The European river Rhine and the American Mississippi both are among the longest rivers of their continents. This is about where the comparison ends. The same goes for corporate governance in Europe and the United States. It is said that Europe uses the ’Rhineland model’ for supervision in companies. In the United States, the typical Anglo-Saxon model is usually applied. The Dutch Caribbean and Curacao also use the Rhineland model. The differences are significant.
Most corporations in Europe have a so-called two-tier structure. There is a strict distinction between executive management duties and supervisory duties. The supervisory duties are fulfilled by an independent board: the supervisory board. In (relatively large) foundations, this is the supervisory council. The Anglo-Saxon model often has a so-called one-tier structure. In this structure you only have one Board. The Board has two types of members: members with a (mainly) executive duties and members with a (mainly) supervisory duties. Resolutions are jointly passed by the entire Board. Each member will decide based on his or her specific perspective, mainly executive or rather supervisory.
In recent years, this initially quite strict distinction is becoming more vague. Corporations in the United States increasingly switch to the Rhineland two-tier structure, while legislation in Europe (also in the Netherlands and in Curacao) also allows a one-tier structure nowadays.
However, the differences between the Rhineland and Anglo-Saxon models are much more fundamental. In the Rhineland model, it has been laid down by law in many European countries (and also in the Dutch Caribbean), that the continuity of the company has to be the leading criterion for managing directors and supervisory directors. Actually, all resolutions have to serve this purpose. Short-term profit is not really worth pursuing. The Anglo-Saxon model values this principle much less and focuses more on shareholder value. There is a reason that many family businesses opt for the Rhineland model, whereas companies listed on the stock exchange usually use the Anglo-Saxon model. The values in a family business are by nature aimed at continuity (great-grandfather’s life’s work), rather than short-term profit, possibly at the expense of continuity.
The difference between both structures was relevant in the obituaries of the collapse of the Dutch department store Vroom and Dreesmann. It is reported that (besides a hopelessly old-fashioned business operation) one of the causes for the bankruptcy was the quick sale of the V&D real estate to yield money for the (American) shareholders. In the Anglo-Saxon model, it is not uncommon for a shareholder to bleed a company dry and discard it. The shareholders’ interest and value creation are most important. In the Rhineland model, this is regarded not very chic and not very social. Continuity of the business operation and employment are valued more.
One structure is not necessarily better than the other. I think it is good for the top management of a company (shareholders, management board and supervisory board) though, to regularly account for the ultimate priority: generate a profit for the shareholders or preferring a more socially rooted function. The same applies to the shareholder in our state-owned corporations in Curacao: wanting to draw dividends from these corporations may not be compatible at all with the social function and the responsibility that the shareholder as well as the management board and supervisory board have.
Do you have a question about corporate governance yourself? Please e-mail it to governance@vaneps.com and perhaps your question will be discussed in the next blogpost.
