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A COMPARISON BETWEEN MONISTIC

AND PLURALISTIC CORPORATE BOARD


STRUCTURES

Mahmudur Rahman
University of Central Lancashire
MSc International Business and Management
Email: mrahman3@uclan.ac.uk

A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


The corporate governance is the system that regulates how a corporation is organised and
controlled (Jungmann, 2006). More importantly, it is based on a great number of
institutional aspects, for instance, board structure, ownership principles as well as
harmonisation of stakeholders interests (Millet-Reyes and Zhao, 2010). Through
globalisation and technical revolutions, business environment increasingly has become
complex which drives enterprises to consider and involve stakeholders into their
boardrooms more to improve the firms performance as well as to deal with social
responsibilities better. This study discusses the relative advantages and disadvantages of
monistic and pluralistic corporate board structure as well as examines how these may
impact differently on both the short-term and long-term strategies.
To understand the basic concept of monistic and pluralistic system, first, we need to
understand the structure. It is a well-known characteristic that there are two main corporate
structure board systems- one-tier and two-tier board structure. The one-tier board
structure, also known as unitary or monistic, that has only one board of directors with
executive and non-executive directors, is mostly used in common law countries (MilletReyes and Zhao, 2010) such as the UK and the USA. The two-tier board structure, also known
as dualistic board system where the management and control bodies are completely
separated, is usually adopted in civil law countries (Millet-Reyes and Zhao, 2010) like
Germany and Austria. Furthermore, there are other corporate board systems that represent
more pluralistic aspects where essential stakeholders are more involved in boardrooms such
as the corporate system in Japan (Hayashi, 2013).
As already mentioned, the monistic board structure is generally or even compulsorily used in
common law countries, i.e. the UK and the USA. As all the board members, executive and
non-executive directors are sitting in the same Board of Directors (Bohinc, 2011), it makes
the structure simple and provides a greater information flow as well as the availability of this
for everyone in the boardroom (Allen and Zhao, 2007; Jungmann, 2006).
Furthermore, the one-tier board system allows firms to make quicker decisions and put
these into practice faster since no approval from another instance is needed (Jungmann,
2006). For example, for financial reasons the management has decided to lay off workers.
Such a decision is easier to implement in the monistic structure. Block and Gerstner (2016)
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


argue that this advantage presents less administrative concerns which in turn provide cost
effective process. Moreover, all the directors are involved in the decision-making process
which helps well understanding and participation in the business by the board (Block. and
Gerstner, 2016, Bohinc, 2011; Jungmann, 2006).
The shareholder model of governance provides sufficient motivation for investment since
the shareholders get a higher rate of return on their investment and dividend as the major
target of this system is to maximise the profit (De Moor, 2014; Letza, Kirkbride, Sun and
Smallman, 2008).
Despite these advantages, however, the unitary board structure has a key detriment when it
comes to the practice. Since the management and control are in the hands of the same
board where no clear separation takes place, it is hard to make decisions and at the same
time monitor and control them (Allen and Zhao, 2007; Jungmann, 2006). Moreover, the
monitoring role is less isolated as the relationship between board members are very close
(Allen and Zhao, 2007; Ghezzi and Malberti, 2008). The main reason behind it is the
interlocking directorships (Millet-Reyes and Zhao, 2010) where an independent director is
an executive director on another board (Allen and Zhao, 2007).
In a monistic corporate board structure, there is an issue about independence and
separation of responsibilities. Jungmann (2006) criticised in his paper that there is a
monitor-colleague-dilemma which a non-executive director must face since they should
monitor others in the boardroom and are their colleagues at the same time. This
environment leads to less independence. Further, Jungmann (2006) argues that by
clarifying the roles and responsibilities of each director it would be possible to decrease this
difficulty as well as that the chairman of the board should create and maintain an
atmosphere where board director can discuss complications and enquiries frankly and
openly (Jungmann, 2006). Nevertheless, often the CEO of the company is also the chairman
of the board at the same time which makes it difficult to separate the boardroom internally
to make it more effective (Allen and Zhao, 2007; De Moor, 2014). Coupled with this
argument, Jungmann (2006) discusses structural shortcoming and claims that the
effectiveness of corporate control depends not only on the personality of the non-executive
directors but foremost on the personality of the chairman.
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


