1. THE ANGLO-US MODEL
it is distinguished by share ownership of the individual, and institutional, investors not affiliated with the corporation; a well-defined legal framework defining the rights and duties of three key players, namely management, directors, and shareholders; and an uncomplicated method for interaction between shareholder and corporation, and shareholders during or outside the AGM.
Equity financing is a common method of raising capital for corporations. So it is not surprising that the US is the largest capital market in the world.
There is a causal relationship between the significance of equity financing, the size of the capital market, and the development of a corporate governance system. The US is the world’s largest capital market and the home of the world’s most-developed system of proxy voting and shareholder activism by institutional investors.
Key Players in the Anglo-US Model:
It comprises management, directors, shareholders, government agencies, stock exchanges, self-regulatory organizations, and consulting firms that instruct corporations and shareholders on corporate governance and proxy voting.
The three important players are management, directors, and shareholders. They form what is commonly referred to as the "corporate governance triangle."
The Anglo-US model that is developed within the context of the free market economy, implies the separation of ownership and control in most publicly-held companies. This significant legal distinction serves an important business and social purpose: investors contribute capital and maintain ownership in the enterprise while avoiding legal liability for the acts of the corporation, by ceding to management control of the corporation and paying management for working as their agent by undertaking the affairs of the corporation. The expense of this separation of ownership and control is defined as “agency costs”.
The attention of shareholders and management may not always occur simultaneously. Laws governing companies in countries using the Anglo-US model attempt to harmonize this conflict in several ways. They specify the election of a board of directors by shareholders and expect that boards act as fiduciaries for shareholders’ interests by supervising management on behalf of shareholders.
2. The Japanese Model
It is characterized by a high level of stock ownership by related banks and corporations; a banking system distinguished by strong, long-term links between bank and company; a legal, public policy and industrial policy framework constructed to assist and promote “keiretsu”; boards of directors comprised almost solely of insiders; and a low or non-existent level of input of outside shareholders, caused and aggravated by tricky procedures for exercising shareholders’ votes.
Equity financing is vital for Japanese corporations. But insiders and their associates are the main shareholders in most Japanese corporations. They play an important role in individual corporations and the system as a whole. The interests of outside shareholders are marginal. The proportion of foreign ownership of Japanese stocks is small, but it may serve an important factor in making the model more responsive to outside shareholders.
Key Players in the Japanese Model:
It is many-sided, centering around the main bank, and a financial or industrial network or "keiretsu". The major bank system and the keiretsu are different, yet coinciding and interrelated elements of the Japanese model.
Nearly all Japanese corporations have a close relationship with the main bank. The bank delivers its corporate client with loans and services associated with bond issues, equity issues, settlement accounts, and relevant consulting services. The main bank is a major shareholder in the corporation.
Japanese corporations have strong financial relationships with a network of connected companies. These networks, distinguished by cross-holdings of debt and equity, trading of goods and services, and informal business contacts, are recognized as keiretsu.
The government-directed industrial agreement plays a key role in Japanese governance. Since the 1930s, the Japanese government has sought an active industrial policy constructed to assist Japanese corporations. This policy comprises official and unofficial representation on corporate boards when a company faces financial complications.
The four key players are the main bank (major inside shareholder), affiliated company or keiretsu (major inside shareholder), management, and the government. Note that the interchange among these players serves to link relationships rather than balance powers.
3. The German Model
Banks carry long-term stakes in German corporations, and bank representatives are elected to German boards. But this representation is consistent.
Germany’s three largest extensive banks that provide a diversity of services play a major role; in some aspects of the country, public-sector banks are also key shareholders.
There are three unique elements of the German model. Two of these elements refer to board composition and one concerns shareholders’ rights. First, this model specifies two boards with separate members. German companies have a two-tiered board structure comprising of a management board and a supervisory board. The two boards are entirely distinct where no one may serve simultaneously on a firm’s management board and supervisory board. Second, the size of the supervisory board is set by law and can't be altered by shareholders. Third, voting right restrictions are legal; these limit a shareholder to voting a specific percentage of the corporation’s total share capital, regardless of share ownership position.
Most German corporations have preferred bank financing over equity financing. This results in the German stock market capitalization is small to the size of the German economy. Also, the level of individual stock ownership in Germany is low that reflects the Germans’ cautious investment strategy. It is not shocking that the corporate governance structure is geared towards conserving relationships between the key players, the banks, and corporations.
The system is somehow uncertain towards minority shareholders, enabling them to scope for interaction by authorizing shareholder proposals, but also permitting companies to impose voting rights regulations. The percentage of foreign ownership of German equity is substantial. This factor is gradually starting to affect the German model, as foreign investors from inside and outside the European Union start to support their interests. The globalization of capital markets is also urging German corporations to change their ways. These accounting beliefs provide much bigger financial transparency than German accounting standards.
Key Players in the German Model:
German banks, and corporate shareholders, are the key players in the German Corporate Governance Model. Banks play a diverse role as shareholders, lenders, an issuer of equity and debt, depository, and voting agent at AGMs.
In Germany, businesses are also shareholders, sometimes holding long-term interests in other companies, even where there is no industrial or commercial association between the two.
The required inclusion of labor or employee representatives on larger German supervisory boards differentiates the German model from both the Anglo-US and Japanese models.
do you feel one structure encourages good corporate citizen behaviour more than others?
thanks for sharing!