Carla I. Koen. Comparative International Management
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Learning Objectives
By the end of this chapter you will be able to:
understand the concept of corporate governance
appreciate the differences between the shareholder and stakeholder models of
corporate governance
provide a societal explanation for the differences between these two corporate
governance models
evaluate the position of the Japanese model of corporate governance vis-à-vis
the shareholder and stakeholder models
understand the European difficulties in arriving at one European model of
corporate governance
assess the differences between corporate governance issues in large, small
and medium-sized companies
appreciate the link between the concept of corporate social responsibility and
corporate governance
reflect on the effects of globalization forces on corporate governance systems.
Chapter
6
Comparative
Corporate Governance
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Chapter Outline
6.1 Introduction
6.2 Corporate Governance: a Societal Explanation of Major Capitalist Models
The Anglo-Saxon model
Case: Haier’s Purpose
The Rhineland model
Case: Grohe AG
The Japanese model of corporate governance
Case: Corporate Governance in Russia
Corporate governance systems in western Europe
Case: Parmalat
Case: Corporate Governance in China
6.3 Conclusions
Study Questions
Further Reading
Case: Barings
Case: Ahold
References
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6.1 Introduction
The literature on corporate governance originates in the USA and the UK, and was
initially concerned with a fairly narrow set of issues: how can shareholders monitor and
motivate management to act in their interests (the agency problem) – that is, how to
improve ‘shareholder value’ through increasing share price (Vitols, 2001). In this
context, effective corporate governance rests on two pillars:
1. the ability of owners to monitor and, when required, intervene in the operations of
management, and
2. the vigour of the market for corporate control, which should vest the monitoring task
in those owners most capable of carrying it out.
From the mid-1990s onwards, corporate governance has become a fiercely debated
topic in the comparative management literature. This literature aims to understand the
existence of international variations in corporate governance and tries to explain the
impact of these differences on the competitive performance of firms. This literature takes
a broad view of the relationships involved in governing companies. It distinguishes
between two different models of corporate governance for which different terms are used
interchangeably in the literature:
1. the shareholder, outsider or market-based model, also called the Anglo-
Saxon model, in which the maximization of ‘shareholder value’ is the primary goal
of the firm and only shareholders enjoy strong formalized links with top manage-
ment, and
2. the stakeholder, insider or bank-based model, also called the Rhineland
model, in which a variety of firm constituencies – including employees, suppliers
and customers, and the communities companies are located in – enjoy having a say
in the firm, and whose interests are to be balanced against each other in management
decision-making (Aoki, 1999).
The term market-based refers to the fact that, within the system, the financial needs of
firms are fulfilled through the capital markets. The term outsider refers to the fact that the
locus of corporate control and monitoring resides in the disciplines of capital markets.
The model presumes that information flows are relatively good and that the regulatory
system requires ample disclosure of information, enforces strict trading rules and allows
a market in corporate control (via hostile take-over) to flourish. The model is based on
liquid stock markets (or stock markets in which there are sufficient numbers of listed
shares and share trading) and diversification of portfolios (see Table 6.1).
The contrasting stakeholder, or insider, model relies on the representation of specific
interests on the board of directors, which is expected to play a strong monitoring and dis-
ciplining role with regard to management. Management discipline via securities markets
is often weak in this model. There is often concentrated shareholding, with cross-holdings
among companies being fairly common. Another feature of the ‘insider’ or stakeholder,
model is that securities regulators often permit asymmetric information policy and are
not overly concerned about the rights of minority shareholders. The term bank-based
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refers to the fact that firms generally turn to banks rather than capital markets for finance
(see Table 6.1).
In addition, the comparative management literature often treats corporate gover-
nance as a facet of the more general debate about the evolution of the different models of
capitalism. In this context, scholars have claimed that one or the other corporate gover-
nance model is economically superior and that, over time, we should see convergence
towards this model of ‘best practice’. The shareholder, or outsider, model was heavily crit-
icized in the early 1990s for its tendency to under-invest and focus on short-term results
(Porter, 1990). At present, however, the majority view is that the shareholder model will
prevail due to the globalization of capital markets and the growing power of institutional
investors (Lazonick and O’Sullivan, 2000, cited in Vitols, 2001: 337). (We discuss these
issues at length in Chapter 12.)
For a number of reasons, comparative corporate governance debates often take place
within the contours of the cultural–institutional or societal approach used in this book.