From the shareholder perspective, one complication can be seen promptly. In a unitary
corporate structure, shareholders must accept that usually there are no representatives on
the board of directors to put forward their concerns (Bohinc, 2011). Further to this, there is a
risk factor since individual shareholders and minority interest might be overlapped. Another
key aspect to remember is that the trading shares takes place more often in this type of
corporate system than in a pluralistic one. The leading reason for this occurrence is the
ignorance of shareholders interest while making strategic corporate decisions (Millet-Reyes
and Zhao, 2010). If shareholders are not happy with boards decisions, they will sell their
shares as there are no other possibilities left for them. On this account, the board members
focus on short-term corporate strategies as the needed resources for long-term business
approaches have less availability (Letza, Kirkbride, Sun and Smallman, 2008). For instance, a
manufacturing company would like to buy properties as the value has fallen, although they
are not needed for the business immediately. But for a long run strategy it could be
remunerative, nevertheless, it is difficult to get through the board of directors. Moreover, it
is also possible to claim that because of this, it is difficult to persuade foreign investors and
shareholders to invest in stocks (De Moor, 2014; Millet-Reyes and Zhao, 2010).
Nevertheless, one of the most significant matters is that the monistic system does not allow
any important stakeholders for instance employees and suppliers to get involved in the
boardroom which results in less involvement in the decision-making process (Bohinc, 2011).
Low or even no participation and encouragement of stakeholders leads to low performance
in the daily operational business where stakeholders translate the corporate strategy into
action, as well as the knowledge of day-to-day business, is missed both on the board and in
the decision-making process (Westphal and Bednar, 2005). At the same time, the
responsibility and accountability for non-executive directors are high as they should act as
independent advisors (Millet-Reyes and Zhao, 2010).
When we look at other corporate systems, as mentioned above, although the pluralism on
the board structure can have some improvements, this system is not much superior either.
Historically, the pluralistic view of the corporate board system has been implemented in
Germany with their dualistic board structure. The main purpose of this model is to separate
the controlling body from the management body to protect the interest of shareholders as

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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


well as having public confidence (Jungmann, 2006). Another key point to remember is that
the separation of ownership, management and controlling which allows companies to avoid
agency problem and it provides a strong dissection of the executives responsibilities
between management board and supervisory board (Choa and Rui, 2009; Glinkowska and
Kaczmarek, 2015; Jungmann, 2006; Lawriwsky, no date, p41-46; Millet-Reyes and Zhao,
2010). Jungmann (2006) argues in his paper that this structural benefit is noticed as one of
the major advantages of the two-tier system.
One of the significant advantages is the influence of shareholders that includes shareholders
and employee representatives through contribution and involvement in the supervisory
board (Hayashi, 2013; Jackson, 2009; Millet-Reyes and Zhao, 2010). The fact that this
separation and diversity in the board structure produces favourable publicity and therefore
helps corporations to attract foreign investments (Millet-Reyes and Zhao, 2010) as well as it
is easier to design long-term corporate strategies as shareholders or their representatives
are involved in the strategic business planning. On the other hand, in this corporate board
system, there are fewer share trades than the monistic system. The main reason, as is
already mentioned above, is the greater and active involvement of shareholders in the
boardroom (Millet-Reyes and Zhao, 2010).
Diversity in the boardroom conceives new ideas; management board makes fewer mistakes
as stakeholders provide their imperative inputs, therefore, the performance both in financial
and CSR (Corporate Social Responsibility) sectors improve (Choa and Rui, 2009; Harjoto,
Laksmana and Lee, 2015; Hayashi, 2013; Millet-Reyes and Zhao, 2010; Molz, 1995).
Moreover, motivation and productivity of employees are better as their voices are heard on
the board via representatives. Another key aspect is that non-traditional-candidates
(Millet-Reyes and Zhao, 2010) such as team leaders or head of departments of the company
could get promoted to the boardroom which makes the management board more diverse
(Millet-Reyes and Zhao, 2010).
Furthermore, the size of the management board plays an important role in the decisionmaking process. Choa and Rui (2009) argue that the small size of management board in the
pluralistic board system allows for quick decision-making as well as produces a greater
performance. However, the implementation of the decisions that are taken by the
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


