE ROLE OF BOARD OF COMMISSIONER IN PREVENTING CORPORATE SCANDAL: CASE STUDY OF PT MERPATI NUSANTARA AIRLINES

Corporate scandal resulted from bad consideration and weak analysis to create management decision in running company’s business. This paper discusses the supervisory role and function of supervisory board which is begun with the establishment of corporate supervisory function system from two corporate supervisory system in the world: Two-Tier Baord and One-Tier Board. In addition, this paper also explains connection between such supervisory function with the corporate scandal of PT Merpati Nusantara Airlines. Moreover, this paper examines related matters related to significant distinctions between response towards the corporate scandal based on the corporate management supervision. In conclusion, this paper addresses what can we learn from the corporate scandal of PT Merpati Nusantara Airlines and also whether supervision model by board of commissioners are still relevant to control the performance of the company.

Corporate Social Responsibility Strategies of Spanish Listed Firms and Controlling Shareholders’ Representatives

This article aims at analyzing how controlling shareholders’ representatives on boards affect corporate social responsibility (CSR) strategies (disclosing CSR matters) in Spain, a context characterized by high ownership concentration, one-tier boards, little board independence, weak legal protection for investors, and the presence of large shareholders, especially institutional shareholders. Furthermore, among controlling shareholders’ representatives, we can distinguish between those appointed by insurance companies and banks and those appointed by mutual funds, investment funds, and pension funds. The effect of these categories of directors on CSR strategies is, therefore, also analyzed. Our findings suggest that controlling shareholders’ representatives have a positive effect on CSR strategies, as do directors appointed by investment funds, pension funds, and mutual funds, while directors appointed by banks and insurance companies have no impact on CSR strategies. This analysis offers new insights into the role played by certain types of directors on CSR strategies.

Audit Committees and Earnings Management – Evidence from the German Two-Tier Board System

This study investigates whether audit committees of German firms and their characteristics are related to earnings management. This issue is of particular interest, as it reveals the effectiveness of voluntarily established audit committees in a two-tier board system. In contrast, most prior research focuses on the characteristics of mandatory audit committees in one-tier board systems. We use a sample from German listed firms between 2005 and 2009, and accrual-based earnings management serves as a proxy for audit committee effectiveness. The results suggest that the existence of an audit committee is related to a lower degree of earnings management. Using a differences-in-differences approach, we also provide evidence that the level of earnings management decreases after the formation of an audit committee. Moreover, the results show that the participation of financial experts in audit committees and the increase in audit committee meetings are associated with less earnings management, i. e. these characteristics seem to enhance the effectiveness of audit committees. With respect to meeting frequency, 4–5 meetings per year seem to represent an effective number of meetings in order to reduce the level of earnings management.

Codetermination: The Necessary Presence of Workers on the Board. A Mathematical Model

We analyse in a firm the possible choice between two systems of corporate governance: the one-tier board, a structure commonly used in the Anglo-American world, and the system of Codetermination, a two-tier board with the presence of workers' representatives in the supervisory board, a model commonly adopted by firms in Germany. The aim is to fill a gap present in the current literature, the absence of a mathematical model that explains how works the governance's system of Codetermination presents not only in the German world, but expanding in many other European countries, as a result of the recent EU directives, which emphasize the need to involve workers in company decisions.

Does a one-tier board affect firms’ performances? Evidences from Italian unlisted enterprises

Even though the financial literature has examined the relation between the composition of the board of directors and firms’ performances, few studies have investigated the effect of adopting a specific corporate governance system. Past studies have not found clear evidence of the superiority of a specific corporate governance system in terms of economic and financial performances; instead, they have generally been limited to legal systems where the adoption of a specific system is mandatory. In this paper, we take into consideration the case of the Italian Corporate Law Reform, which gives firms the opportunity to choose, in a non-mandatory way, between different governance systems and in particular between a one-tier model and the pre-existing system prior to the Reform. Using propensity score matching and focusing on a sample of unlisted Italian joint-stock companies, we found evidence of a significant worsening of performances from 2003 to 2013 for corporations adopting a one-tier board after the Reform.

One- or Two-tier Board System? A Comparative Analysis of the British and Polish Systems of Corporate Governance

Corporate literature and practice reveal that neither the British one-tier nor the Polish two-tier board system is entirely safe for business participants. This article considers the implementation of a one-tier board system in Poland to be an alternative to the currently binding one, in addition to increasing the number of independent supervisors on supervisory boards.

Supervisory boards in high growth SMEs and mandated board members: two dilemmas

Two dilemmas for boards of growing small and medium-sized enterprises in a two-tier context as a result of their need for external resources (i.e., capital) and the concomitant introduction of external directors (expertise) are discussed in this paper. Firstly, split loyalties can occur when an externally mandated non-executive director may be pressured to act primarily in the interests of his/her mandating firm (e.g., a major investor), which may diminish the incentive to act in the best interest of the focal firm. Secondly, a culture clash is likely when external directors in the much prevalent family-based SME prefer formal control above informal governance which may harm the board's effectiveness. We propose that a one-tier board structure in combination with an effective chairperson is a solution to mitigate both dilemmas.

Culture and Corporate Governance: The Influence of Language and Religion in Switzerland

We investigate the effect of culture on corporate governance using the extraordinary opportunity that the corporate landscape of Switzerland provides. Within a single institutional framework (e.g., Swiss federal corporate law), we use language (German and French) and religion (Roman Catholicism and Protestantism) as proxies for culture. These groups share a distinct set of values particularly in their tolerance for hierarchical structures. We observe that firms in Swiss–French areas and firms in Roman Catholic cantons are more likely to have one-tier boards, whereas two-tier boards are more prevalent in Swiss–German areas and Protestant cantons. Furthermore, board composition is significantly driven by language. In contrast, ownership and equity structure are not significantly related to culture.