First, corporate governance issues can fruitfully be examined within the framework of the
approach as it helps to explain the differences between different countries. As governance
structures and systems initially developed, differing institutional and cultural factors
caused them to vary. Divergent paths resulted in multiple governance forms. The ‘insti-
tutional clusters’ concept of coordinated market economies (CMEs) and liberal market
economies (LMEs), which are discussed in Chapter 1, provide a broader institutional
context within which stakeholder and shareholder models of governance, respectively,
can be discussed.
Moreover, within the cultural–institutional approach, the corporate governance
regime itself is perceived as an institution, which helps to explain the comparative insti-
tutional advantage of firms. Indeed, some firms appear to view differences in corporate
governance as an untapped source of competitive advantage. As part of their efforts to
create superior value in this changing global environment, they are adopting structures
and mechanisms from different governance systems.
For example, Ford Motor Company has adopted extensive cross-ownership rela-
tionships through equity holdings, acquisitions, alliances and research consortia,
practices common in the Japanese keiretsu. German firms such as DaimlerBenz,
COMPARATIVE CORPORATE GOVERNANCE 257
Table 6.1 Differences between the ‘shareholder’ and ‘stakeholder’ models
Shareholder model
• financial needs of firms fulfilled through the market
• locus of corporate control and monitoring resides in the disciplines of the market
• assumption of perfect information flows
• effective regulatory system
• model is based on liquid stock markets and diversification of portfolios
Stakeholder model
• financial needs of firms are fulfilled through bank finance
• monitoring and control function resides in the dual-board system
• concentrated shareholding and thus illiquid markets
• regulators often allow for asymmetric information flows
• rights of minority shareholders are not always protected effectively
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Deutsche Telecom and Hoechst have altered their financial disclosure practices to
gain access to American financial markets (Rubach and Sebora, 1998).
Finally, since the societal approach stresses the embeddedness of national institu-
tions, as well as the possibility of ‘complementarities’ between different combinations of
these institutions, the approach hypothesizes that different responses to international-
izing capital markets, other than convergence, are possible. Companies may respond very
differently to similar sorts of pressure, and distinct sets of ‘best practice’ contingent on the
national context may emerge (Vitols, 2001: 338–9). As already suggested, this argument
is discussed in Chapter 12.
This chapter applies this broad approach to corporate governance by examining the
interaction between corporate governance aspects in large, small and medium-sized firms
and national institutions in different countries in the context of internationalizing capital
markets. In the absence of a theoretical link between culture and corporate governance
aspects, the focus here is on the impact of formal institutions on the corporate governance
aspect. Since governance institutions are embedded in the societal, cultural effects can be
conceived of as largely reflected in the choice of formal institutions. It could, for instance,
be assumed that the lower a country scores on the uncertainty avoidance index of
Hofstede, the more it will be market-orientated. Capital market investments entail risks,
which risk-averse nations would arguably want to avoid as much as possible.
Against this background, the next section relates the discussion on the two major
capitalist corporate governance models – the shareholder (or Anglo-Saxon) versus stake-
holder (or Rhineland) models – to the institutional approach through an analysis of the
major corporate governance features influencing postwar company decision-making in
advanced countries. At the same time, these features together are seen as comprising the
broad definition of corporate governance used here:
the structure of ownership of companies
the relationship between management and the various stakeholders in a company
the structure of management or top management institutions (i.e. unitary or two-
tier boards), and
the method of bringing about corporate restructuring.
The in-depth explanation of the two main models is followed by an analysis of the
Japanese model of corporate governance, which is argued to be similar to the Rhineland
model. Next, the Russian model of corporate governance is discussed in the form of a case
study. The subsequent section is devoted to continental European models, which are vari-
ants of the two main models. The analysis in the two sections shows that differences
between the advanced and transitional nations in the aforementioned corporate gover-
nance features stem from differences in key societal institutions – that is, from differences in
governmental regulation
the character of the financial system
corporate law, and
cultural values.
The second section concludes with a case study on Chinese corporate governance
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and financial reforms. The chapter further discusses the major strengths and weaknesses
of the two main corporate governance models. At the same time, a summary is provided
of the discussion on the direction of change in the two main models. While doing so, an
examination is made of the widespread view that, since international capital markets are
increasingly dominated by diversified portfolio investors (such as mutual funds
1
and
pension funds) seeking higher returns, companies must adopt the shareholder model or
be starved of the external capital needed to invest and survive (Vitols, 2001: 338).
Finally, in view of the recent upsurge in interest in corporate social responsibility
(CSR), the link with corporate governance issues is discussed, where appropriate,
throughout the chapter. Simply put, corporate social responsibility can be defined as the
duty of organizations to conduct their business in a manner that respects the rights of
individuals and promotes human welfare.
