Key Models of Corporate Governance: Insights and Comparisons

Introduction to Corporate Governance Models

• In every country, the corporate governance structure has certain characteristics or constituent elements, that distinguish it from other countries' structures. It may surprise you to learn that there are various kinds of Corporate Governance Models.

There are mainly 4 models of corporate governance:-

1. Anglo-American Model
2. Japanese Model
3. German Model
4. Indian Model

• The above four models- the Anglo-American, Japanese, and German- are considered main models. In addition, we will also discuss the Indian Model of Corporate Governance.

Corporate Governance Models:

Anglo-American Model

• This model is an Outsider Model. It is also known as the "Anglo-Saxon Model" or "Anglo-US Model". This model is the basis of Corporate Governance in the U.S.A, UK, Canada, Australia, and some commonwealth countries. This model emphasizes the interests of shareholders. The Anglo-American Model of Corporate Governance's primary feature is the protection of shareholder interests.
• The main Key Players in this model are:- (1) Management (2) Directors (3) Shareholders. A "Corporate Governance Triangle" is formed by these three.
• Under this model, there is a separation of ownership and control. Here, investors contribute capital and maintain ownership in the enterprise. They are entitled to elect each and every member of the Board, which controls the company's management.
• The cost of this separation of ownership and control is defined as "agency costs". Important decisions are placed on the vote of the shareholders in the Anglo-US system, which depends on efficient communication between the board, management, and shareholders.
• Shareholders are the owners of the company and if they want, they can stop funding the company. So, the main focus of this theory is to satisfy the shareholders and protect their interests. The most powerful tool at their disposal when dealing with managers is shareholder funding.

Anglo-American Model of Corporate Governance

Japanese Model

• This model is also known as the Business network model. The Key Players in the Japanese system are:- (1) the Bank (2) the Keiretsu (3) the Management (4) the Govt.

1. BANK:- provides loans and works as a major shareholder of the company by underwriting the unsubscribed shares.
2. KEIRETSU:- is a Japanese term referring to a business network made up of different companies including manufacturers, supply chain partners, distributors, etc.
3. MANAGEMENT:- manage the activities and functioning of the company.
4. GOVT.:- influence the management of the company through policy and regulations.

• Inside shareholders and inside directors play a significant role in the company. While outside shareholders and outside independent directors play an insignificant role in the company.
• There are few genuinely independent or outside directors and outside shareholders have little or no control in the matter. Even the Board of Directors is also made up entirely of insiders.
• Open lines at the top represent the non-linked interests of the two. While the four connecting lines represent the linked interests of the four.
• An open-ended hexagon can be used to represent the Japanese Model of Corporate Governance:

Open-ended Hexagon of Japanese Model

German Model

• This model is also known as the "Continental European Model" or "Two-tier Board Model". It consists of two Boards:- (1) Supervisory Board and (2) Management Board. It is utilized in several nations, including France, Germany, and the Netherlands.
• It is believed that workers are one of the key stakeholders in the company and they should have the right to participate in the management of the company along with the shareholders.
• Under the German Model of Corporate Governance, fifty percent of the members of the supervisory board are elected by the shareholders while the other fifty percent are appointed by the labor unions.
• Under this system, employees and labor are not just the stakeholders but they enjoy a share in governance.

German Model of Corporate Governance

Indian Model

• This model is a mix of Anglo-American and German Models. This is because, in India, there are three types of Corporations:- Private Companies, Public Companies, and PSUs (including Statutory Companies, Govt. Companies, Banks, etc.).
• Each of these corporations has a distinct pattern of shareholding. This model focuses on both aspects:- (1) To protect the interest of the shareholders and (2) To elect the Board of Directors to manage the functioning of the company.
• In the Indian Model of Corporate Governance, the shareholders elect a Board of Directors to monitor the running of the company on their behalf. The Board, in turn, appoints a team of managers who handle the day-to-day functioning of the company and report periodically to the Board.
• Thus, managers are the agents of the shareholders and function to maximize shareholder's wealth.

Conclusion

We can infer from the information above that there are essentially four types of corporate governance: the Japanese model, the Indian model, the German model, and the Anglo-American model. Under the Anglo-American Model, the primary objective is to protect shareholder interests. Inside directors and shareholders are very important to the Japanese model corporation. However, outside independent directors and stockholders have little influence over the business. According to the German Model, labor unions appoint half of the supervisory board members, while shareholders elect the remaining half. In contrast, the Indian model places equal emphasis on two key areas: (1) safeguarding shareholder interests; and (2) choosing the Board of Directors to oversee the company's operations.