Company structures can vary depending on the country’s legal framework. Lithuania and the United Kingdom (“UK”), despite both being European nations, have distinct approaches to corporate governance, particularly regarding the roles and responsibilities of boards.

This article covers the key differences between a Lithuanian management board and a UK board of directors.

Structure and Roles

Lithuania

The Lithuanian Company Law allows for a two-tier board system, but it’s not mandatory. Companies can choose a one-tier system with just a Management Board. This board is responsible for the day-to-day decisions and strategic direction of the company. 

In a two-tier system, a separate Supervisory Board (in the Law on Companies it’s called a Supervisory Council) is responsible for:

• Monitoring the performance of the Management Board: This includes reviewing financial statements, strategic plans, and overall company direction. The Supervisory Board ensures the Management Board is making sound decisions for the company’s long-term success.
• Ensuring compliance with regulations: The Supervisory Board makes sure the company operates within the legal and ethical frameworks set by national and industry regulations.
• Appointing and removing members of the Management Board: The Supervisory Board selects qualified individuals to lead the company’s operations. They also have the authority to remove Management Board members if performance is lacking or compliance issues arise.
• Mediating between stakeholders: The Supervisory Board can act as a bridge between different stakeholders in the company, such as shareholders, employees, and creditors.

This two-tier structure aims to create a clear separation of duties and promote good corporate governance.

United Kingdom

The UK operates under a single-tier board system. The Board of Directors holds all the executive and non-executive directors, collectively responsible for the company’s strategic direction, performance, and financial well-being.

Collectively, the Board of Directors in the UK system is responsible for:

• Setting the company’s strategic direction: They define the long-term goals and objectives for the company’s growth and profitability.
• Overseeing the company’s performance: The board monitors financial results, operational efficiency, and adherence to regulations.
• Ensuring the company’s financial well-being: The board makes decisions on capital allocation, investments, and dividend payouts to shareholders.

This single-tier system emphasizes combined leadership and accountability, with both executive and non-executive directors working together to guide the company’s success.

Composition

Lithuania

Size: The Management Board is designed to be a lean decision-making body. By law, it must have at least three members, but companies can choose to have more depending on their size and complexity.

Composition: Only natural persons, meaning individual human beings, can be members of the Management Board. This excludes legal entities like other companies from holding board positions.

Election Process: Shareholders hold the ultimate power in electing the Management Board members. However, if a Supervisory Board exists in the company structure, it assumes the responsibility of electing the Management Board.

General Manager (CEO): Unlike some other countries, the General Manager, also referred to as the CEO, is not automatically a member of the Management Board. The board itself has the authority to appoint and remove the General Manager, ensuring a clear separation of duties and fostering accountability.

This structure aims for a focused and agile Management Board that can make swift decisions while maintaining clear lines of responsibility within the company.

United Kingdom

Size and Composition: The UK system offers more flexibility in terms of board size and composition compared to Lithuania’s Management Board. There’s no legal minimum or maximum number of directors, allowing companies to tailor the board to their specific needs. However, best practices often recommend a board size that allows for effective discussion and decision-making, typically ranging from five to twelve directors.

Executive Directors: Companies can appoint executive directors who hold senior management positions within the company and are directly involved in day-to-day operations. This allows for a close connection between strategic decisions and their implementation.

Non-Executive Directors: Non-executive directors, also known as independent directors, are crucial for bringing objectivity and external expertise to the board. They are not directly involved in the company’s management and can provide a critical and independent perspective on strategic decisions. The presence of non-executive directors also promotes good corporate governance by holding executive directors accountable for their performance.

The balance between executive and non-executive directors on a UK Board of Directors can vary depending on the company’s size, industry, and specific circumstances. However, having a healthy mix of both types of directors is generally considered a best practice for effective corporate governance.

Accountability

Lithuania

The Management Board, along with its individual members, operate under a strict duty of care and loyalty. This means they are held accountable for their actions and decisions, with significant consequences for breaches of this duty. Here’s a breakdown of these key principles:

• Duty of Care: Board members must act with due diligence and care, similar to how a prudent person would manage their own affairs. This includes:
  • Making informed decisions: Gathering and analyzing all relevant information before making strategic choices.
  • Exercising good judgment: Applying sound business judgment and considering potential risks and benefits of decisions.
  • Following the law and regulations: Ensuring the company operates within the legal framework.
• Duty of Loyalty: Board members must act in the best interests of the company as a whole, not just for the benefit of themselves or specific shareholders. This includes:
  • Avoiding conflicts of interest: Disclosing any personal interests that could conflict with their duties as board members and abstaining from decisions where such conflicts exist.
  • Protecting company assets: Acting responsibly and safeguarding the company’s resources from misuse or waste.
  • Promoting long-term sustainability: Making decisions that consider the company’s long-term viability and success, not just short-term gains.

