A Critique of the Anglo-American Model of Corporate Governance

There is a developing literature comparing different models of capitalism from alternative analytical
frameworks highlighting the strengths and weaknesses of diverse forms of capitalism, and the prospects
for institutional diversity when confronted with growing pressures for international economic
integration.This paper examines how different varieties of capitalism produce different levels of
inequality. Specifically how the Anglo-American variant of corporate governance in its US manifestation
afforded CEOs of large corporations inordinate power and wealth, and the consequences of this for
inequality in wider society. Arrogation of an increasing share of the wealth of corporations by CEOs
impacts upon relationships with other stakeholders and displaces CEOs objectives. The significance is
that this is precisely the model of capitalism that is being propagated vigorously throughout the world.
This dynamic induced the present international financial crisis, in which investment bank executives were
massively incentivised to pursue vast securitization and leverage which hugely enriched themselves, but
caused the collapse of financial institutions worldwide, the violent instability of financial markets,
substantial damage to the real economy, and impacted severely on the employment security and living
standards of working people.

German corporate governance criticism

The German system of corporate governance has traditionally been characterized by the important role
that large shareholders and banks play, a two-tier board structure with labour participation on the
supervisory board of large companies, the absence of hostile takeovers, and a legal framework based on
statutory regulations deeply rooted in the German doctrine. Another distinctive feature of the German
regime is the efficiency criterion that corporate governance is to uphold. Whereas in Germany (as well as
in many other Continental European countries and Japan) the definition of corporate governance
explicitly mentions stakeholder value maximization, the Anglo-American system mostly focuses on
generating a fair return for investors. Because of its idiosyncratic configuration, German corporate
governance has been labelled “Deutschland AG” or “Germany Inc.”.

Recently, Germany has however witnessed a number of financial operations that do not fit well with this
description. We can mention here the initial public offering of Deutsche Telekom AG, the successful
hostile takeover of Mannesmann by Vodafone, and the cross-border merger between Daimler Benz AG
and Chrysler Corp. The introduction of voluntary regulations such as the Takeover Code of 1995 and the
Corporate Governance Code of 2002, however limited, is another major change. Last but not least, there
is evidence that listed German firms are progressively applying the principle of shareholder value. All
these events call into question the “Deutschland AG” paradigm. They have also generated an extensive
debate. Hence, the question that arises is whether the German system of corporate governance has indeed
changed some of its basic features and whether these changes have resulted in a certain degree of
convergence of the German system towards the Anglo-American, market-centred system.

This paper aims at answering this question by providing an exhaustive review of the literature. In detail,
we describe the various alternative mechanisms that theory suggests ensure economic efficiency and
summarise the empirical evidence on Germany. In particular, we examine the role of the control structure,
the board, creditor monitoring, the market for (partial) corporate control, and product market competition
as corporate governance devices. We also discuss changes in the legal framework. The picture that
emerges from our analysis is not substantially different from “the stereotypical view of German finance”
(Jenkinson and Ljungqvist 2001, p. 397). However, we also find that some of the features that underlie
this view do not exist anymore (e.g. the use of voting caps and multiple voting shares).

A Critique of the the Japanese corporate governance model

The Japanese model brings, as a new, the holding concept, which designates industrial groups consisting
of companies with common interests and similar strategies. The managers’ responsibility manifests itself
in relations with shareholders and keiretsu (a network of loyal suppliers and customers). Keiretsu
represents a complex pattern of cooperation and also competition relationships, characterized by the
adoption of defensive tactics in hostile takeovers, reducing the degree of opportunism of parties involved
and keeping long term business relationships. Most Japanese companies are affiliated with this group of
trading partners. The characteristic pattern of governance is dominated by two types of legal
relationships: one of co-determination between shareholders and unions, customers, suppliers, creditors,
government and another ratio between administrators and those stakeholders, including managers. The
necessity of the model results from the fact that the activity of a company should not be upset by the
relations between all these people, relationships that generate risks. Management decisions pursue
improving the income and power of an enterprise, in particular by specific corporate governance
practices, although sometimes the shareholders control on the management can be hampered. Therefore,
the Japanese model (similar to the German one) is based on internal control; it does not focus on the
influence of strong capital markets, but on the existence of those strategic shareholders such as banks. As
in Germany, major shareholders are actively involved in the management process, to stimulate economic
efficiency and to penalize its absence. It is also aims to harmonize the interests of social partners and
employees of the entity. The Japanese governance system facilitates the monitoring and flexible financing
of enterprises, effective communication between them and the banks, as the main source of financing
consists in bank loans. It should be noted that the owners are other companies or even banks, control the
management strategies; ownership is always oriented to the control.

A Critique of the Family-based and other systems of Corporate Governance in Asia7

In this context, the key issue in governance is the problem of monitoring the
family businesses. We can distinguish between two phases of growth of the family
business here. In phase one the family businesses are financed internally. Since the
owners are also the managers in most cases and there is no outside financier, there is
no agency problem and self-monitoring is effective. However, later the family
businesses usually borrow from banks and raise capital by issuing stocks. At the same
time, even with large doses of external finance, under the prevailing FBS type of
governance the family groups still control the governance aspects (including the
decision to hire and fire management and in many cases the selection of members of
board of directors). Clearly, under such circumstances there is an asymmetry of
information between the outside financiers and the inside owner-managers. This will
usually lead to both an adverse selection and a moral hazard problem.9 With the
emergence of these problems, agency costs will rise as the share of outside financing
rises under the FBS type of governance. Under these circumstances the FBS type of governance,
unless improved through appropriate reforms, will lead to inefficiencies in production and
mismanagement of assets. There could be managerial slack, inappropriate
diversification of businesses and other types of unproductive managerial behavior.

Hong Kong SAR probably illustrates the reform of FBS type of governance in
Asian economies the best. In spite of gradual reforms, the predominance of family-
control even in large corporations leaves no room for doubt that the governance
structure is still heavily dominated by families. In a survey by the Hong Kong Society
of Accountants (1997) it was found that fifty three percent of all listed companies
have one shareholder or one family group of shareholders owning fifty percent or
more of the entire issued capital. Seventy seven percent of all listed companies show
one shareholder or one family group of shareholders owning thirty five percent or
more of the entire issued capital. Finally, if one looks at the 25% or more level, the
extent of control by one shareholder or one group of family shareholders rises to 88
percent. Although the board of directors does not always have a majority of family-
connected directors, the influence of large shareholders from families is still
considerable