One of the main types of CSR process is stakeholder management (Wood, 1991).
When implemented, this process helps to keep the firm abreast of, and to address success-
fully, stakeholder demands. Stakeholder issues are concerns of importance to the groups
that can directly or indirectly affect or be affected by the firm’s activities (Clarkson, 1995).
To an ever greater extent, it seems, corporations are being called upon to respond to the
needs of ‘stakeholders’ other than investors. Yet, this strong interest in CSR comes, ironi-
cally, at a time when investors all over the world – many of them large institutions with
the capacity and will to topple underperforming CEOs – are escalating their demand that
corporations maximize shareholder returns.
The movement for better and more responsive corporate governance seeks to ensure
that managers act in the best interests of their shareholders. Compensation of top cor-
porate officers is linked more closely to share prices than ever before (see Chapter 5 for
more information on this topic). The steady improvement in corporate profitability over
the last few years is due, at least in part, to restructurings that have resulted either in
layoffs or in diminished wages and benefits (Reich, 1998). While there are many questions
with respect to whether and how companies should be responsible in some way in society,
the focal point here is whether there is a new meaning for CSR that is consistent both with
the greater need for corporate responsiveness to employees and communities, and with
the greater demands from investors for performance. The cases at the end of this chapter,
dealing with the Barings and Ahold scandals, should be seen in this light.
6.2 Corporate Governance: a Societal
Explanation of Major Capitalist Models
While there is a range of different modes of corporate governance systems in advanced
economies, as indicated, two offer clear and distinctly different forms: the shareholder, or
outsider, model (also referred to as the ‘Anglo-Saxon’ form of corporate governance) and
COMPARATIVE CORPORATE GOVERNANCE 259
1
Mutual funds are collective investments, run by fund managers. For example, if a small investor has, say, 2000
euros to spend on equities, there are two choices. The money can be spent on just one or two companies’ shares
or spread widely over ten companies’ shares. In the first case, the risk is great if one company performs badly. In
the second case, with 200 euros spent on each share, the dealing costs are discouragingly high. The answer may
be to put the money into mutual funds.
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the stakeholder, or insider, model (referred to as the Rhineland model.) The first is domi-
nant in the Anglo-Saxon cluster of countries, including the USA, the UK, Ireland,
Australia and Canada. Rhineland capitalism is attributed to Germany, Japan and conti-
nental European countries.
The problem with this distinction between the two main systems is that it does not
express the variations that exist between the systems that are classified as ‘insider’. Each
of the continental European systems has, to a different extent, some elements of the out-
sider system. For example, the Netherlands, Sweden and Switzerland, three countries
considered to have insider systems, have a relatively large number of domestic listed
companies and a high stock market capitalization (see below). Comparing Germany and
Japan as examples of the insider system is also rather problematic. Both might have some
similar mechanisms of corporate control, but their dissimilarities are even greater. The
corporate governance systems of continental European countries and Japan could
perhaps best be positioned somewhere on a continuum between the Anglo-Saxon model
with its strong emphasis on shareholder value and the Rhineland model with its attention
to broader societal needs.
By providing an analysis of the Anglo-Saxon, the Rhineland, and the Japanese cor-
porate governance models, this section illustrates how difficult it is to generalize about
corporate governance systems. Recent changes in corporate governance aspects are high-
lighted throughout the section, which concludes with a case on Russia, to illustrate the
problems that countries in transition experience in setting up a reliable corporate gover-
nance system.
The Anglo-Saxon model
Capital markets and regulation
Broadly speaking, the Anglo-Saxon corporate governance model is based on a system that
places emphasis on equity finance for business. This means that companies issue shares or
bonds rather than relying on bank loans for fulfilling their financial needs. Capital
markets tend to be large and regulated in a manner favourable to trading in equities.
Large, diversified and efficiently functioning stock markets are argued to develop when sup-
ported by complementary institutions, such as the legal protection of small shareholders
and maximum limits on the shareholdings of financial institutions (Roe, 1994). These are
typically institutions that are characteristic of the Anglo-Saxon model.
As in most countries, and akin to the Rhineland model of finance, small firms in the
US and the UK rely on bank lending to make investments. The large firm model in
Germany and Japan, on the other hand, is converging towards the Anglo-Saxon model.
As will become clear later on in this section, the main differences between the two models
are found in the medium-sized firm segment.
The structure of ownership
In the Anglo-Saxon model, companies do not generally hold each other’s stocks. In other
words, unlike in Germany and Japan, one does not find extensive cross-shareholding.
Also, unlike the case in Germany and Japan, financial institutions rarely hold stock issued
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