External Aspects Of Corporate Governance
Anglo-Saxon corporate governance is a combination of internal control (control through ‘voice’) and external control through ‘exit’. ‘Voice’ is a choice that shareowners have if they are unhappy with the performance of the company in which they have shares. They exercise voice if they express their dissatisfaction attempting to alter management style. ‘Exit’ is a choice that shareowners have if they are unhappy with the performance of the company in which they have shares. To exit, they simply sell their shares. The Anglo-Saxon governance differentiates from the German-Japanese model, which is largely based on ‘voice’, in the role of banks and industrial patterns where most funds are channeled through the banks and they dominate the capital markets. As there are no hostile takeovers, the role of the stock market is not significant as a source of capital.
Information on the volume of successful domestic merger and acquisition transactions for the lower half of the 1980s is given in Table 3(in the Appendix). The market for mergers is much more active in the US and UK than in Japan and Germany. According to Kaplan (1993a), “just over 2% of his sample of large Japanese firms were taken over or merged in the period 1980-1989, [compared with] over 22% of his sample of the large US firms.” (S. Prowse, 1994, page 48). In direct relation to these reports, Franks and Mayer (1992) report that during 2 years in the mid –1980s there were thirty-five successful hostile bids made in the UK. In the USA and UK, the exposure of managers to the threat of takeovers is regarded as the primary means of insuring good performance of organizations. In contrast in Germany, the performance of companies is mainly controlled through institutional mechanisms such as ownership of banks, two-tier boards and co-determination. Therefore, the corporate governance issues around hostile takeovers are largely confined to those countries which have adopted the Anglo-Saxon approach to governance.
In the US, managers tend to forgo medium or long-term interests in order to undertake their short-term interests. On the other hand, in Germany and Japan, there is a limit to the pressure the market for corporate control can release.
A highly liquid capital market sustains the Anglo-Saxon system. The German dependence on bank finance and their lesser use of the capital market is summarized in the following quote by Herr Gottfried Bruder: “ the obsessive preoccupation of the British capital market with the gearing of companies… is quite different from the more relaxed views on gearing in Germany. We regard British companies as historically over-capitalized. By comparison, institutional investors are in Germany insignificant, equity investment plays not nearly as great a role generally, I could not conceive of a German company voluntary depleting its reserves to pay dividends ” (J.P. Charkham, 1994, page 98).
Porter argued that the US has a ‘fluid capital’ system, where institutional investors are impermanent as owners. Their stakes in many companies are divided, as investors; they focus on the profits, which can be made from a particular transaction rather than from the relationship as a whole. When deciding whether to buy or sell their stock, they depend on the limited information available to all outsiders and oriented toward predicting fluctuations in the short-term stock price. In contrast, Japan and Germany have “dedicated capital” systems with permanent owners and are more interested in long-term relationship with the company.
Internal Mechanisms Of Corporate Governance
In the board structure, the Anglo-Saxon model of board specifies the representatives of the owners. In contrast, German co-determination system, board membership is splited between employee and shareholder representatives. In UK and US the board is sole tier, while in Germany there is a two-tier structure with an administrative tier (Aufsichtsrat) monitoring the management tier (Vorstand). In contrast to the UK/USA, the German board it is not seen as an addition to the Chief Executive Officer. Vorstand monitors the ability of its own members. In Japan employee contribution also exists, but it is cultural rather than legal. The typical board has 21 members almost all of who are insiders. By contrast, in the Anglo-Saxon model outsiders control the company boards of directors with little stake in the corporation, besides their shareholdings, meanwhile, in the US it consists of 13 or 14 members and only one third of them are insiders.
The corporate ownership system provides the German a role, but these roles are not as vital as the roles in the UK and US. The German private shareholders do not comprise to huge segment of the market when compared to the Anglo-Saxon companies even though the configuration of shareholdings is similar in Japan to the UK, the character of the institutional shareholdings is diverse because a large amount shareholders in Japan comprises of internal members.
Here, Germany and Japan banks are able to hold equity in companies, although these are restricted to 5% in Japan, and 12% in Germany. In both countries banks have spaces on company boards. By distinguishing, the USA banks are banned from owning any stock on their own account (Glass-Steagall Act of 1933). Bank who own companies cannot own more than 5% of any one firm and their holdings must be reflexive. All entities owning 5% or more of a company must notify the Securities Exchange Commission of ownership and sources of finance. Any stockholder who shows so much control over a firm in the course of shareholdings is probable for the acts of the firm. Insider trading laws daunts investors from holding huge equity stakes and using them for purposes of corporate control, in view of the fact that doing this makes them insiders and hence susceptible to tribunal under the Insider Dealing Act. Similarly, UK banks frequently require the authorization of the Bank of England to obtain shareholdings in surplus of 10% of banks’ capital in non-financial firms. If the shareholdings go beyond 20%, there are negative implications for a bank’s capital adequacy position.
In conclusion, corporate governance issues around hostile takeovers are largely confined to those countries which have adopted the Anglo-Saxon approach to governance.
Basically, the German and Japanese are relationship oriented. The market is not liquid and the ownership is not concentrated while the Anglo-Saxon system differs from it. The Anglo-Saxon system is the reverse.
BIBLOGRAPHY.
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M.M. Blair (1995). Ownership and Control: Rethinking Corporate Governance for the 21st century, Washington: The Brookings Institution.
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J.P. Charkham (1994). Keeping Good Company: A Study of Corporate Governance in Five Countries, Oxford: Clarendon Press.
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N. Dimsdale and M. Prevezer (1994). Capital Markets and Corporate Governance, Oxford: Clarendon Press.
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S.N Kaplan (1997). Corporate Governance and Corporate Performance: A Comparison of Germany, Japan and the U.S., Journal of Applied Corporate Governance, 9(4).
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M. Miller (1994). Is American Corporate Governance Fatally Flawed?, Journal of Applied Corporate Finance, 6 (4).
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R.A.G Monks and N. Minnow (1995). Corporate Governance, Blackwell.
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S. Prowse (1994). Corporate Governance in an International Perspective, BIS Economics Papers, No. 41- July 1994
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D.D. Prentice and P.R.J. Holland (1993). Contemporary Issues in Corporate Governance, Oxford: Clarendon Press.
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E.R. Schneider- Lenne: Corporate Control in Germany, Oxford Review in Economic Policy, 8 (3).
