**5. Models of corporate governance**

Historical circumstances, social, legal, and economic conditions form a specific model of corporate governance in each country, and those models vary in participants, legal framework, reporting systems, etc. According to some common features, all models can be divided into three types: Anglo-American, German (Western European), and Japanese.

Anglo-American model, called sometimes as an outsider model, is characterized by heavy sparsity of the capital and a tendency to increase in outsider shareholders, which are not connected to the corporation. The model is market-oriented and aiming at the exceptional satisfaction of shareholders' interests. As in an outsider model, there are a huge number of shareholders with tiny shares, and mostly the decisions are made by the manager.

Japanese and German models can be called as insider models, as the ownership rights are distributed among insider participants, which are somehow connected to the corporation, and own relatively big shares. Consequently, the relationships between shareholders are extremely important; the main goal for the insider model is not only to maximize the shareholders' benefit but also to maximize the welfare of other stakeholders.

However, the existence of different models of corporate governance does not solve the underlying issues on ensuring financial return on investments, the conflict between long-run and short-run interests, between management and directors, between different business strategies of investors, etc.

#### **5.1. Anglo-American model**

• The board is responsible for creating, following, and improving, if needed, the corporate strategy, long-terms plans, risk policy, budgeting and financial planning, monitoring and evaluation of the company's performance, overseeing potential emerges, acquisitions, and

• The board's functions are electing and replacing, guiding and monitoring the CEO activities. • The board members should identify and eliminate the possible conflict of interest of the board members, top managers, shareholders, and stakeholders as well as issues on misuse

All the abovementioned principles are required for efficient performance of corporate governance, transparent mechanism of cooperation, and interactions of all participants of corporate governance as shareholders, managers, and stakeholders. At the same time, some issues on implementing those principles can appear in countries with developing or transitional economies, as an uncompleted and still-forming legal system of a country that consists of contradicting rules on corporate governance or even does not include any. As a rule, there are some "gray" gaps (uncertain regulation norms) in the legislation of those countries that are suitable for unfair managers to misuse the current law, that, in turn, makes difficult to develop an efficient corporate governance framework. The solution can be found only in a steady improvement of the legislation in accordance to vital needs of corporations rather than

Historical circumstances, social, legal, and economic conditions form a specific model of corporate governance in each country, and those models vary in participants, legal framework, reporting systems, etc. According to some common features, all models can be divided into

Anglo-American model, called sometimes as an outsider model, is characterized by heavy sparsity of the capital and a tendency to increase in outsider shareholders, which are not connected to the corporation. The model is market-oriented and aiming at the exceptional satisfaction of shareholders' interests. As in an outsider model, there are a huge number of

Japanese and German models can be called as insider models, as the ownership rights are distributed among insider participants, which are somehow connected to the corporation, and own relatively big shares. Consequently, the relationships between shareholders are extremely important; the main goal for the insider model is not only to maximize the share-

three types: Anglo-American, German (Western European), and Japanese.

holders' benefit but also to maximize the welfare of other stakeholders.

shareholders with tiny shares, and mostly the decisions are made by the manager.

capital expenditures.

8 Corporate Governance and Strategic Decision Making

of corporate assets.

politically beneficial changes.

**5. Models of corporate governance**

**4.1. Discussion**

Anglo-American model is used in the United Kingdom, the United States of America, Canada, Australia, New Zealand, etc., and characterized by the absence of dominant shareholders; the share capital is divided between numerous participants with the average share around 2–5%; consequently, no one can demand the special rights or privileges among shareholders. Additionally, the majority of shares belongs to institutional investors as mutual and pension funds; this type of shareholders plays the role of financial managers, which do not want to be presented in the board and, as a rule, do not take any responsibility for the overall efficiency. The continuous change among shareholders is common for this model, as owning a small share makes the selling process easier, comparing to the owning of a significant share. Thus, the American and English stock markets are well known for their high intensity and liquidity [7–9].

The board of directors' functions are:


#### *5.1.1. Discussion*

One of the features of the model (see **Figure 2**) is the limited influence of shareholders as they own small shares; they have a right to vote for changes in a corporation's charter, to select and dismiss auditors and directors, which operate the company on behalf of shareholders (owners), to agree strategic decisions as merging and acquisition. Moreover, they do not have a right to select or dismiss a CEO and influence on operating activities of a company.

The existence of the board of directors is a key for this model of corporate governance, as the board is selected by all shareholders and represents the shareholders' interests. As a rule, the board consists of insiders and outsiders; an insider is a person who works in a corporation or connected to management of a company; an outsider is a person or an organization that is not related to a company and invited to provide specific functions; an outsider does not seek any personal benefit.

**Figure 2.** The structure of Anglo-American model of corporate governance.

According to the Anglo-American model, the key role in a company's management is played by the CEO, who makes all decisions on business activities; the CEO even can arrange a committee or committees if needed and appoint members, in addition, it is required to include the CEO in the board of directors.

#### **5.2. German model**

German model of corporate governance is used in Germany, Austria, and Switzerland; some elements of this model are used in the Netherlands, Belgium, and France.

