Two-tier system
One-tier system


Traditionally, one and two-tier corporate governance systems have evolved from the corporate law of England and Germany, respectively. Under the English model, a company is governed by one corporate body that undertakes both the management and monitoring functions (the one-tier board system). Under the German model, two separate bodies operate independently: the board of directors and the supervisory board (the two-tier board system).

Under Hungarian corporate law, public companies limited by shares may operate under either a one-tier or two-tier system. The main provisions are regulated in the Companies Act (Act 4/2006). By introducing a legal basis for the one-tier system in 2006, the Hungarian regime was brought into line with that of several other western European countries and with EU Regulation 2157/2001 on the statute for a European company, which also provides the option of the one or two-tier system.

Two-tier system

Under the two-tier system, the board of directors and the supervisory board exist side by side. The board of directors conducts the day-to-day management of the company, while the supervisory board conducts supervisory functions. The board of directors exercises its rights and performs its duties as an independent body. The board of directors must comprise at least three members and no more than 11; it will elect its chairman from among its members. The deed of foundation may provide that the chairman of the board will be appointed directly by the shareholders' meeting. The board exercises its rights and performs its tasks as a body in connection with all management issues of the company, whereas all board members may represent the company personally.

In general, Hungarian corporate law sets forth a list of issues that fall within the exclusive competence of the supreme body of the company, although this list may be supplemented by the company's deed of foundation. All issues not falling within the exclusive competence of the supreme body by virtue of law or by provision of the deed of foundation will fall under the competence of the management body.

The Companies Act further lists issues for which boards of public companies limited by shares are specifically responsible if the company's shares are listed on the Budapest Stock Exchange. The board will prepare an annual responsible governance report that must be approved by the shareholders' meeting and published on the company's website. Further, the board must comply with the regular and extraordinary information obligations under the Capital Market Act.

For the purpose of monitoring the company's management, the members of the company are obliged to elect a supervisory board. The supervisory board also acts as an independent body and its members may not be instructed in this capacity by shareholders or by the employer. The supervisory board may:

  • inspect company documents;
  • request statements and explanations from members of the board of directors or employees; and
  • inspect the state of the company's assets.

The supervisory board must comprise at least three members and no more than 15.

One-tier system

If a company operates under the one-tier board system, this must be laid down in its deed of foundation. Under a one-tier system, the company is governed by a unified board performing both management and supervisory functions (thus, there is no separate supervisory board).

Generally, under a one-tier system, the board will comprise at least five members and no more than 11. The maximum number may be increased by the deed of foundation to ensure employee participation.

The majority of the board will be independent members, although the deed of foundation may require a higher percentage. The main aim of such independence is that the unified board can carry out its supervisory functions objectively. The Companies Act provides that a person qualifies as independent only if he or she has no legal relationship with the company other than board membership. When electing board members, the shareholders' meeting will ensure that the independence conditions are met.

Since 2006 – when the one-tier system was introduced – few public companies limited by shares have chosen to operate under this structure in Hungary; the two-tier system is still far more common.

For further information on this topic please contact Boglárka Szánthó at Nagy és Trócsányi by telephone (+36 1 487 8700), fax (+36 1 487 8701) or email ([email protected]).