management board could take longer than in the monistic system. Millet-Reyes and Zhao
(2010) describe in their study that larger boards lead to lower performance as it is difficult
to get an unequivocal agreement in the board.
Notwithstanding these, in practice, the use and implementation of the system look a bit
different than the theory appears to be. Firstly, in the real business, the management board
chooses the members of the supervisory board, excluding employee representatives and the
supervisory board is officially elected at the annual general meeting only (Jungmann, 2006).
Since more power is vested in the management board, it can easily be misused by the board,
especially the CEO, to pick members according to their own wish who might not be the best
choice for the interest of the company. Henceforth, it could be a problem for the
management board to address critical questions and issues while maintaining corporate
responsibilities and private relationships at the same time (Bezemer et al., 2014).
One of the major structural weaknesses of pluralistic board structure is the dependence on
both sides (Jungmann, 2006). The management board requires the approval of the
supervisory board regarding corporate strategic decisions but the supervisory board itself is
not allowed to take any strategic decisions. But the major dilemma is that the supervisory
board is not briefed or inquired for consultation as well as they are not implicated during the
decision-making process (Jungmann, 2006). Further, Jungmann (2006) argues that this
weakness threatens the quality of control and more mistakes could be made since fewer
inputs are yielded from the supervisory board. In addition, because of less communication
with the management board, there is greater need of information for the supervisory board
(Bezemer et al., 2014; Jungmann, 2006). It is arguable that management board does not
provide the information that is needed or the supervisory board does not collect the data,
however, the responsibilities of the board members should be defined clearly (Ghezzi and
Malberti, 2008).
Likewise, in this board system, there is an issue concerning interlocking directorships
(Millet-Reyes and Zhao, 2010) which mean that often members of supervisory board sit on
the management board of another company and vice versa. It is precisely for this reason
that a convenient controlling mechanism cannot take place in the board structure. According
to Millet-Reyes and Zhao (2010), not only is the interlocking directorships seen as a
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A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES


relationship and/or external obstacle but also the internal misuse of the supervisory board
can take place as it allows a member of management board who has resigned to join the
supervisory board in consideration of the agreement of shareholders on annual general
meeting (Millet-Reyes and Zhao, 2010).
On the other hand, in some pluralistic board structures, institutional shareholders can take
advantage of the system to serve their own interest and concern (Anderson, 1984;
Yoshikawa and Phan, 2005). Some of the common systems related to this issue are the
French and Japanese board systems where banks provide long-term financing to the firm
and are often some of its dominant shareholders (Millet-Reyes and Zhao, 2010) which
results in the Principle-Principle problem in the boardroom (Suzuki, 2016). Nevertheless, one
of the main weaknesses of the two-tier or pluralistic board structure is that a shareholder or
block holder can sit in the supervisory board that in turn causes the agency-problem again
(Jungmann, 2006).
In conclusion, all things considered, it has been shown that both the monistic and pluralistic
corporate board structures have their strengths and weaknesses. However, in todays
complex and dynamic business environment, it is important to involve stakeholders to
improve both corporate and CSR performance. Letza et al. (2008) describe the corporate
governance rather social than purely economic or mathematical reality as well as processual
rather than fixed and relatively enduring reality. Moreover, it was also described as a
corporate process that the governance cannot isolate from social and other non-economic
conditions; besides, factors such as power, legislation, culture, social relations, and
institutional contexts can also not be segregated. Both structure systems have their merits
and demerits and a lot of potential for improvement but at the end of the day the individual
companies must figure out which board structure would be more suitable for them based on
the selection of the systems, if possible.

Mahmudur Rahman

A COMPARISON BETWEEN MONISTIC AND PLURALISTIC CORPORATE BOARD STRUCTURES

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Mahmudur Rahman