Consequences of Breaches:

If the Management Board or individual members breach their duty of care or loyalty, they can face significant repercussions, including:

• Personal liability: They may be held personally liable for any damages caused to the company by their actions or omissions.
• Removal from the board: Shareholders or the Supervisory Board (if one exists) can take legal action to remove them from their positions.
• Reputational damage: Breaches can cause significant reputational harm to both the board members and the company itself.

By upholding these duties, the Management Board ensures they are acting responsibly and ethically, fostering trust from stakeholders and contributing to the company’s long-term success.

United Kingdom

The Board of Directors in the UK operates under a principle of collective accountability to the shareholders, who are the company’s owners. This means the board is ultimately responsible for the company’s performance, financial health, and strategic direction. Shareholders have the power to:

• Vote on board decisions: For certain significant decisions, such as major acquisitions or changes to the company’s capital structure, shareholders have the right to vote and approve the board’s proposals.
• Elect and remove directors: Shareholders hold the power to elect directors to the board and, in extreme cases where performance is lacking or misconduct occurs, can vote to remove directors through a process called a “no confidence” vote.
• Take legal action: If shareholders believe the board has breached its duties, they may take legal action to hold them accountable.

Personal Liability for Individual Directors:

While the board functions as a unit, individual directors can also face personal liability for breaches of their duty. Here are some common situations where this might occur:

• Negligence: If a director fails to exercise reasonable care and skill in their decision-making, leading to losses for the company.
• Misfeasance: If a director uses their position for personal gain or acts in a way that harms the company.
• Breach of trust: If a director discloses confidential information or acts against the best interests of the company.

These are just some examples, and the specific grounds for holding directors personally liable can vary depending on the circumstances. However, the potential for personal liability serves as a strong incentive for directors to uphold their duties and act responsibly in the best interests of the company and its shareholders.

Additional Considerations

Shareholder Representation: Lithuanian boards don’t have a legal requirement to include representatives beyond shareholders. UK boards, while not mandated, may consider including stakeholders like employees or creditors.

Listed Companies: Both countries have stricter regulations for boards of publicly listed companies to ensure transparency and good corporate governance.

In Conclusion

Understanding the key distinctions between Lithuanian management boards and UK boards of directors is crucial for businesses with operations in either country or those considering expansion into these markets. Here’s why:

• Compliance: Ensuring your board structure adheres to the legal requirements of the jurisdiction you operate in is essential. Failing to do so can lead to legal ramifications and hinder your business activities.
• Effective Decision-Making: The structure of your board directly impacts how decisions are made within your company. The two-tier Lithuanian system, with a separate Supervisory Board for oversight, can be beneficial for larger, more complex companies where strong governance is paramount. The UK’s single-tier Board of Directors might be more suitable for smaller, faster-paced businesses where streamlined decision-making is a priority.
• Risk Management: The composition of your board also plays a role in managing risk. Lithuanian boards, with a focus on separating duties between management and oversight, can be effective at mitigating operational risks. UK boards, with a mix of executive and non-executive directors, can foster a culture of accountability and strategic risk assessment.

Tailoring Board Structure for Success:

The optimal board structure for your company depends on several factors:

• Company Size and Complexity: Larger, more complex companies often require a more robust governance framework, potentially favoring a two-tier system like Lithuania’s. Smaller companies might find a single-tier board, like the UK system, to be more efficient.
• Industry and Regulatory Environment: Certain industries or heavily regulated sectors might have specific requirements for board composition or oversight functions. It’s crucial to consider these factors when choosing a board structure.
• Risk Profile: Companies with a higher risk profile, due to factors like rapid growth or innovative technologies, might benefit from a board structure that emphasizes risk management and independent oversight.

By carefully considering these aspects and the specific needs of your business, you can make an informed decision about which board structure (Lithuanian management board or UK board of directors) will best support your company’s success in its chosen jurisdiction.

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