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Summary of the CONTENT:

🏢 How do internal structures ensure ethical behavior? Internal structures like boards and employee representation safeguard ethical practices by monitoring management and guiding decisions toward shareholder and public interests.

⚖️ What’s the role of corporate boards in governance? Boards serve four key functions: executing daily operations, representing the firm externally, controlling misuse of power, and advocating for stakeholder interests.

🌍 What are the two board models?

One-Tier (Unitary): Combines executive and control functions for efficiency but risks misuse of power (e.g., Microsoft).

Two-Tier: Separates executive and supervisory boards, enhancing oversight and employee representation (e.g., Siemens).

👥 How do employees participate in governance? Employee codetermination ensures workers influence strategic decisions at the company level (board representation) and operational decisions at the plant level (works councils).

💼 What are the supervisory board's key roles? Supervisory boards appoint/dismiss executives, monitor activities, advise on strategy, and ensure organizational compliance with ethical and legal standards.

🌐 What drives board diversity? Guidelines promote diversity in gender, nationality, and expertise to minimize groupthink and enhance competence, commitment, and independence.

🏛️ What laws guide employee codetermination in Germany?

One-Third Participation Act: For firms with 500–2,000 employees, one-third of the board is worker representatives.

Codetermination Act: For firms with >2,000 employees, workers hold 50% of board seats.

🏭 What are works councils' roles at the plant level? They address work-related issues (e.g., hours, health, safety), influence HR planning, and advocate for employees through meetings and arbitration committees.

🔄 How do internal structures and external institutions interplay? Laws and norms from external bodies shape internal structures (e.g., diversity quotas, codetermination laws), ensuring alignment with societal values.

🛡️ Why are internal structures critical for long-term success? They balance shareholder goals with public legitimacy, reducing scandals and fostering ethical, sustainable business practices.

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Stories, Metaphors, Symbols, and Archetypes:

🪜 The Ethical Ladder Internal structures climb step-by-step: from shareholder monitoring to public trust-building, ensuring stability and integrity at every level.

🤝 The Dual Lens The two-tier board acts like bifocals: the executive board focuses on short-term operations, while the supervisory board oversees long-term clarity.

🛠️ The Employee Engine Codetermination ensures employees are like well-tuned gears in a machine, driving ethical and operational alignment across levels.

🌈 The Diversity Mosaic Diverse boards are like mosaics—each piece (gender, expertise, nationality) contributes to a cohesive, balanced, and resilient whole.

🌳 The Governance Tree Roots (external institutions) anchor internal structures (branches), supporting the organization’s ethical growth and adaptability.

How can internal structures help organizations to behave in an ethical way, and how is the interplay between internal structures and external institutions? This is what we will talk about in this video.

But first of all, let's have a look at our learning objectives. We want to reflect upon the relevance of internal structures for ethical organizational behavior, and we are exploring and discussing the different functions and forms of the corporate board. In the last step, we are distinguishing between company and plant-level employee codetermination.

Let's take a look at an example first of all, and we will talk about gender equality in German corporate firms and especially in their leadership. There has been a long ongoing debate on equality on boards and equality rights for both sexes. We are talking now about the law implemented in the early 2000s, here early in 2010. There was a discussion ongoing whether we need legislation that talks about corporate leadership and equality of the sexes or gender equality in corporate boards.

Before the law was implemented, there was a discussion about firms whether they do it just because there's a public opinion that there should be a change in boards and board composition. But then, after a while, after this didn't happen from alone, that we observed more equally distributed or composed boards, then legislation came in and gave a rule on board composition and how a board should look like for listed companies in Germany.

Germany's Minister for Women, Family Affairs, Senior Citizens, and Youth, Manuela Schwesig at that time, said that this was really a historic step for equal rights that we have now this legislation. As we can see here, we have rules and norms in countries, external institutions, that inform us how internal structures such as the board should look like. The board then has the internal responsibility to comply or to watch and make sure that the organization complies with corporate governance standards, the law, and so on.

So we see that the internal structures of an organization interplay with the institutions, with the external institutions, to build up corporate governance and ensure that companies behave in an ethical way following moral values in their daily business.

Let's take a deeper dive into the internal structures and the logics behind them, why we want them to be in the way they are, and why we want them to be set up in a way so that we might come up with solutions to potential misbehavior.

There's an agency logic behind. Internal structures should be there in order to secure the interest of the shareholders. Shareholders, what do they want in the end? They want to earn money based on their shares, right? To do so, it's not good if a company is part of a corporate scandal, if there is some inappropriate behavior.

Internal structures of an organization should help to monitor management behavior for shareholders. It should help them and create thereby a disincentive for inappropriate behavior. Therefore, we have some key internal structures. We have a supervisory board that monitors the organization, that monitors management, and we have internal audit units that serve as investigation departments internally. We make sure that shareholders, which are the principals of an organization, really have control about what the agents here, the managers, are doing, so that behavior of the agents follows the interest of the principal, so that we do not have something like hidden action, hidden information, or moral hazard involved here.

