Models of Corporate Governance

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A corporation in the UK or US is usually headed by a CEO.
A corporation in the UK or US is usually headed by a CEO. (Image: businessman image by Christopher Hall from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Corporate governance is the process by which large companies are run. There are various different models that are applied across the world. There is disagreement over which is the best or most effective model as there are different advantages and disadvantages with each model. Methods are developed according to the laws and other factors specific to the country of origin.

Anglo-US Model

The Anglo-US model is based on a system of individual or institutional shareholders that are outsiders of the corporation. The other key players that make up the three sides of the corporate governance triangle in the Anglo-US model are management and the board of directors. This model is designed to separate the control and ownership of any corporation. Therefore the board of most companies contains both insiders (executive directors) and outsiders (non-executive or independent directors). Traditionally, though, one person holds the position of CEO and chairman of the board of directors. This concentration of power has led many companies to include more outside directors now. The Anglo-US system relies on effective communication between shareholders, management and the board with important decisions being put to the vote of the shareholders.

Japanese Model

The Japanese model involves a high level of ownership by banks and other affiliated companies and "keiretsu," industrial groups linked by trading relationships and cross-shareholding. The key players in the Japanese system are the bank, the keiretsu (both major inside shareholders), management and the government. Outside shareholders have little or no voice and there are few truly independent or outside directors. The board of directors is usually made up entirely of insiders, often the heads of the different divisions of the company. However, remaining on the board of directors is conditional on the company's continuing profits, therefore the bank or keiretsu may remove directors and appoint its own candidates if a company's profits continue to fall. Government is also traditionally influential in the management of corporations through policy and regulations.

German Model

As in Japan, banks hold long-term stakes in corporations and their representatives serve on boards. However they serve on boards continuously, not just during times of financial difficulty as in Japan. In the German model, there is a two-tiered board system consisting of a management board and a supervisory board. The management board is made up of inside executives of the company and the supervisory board is made up of outsiders such as labor representatives and shareholder representatives. The two boards are completely separate, and the size of the supervisory board is set by law and cannot be changed by the shareholders. Also in the German model, there are voting right restrictions on the shareholders. They can only vote a certain share percentage regardless of their share ownership.

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