Models of Corporate Governance

Different models define corporate governance in Germany and the U.S.:  the U.S., the Anglo-American Corporate Governance Model and the German Model, also referred to as the two-tier board model. The figures below illustrate the differences between the German model and the Anglo-American Model.

Figure 1: The German Corporate Governance Model Source: O’Reilly (2020)


Figure 2: The Anglo-American Model Source: O’Reilly (2020)

3.4 Shareholder Theory of Corporate Governance (Anglo-American Model)

            The Anglo-American model of corporate governance accords shareholders rights and importance. Under the model, shareholders can elect members of the board to direct management. The model adopts unique features that include the following: the model is shareholder-oriented and is similar to the Anglo-Saxon model practised in the U.K., Australia and other commonwealth countries. Under the model, directors are not independent of management. Professionals, often with negligible ownership stake run the company. This model has a clear distinction between management and ownership and allows outside investors such as mutual funds and portfolio investors. These investors are allowed to exit the ownership of the company should the company’s success fail to match their expectations. Under this model, there are strict rules against insider trading and the disclosure of norms is highly discouraged. Overall, this model protects small investors from large investors as the latter are discouraged from taking up leadership roles. (Order Customer Paper from us)

The German corporate governance model is not as comprehensive as the American -also referred to as the European Model, the model values employees over investors. Here, employees are allowed and have the right to participate in the company’s leadership. The model allows for the management of the company through two boards, the supervisory board and the board of management. The former is elected by shareholders, who also elect representatives for the supervisory board who constitute half of the board. The board of management then appoints and monitors the management board and report to the supervisory board. The supervisory board has the right to dismiss the board of management and constitute another.

3.5 Stakeholder Theory of Corporate Governance (German Corporate Governance Model)

            Shareholder theory refers to organizational management and ethics (Keay, 2010). The author contends that the theory has evolved as scholars attempt to confront weaknesses and develop new aspects of the theory. In essence, the theory addresses the purpose of a company with its normative, descriptive and instrumental aspects. Under normative aspects, Keay (2010) posits that the theory explains the moral basis on how shareholders should be treated and that shareholders should be perceived as “ends and not means.” Optimally, shareholders are valuable to any enterprise and should be involved in the management of the company. The legitimacy of this claim “disagrees with shareholder primacy that managers should run corporations primarily for the shareholder’s and ensure that their wealth is maximized” (Bert, 2005). Meanwhile, the descriptive aspect of stakeholder theory explains corporate behaviour. The theory provides a framework that enables the examination of the correlation between a company’s performance and stakeholder management. The theory is primarily concerned with examining how stakeholders could improve a company’s efficiency and overall performance. Lastly, the convergence approach combines instrumental and normative aspects (Jones and Wicks, 1999). (Hire Essay Writer for a similar paper)

Among the four, the normative aspect is the core of the shareholder theory. This study focuses on this aspect, for it considers the potential of contributors to an organization. Ideally, all those who contribute to the organization should benefit. Hence, instead of the organization working to maximize shareholder’s value only, based on the theory and particularly the normative aspect of the theory, it should create value for stakeholders. This assertion is supported by the fact that an organization has the mandate to be accountable and benefit its stakeholders. Unlike shareholders, stakeholders view the company as a means of receiving services and as a coordinator of the various stakeholders. Such an enterprise is often concerned with the damages the external environment has on the entity (Orts and Strudler, 2002). By considering shareholder primacy or externalizing, managers retain benefits to shareholders and transfer organizational costs to stakeholders. This occurs when, for instance, a company lays down employees for it to have enough to pay its shareholders and to retain cash as a means of influencing the share price, thus benefiting shareholders and management.

3.6 Maximizing Shareholder Value

            Theories on shareholder maximization form fundamental principles taught in business schools. This is despite contention and criticism by authors such as Smith (2014) who argue that the belief is unfounded and that “shareholders should be at the back of the line.” However, the justification for the need to maximize shareholder value results from the need to enhance corporate efficiencies and achieve broader social development and wealth generation. According to Hansmann and Kraakman (2001), “The point is simply that now, as a consequence of both logic and experience, there is a consensus that the best means to this end (that is the pursuit of aggregate social welfare) is to make managers strongly accountable to shareholder interests.” Thus, the more significant majority of the population encourages the concept of shareholder value maximization. The criticism of shareholder wealth maximization has resulted in the near elimination of the practice as the elite engage in politics and thus fail to ensure the practice benefits the masses. The “trickle-down effect,” as explained by Bughin and Copeland (1997), is a “vicious cycle,” one dictated over by capitalism and corporate greed. However, perhaps there is a need for proof that corporate governance enhances social structures and improves society. There is also a need to show that corporate governance enhances innovation entrepreneurship though the philosophy of shareholder value maximization “downsize and distribute,” and “retain and reinvest.”


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