But there's also an entrepreneurial logic. It's not only that we want to make sure that the organization follows what the shareholders want, but we also want to ensure that the company survives, right? So that it has long-term commercial viability, and it only has such if it follows legitimate actions that the greater public is okay with. These internal structures guide management behavior and facilitate appropriate and ethical behavior.

While following the agency logic, it's more about disincentive for inappropriate behavior. From an entrepreneurial logic, it's about ethical and appropriate behavior and providing a benefit to do so. Again, the supervisory board here does this not as a monitoring board but more as mentoring. They should help management to make good decisions, good strategic decisions, so that the organization survives.

Also, other key stakeholders such as the employees get a say. They can help socially approved behavior and foster socially approved behavior inside the organization that all employees really can follow. Therefore, we also draw on their experience and expertise that they know the market environment but also know the operations of the firm. We have codetermination rights for employees.

We are talking about the board, the company board, as a key internal structure, and this board has certain functions. It has an executive function, a representative function, a control function, and a trustee function.

Let's look at the executive function first. As an executive, members of the board manage the day-to-day business. They are the ones who allocate responsibilities within the firm, so they can say who is responsible for what and which part of the business is done in which part of our organization.

The representative function, however, is more directed externally because it's about managing external affairs. The board is representing the firm towards third parties, whereas the executive function is more internally. The representative function is towards these external third parties, also with the authority to make decisions.

Then the control function is about supervising management. We want to prevent misuse of power, misuse of power of managers, as well as regarding internal decisions. It's about abuse of employees, for instance, but also externally some scandals like the emission scandal at Volkswagen. We want to really prevent that management uses its power to force decisions and do something that is not appropriate. So we set and monitor corporate goals as part of the control function.

Then the fourth function of the corporate board is the trustee function, and here it's important that the board is advocating and protecting stakeholders' interests. Stakeholders' interest is kind of also the goal, and to meet these interests is the goal of every organization. This trustee function of the corporate board is then securing that these stakeholder interests are met and protected.

Let's have a deeper look at how this board, the corporate board, is defined and also designed. There are two levels of how to distinguish between board models. There's, on the one hand, the one-tier or unitary board model, and on the other hand, the two-tier board model.

The one-tier board model or the unitary board model is exactly what it's stating: the board is in one group. There's a board of directors, like for example with a chairman, the possible CEO. There are a few inside directors or the internal management directors, and there are some outside directors, so external independent directors. This board of directors is elected by the annual general meeting of an organization.

So this one-tier unitary board model is the integration of executive and control function within one board of directors.

Contrary to this one-tier or unitary board version is the two-tier board, and the two-tier board is separating the executive and control functions between two boards. On the one hand, there's the executive board with the CEO, labor director, or other functions, and the supervisory board with a chairman, shareholders, and employee representatives, so the staff. The annual general meeting of an organization is electing the supervisory board, and this supervisory board is then controlling the executive board.

So here, again, contrary to the one-tier board, it's clearly about separating the executive and control functions between two boards.

Let's now have a deeper look at how organizations are differentiating between the one-tier or the two-tier board. We have some numbers here. We can see different countries here and a European average, and we want to have a deeper look at how many companies or what is the percentage in these countries of the unitary board and the two-tier board.

We can see here that, for example, in the UK, 100% of all UK-based organizations have the unitary board. For example, when looking at Bulgaria or Denmark, nearly all of these organizations are following this approach of the unitary board. However, in looking then at the two-tier board, we can see that, for example, in Germany or in Switzerland, 100% of all organizations are following the idea of the two-tier board. In Germany, this is due to legislation because here the two-tier board is mandatory. This is why we have this 100% here.

However, there are also countries like Romania, for example, where there's a mix between 46% of unitary board and 53% of the two-tier board. So in these countries, or also when looking at the European average, there's quite a variety between unitary board organizations and two-tier board organizations.

Of course, there are different advantages and disadvantages of these two models of board types.

Looking, for example, at the advantages of the one-tier board, it is way efficient and fast decision-making through centralization of executive and control functions. As there is just this one unity, of course this can lead to more efficiency and faster decision-making, and of course also to flexibility and quick responsiveness to changes in the environment because there is this one function, this one board that has to act and respond to change.

The disadvantage, however, is that it's potentially greater exposure to misuse of power, disloyalty, and fraud. As there is just one board, power is not differentiated between different boards but lies within one board, and there's no explicit advocacy of internal stakeholders within the board. So here, having the disadvantage of having just one board can, of course, then lead to greater exposure to misuse.

Some examples of organizations that are using the one-tier unitary board idea are, for example, Microsoft, Boeing, Intel, or IBM.

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