The structure of the model is illustrated in **Figure 3**, and specific features of this model are:


#### *5.2.1. Discussion*

According to the Anglo-American model, the key role in a company's management is played by the CEO, who makes all decisions on business activities; the CEO even can arrange a committee or committees if needed and appoint members, in addition, it is required to include the

The board of directors Shareholders

Elecon

Reporng

(owners)

Stakeholders (employees, suppliers, creditors, communies, government)

German model of corporate governance is used in Germany, Austria, and Switzerland; some

The structure of the model is illustrated in **Figure 3**, and specific features of this model are:

**2.** a tight relationship between banks and industries, which leads to integration of manufacturers with financial institutions and establishing an industrial and financial conglomerate;

**3.** banks participate not only by financing projects but also by selecting representatives to

**4.** including the representatives from employees and labor unions to the supervisory board;

**6.** existence of two boards, a managing board consisting of managers (insiders) and a supervisory board consisting of representatives of shareholders and employees (insiders and outsiders);

elements of this model are used in the Netherlands, Belgium, and France.

**5.** clear division of managing functions into monitoring and operation;

**1.** a corporation's share capital is highly concentrated;

Ocers, managers

Leadership and internal control of operang acvies

Company

**Figure 2.** The structure of Anglo-American model of corporate governance.

Accountability

perform within the supervisory board;

CEO in the board of directors.

Appointment and control

10 Corporate Governance and Strategic Decision Making

**5.2. German model**

According to German model of corporate governance, shareholders have more rights and responsibilities on distribution of net profit, dividend payments, confirming the decisions made by a supervision board and a managing board, election of supervision board members, and appointment of auditors.

**Figure 3.** German model of corporate governance.

The legal and social system of Germany modifies the model of corporate governance and emphasizes the essential need to take into account the interests of not only shareholders but also the employees; the ability to represent employees in a supervision board provides better communication and identifies mutual goals. In addition, the share capital, as a rule, is formed by financial institutions rather than by private investments, that shifts the key negotiation process from shareholders to financial institutions. The functions of shareholders, presented in Anglo-American model, are partly transferred to supervision board's functions in German model.

#### **5.3. Japanese model**

In Japanese practice of doing business, it is common to form industrial and financial conglomerates, where a big financial institution is combined with an industrial company; consequently, in the structure of corporate governance, the representative of a big financial partner (a bank) is included (see **Figure 4**). A corporation's structure is characterized by a common (industrial and financial) usage of loan and share capital, informal channels of communication and sharing information, and cross shareholdings.

Most Japanese corporations do not involve any outsider board members, as a rule; the board of directors consists of representatives of a company and main shareholders. In addition, the government plays an important role in the management as well; the government is involved in strategic planning and ensures the representation (formal or informal) of its interests in a board of directors. A corporation's goals are formed for the satisfaction of shareholders' needs accompanied with promoting governmental interests. It is crucial for a Japanese model of corporate governance to build up new business connections rather than to balance the interests of shareholders as it was for Anglo-American model [7–9].

According to Japanese model, shareholders are responsible for making divisions on


#### *5.3.1. Discussion*

First, Japanese model of corporate governance insures the same direction of all corporations' development as representatives of the government have a right to participate in the board of directors' performance and making decisions process. Second, as corporations in Japan have

**Figure 4.** Japanese model of corporate governance.

The legal and social system of Germany modifies the model of corporate governance and emphasizes the essential need to take into account the interests of not only shareholders but also the employees; the ability to represent employees in a supervision board provides better communication and identifies mutual goals. In addition, the share capital, as a rule, is formed by financial institutions rather than by private investments, that shifts the key negotiation process from shareholders to financial institutions. The functions of shareholders, presented in Anglo-American model, are partly transferred to supervision board's functions in German

In Japanese practice of doing business, it is common to form industrial and financial conglomerates, where a big financial institution is combined with an industrial company; consequently, in the structure of corporate governance, the representative of a big financial partner (a bank) is included (see **Figure 4**). A corporation's structure is characterized by a common (industrial and financial) usage of loan and share capital, informal channels of communica-

Most Japanese corporations do not involve any outsider board members, as a rule; the board of directors consists of representatives of a company and main shareholders. In addition, the government plays an important role in the management as well; the government is involved in strategic planning and ensures the representation (formal or informal) of its interests in a board of directors. A corporation's goals are formed for the satisfaction of shareholders' needs accompanied with promoting governmental interests. It is crucial for a Japanese model of corporate governance to build up new business connections rather than to balance the interests

According to Japanese model, shareholders are responsible for making divisions on

First, Japanese model of corporate governance insures the same direction of all corporations' development as representatives of the government have a right to participate in the board of directors' performance and making decisions process. Second, as corporations in Japan have

model.

**5.3. Japanese model**

12 Corporate Governance and Strategic Decision Making

**1.** dividend payments,

**2.** distribution of net profit,

**4.** appointment of auditors,

**5.** changes to the charter,

*5.3.1. Discussion*

**3.** election of the board of directors,

**7.** directors' and auditors' benefits, etc.

tion and sharing information, and cross shareholdings.

of shareholders as it was for Anglo-American model [7–9].

**6.** emerges and acquisitions, a corporation's reorganization,

a form of financial and industrial conglomeration, the representatives of the main financial institution are included to the board of directors and can participate in its performance as well. The mentioned features are the key exceptions of Japanese model in comparison to others.
