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Corporate Governance: What is it & Are There Any International Differences?

Corporate governance or control is a different facet from the usual operational management process often led by an organization’s executives.

It is a coordination of governance and control that mandates how a board of directors (BOD) runs and supervises a company.

In a nutshell:

  • It often includes ethics that ensure honesty, responsibility, and security.
  • The approaches to corporate control in the U.S. is different than practices in nations like Germany.

 Shareholder Involvement: A Vital Component of Corporate Control

Maybe the most critical aspect of corporate governance is the involvement of shareholders.

The involvement must happen from two perspectives. Number one is the basic acknowledgment of the shareholders’ critical role in the organization.

These are the investors who buy the firm’s shares and finance its activities. Equity serves as a major funding source for companies.

Two, after the basic acknowledgment, it’s important to involve them by delegating some responsibility.

The practice of letting shareholders handpick the board of directors is important for many reasons. The board’s sole role is to serve in the best interests of shareholders.

The BOD onboard employees and supervises the company executives who control the daily dealings in a firm. This arrangement gives shareholders effectively, have a direct say in the running of a company.

 Transparency

Shareholder involvement is a critical aspect of corporate governance. Stockholders choose to stretch out to the community members who do not hold an interest in the brand but can take advantage of its offerings.

Stretching out to community members opens communication lines with the surroundings encouraging organizational transparency.

In essence, the surrounding community, including news sources, must understand the brand’s goal and how it operates.

The transparency principle allows anyone, whether a member of the firm or not, to review and confirm its practices.

This arrangement cultivates trust and will likely motivate more individuals to support the organization and probably become shareholders.

 Security

Security is another critical role of corporate governance.

Both clients and shareholders want to be sure that their confidential data doesn’t land in unauthorized users’ hands.

It is also of critical importance to keep the organization’s business dealings and trade confidential and secure.

A successful data attack does not only lead to financial losses. It also affects public confidence in the organization and can a negative impact on its stocks.

 International Differences in Corporate Governance

Corporate governance or control is a different facet from the usual operational management process led by an organization’s executives.

The German system of corporate control is a matter of focus because of its robust ownership and large holdings, which are quickly unfolding towards the Anglo-American model of broadly spread ownership.

Therefore, we assess the connection between the ownership structure and the 70 biggest corporations’ performance on the German stock exchange.

We use an exclusive sample of the ownership data collected in an elaborate procedure based on various existing data.

Thus, we find only partisan support for a systematic relation between the ownership structure and performance, to the degree that it rejects Berle and Means’ thesis of an inverse relationship between company performance and diffuseness of the ownership

The United States and Germany are broadly perceived as the world’s most developed prominent economic giants; however, corporate governance trends in these two countries are drastically diversified.

The German two-tier model considers the stakeholder prerogative, decisions, and management in various aspects.

On the other hand, The “Anglo-American” model of a one-tier board system is primarily a contemplation of shareholder primacy’s neo-liberal criteria and open market capitalism.

Regularly, corporations need to retain concise communication on their policy, governance, management, and the general purposes of the business through its stakeholders.

Therefore, this report on corporate control underscores the value of performance through accountability, transparency, and increased adherence to governance principles, structures, and practices to stave off the circumstance of governance issues within organizations.

 Comparison between American and German Boards

Corporate governance theory pacts with the optimal organization of management in corporations with several stakeholders.

Corporate control policies are essentially constructed by national laws, personal and corporate decisions, and capital market requirements.

Thus, differences in German and United States governance standards depict opposing corporate norms and diverse capitalism insights.

 Board Sizes

This is one of the striking differences between German and American boards. United States boards average about ten board members, while German boards are around the extent of 23 members.

However, the literature on board size implies that U.S. corporations should outperform German companies, though this is not certainly the case.

The German boards have fewer independent directors, about 21% on average. Thus it could be that the raised independence of the U.S. one-tier board renders the U.S. system less effective.

Still, it is also possible that Eisenberg’s third criticism is no longer pertinent in light of the changing compensation systems of directors, which aligned corporation achievement with director compensation.

 Stakeholder vs. Shareholder

Furthermore, the most apparent difference in the United States and German boards, aside from size, is composition.

The U.S. boards are overwhelmingly organized by independent directors, which have either managers or financial enterprise members.

By legislation and reflection of the German strategy of codetermination, the German boards are obliged to reserve up to half of the seats on their supervisory board for employees.

Thus, the board composition is contemplative of the opposing paradigms in the U.S. and German corporate governance.

Nonetheless, Germany’s two-tier policy, the ‘Codetermination Act of 1976’ delivers for a supervisory board of about 12, 16, or 20, relying on the company (PWC, 2015).

However, the U.S. belief in shareholder involvement and primacy is indicated in the unitary board structure and board composition.

Therefore, the board is considered an independent supervisor, contrary to a partially representative supervisor of stakeholders as in Germany. The U.S. boards do not retain seats for stakeholders such as employees, as in Germany.

Rather, United States labor rights and different stakeholder interests are regulated by contract and governmental restrictions.

 Independence vs. Representation

In German boards, stakeholder criteria are representative, while the U.S. boards are independent.

The German boards immediately represent stakeholder interest by having stakeholder supervision, as U.S. boards on shareholder interest through maintaining independent oversight.

The German corporate standards of supporting stakeholders over independent directors are reflective of a variety of capitalism, which supports stakeholder input and managerial creativity over independence.

Still, the management boards in Germany that have the obligation of setting corporate policy are almost completely composed of executive directors with subjective relations to the corporations.

 Recommendations per the King Report of Corporate Governance

The report on corporate control gives direction on the applications and performance of governance standards and then practices to strive to mitigate the various concerns within entities.

 Asymmetry of information (transparency)

The occurrence of this governance issue is also guided by Principle 5 of the King report, which recommends that;

“The governing body should ensure that reports issued by the organization enable stakeholders to make informed assessments of the organization’s performance and its short, medium, and long-term prospects.”

 Independence of board members

The occurrence of this governance issue is guided by Principle 8 of the King report, which recommends that;

“The governing body should ensure that its arrangements for delegation within its structures promote independent judgment and assist with balance of power and the effective discharge of its duties.”

And Principle 7 recommends that;

“The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity, and independence for it to discharge its governance role and responsibilities objectively and effectively.

 Risk management

The occurrence of this governance issue is also guided by Principle 11 of the King report, which recommends that;

“The governing body should govern risk in a way that supports the organization in setting and achieving its strategic objectives.”

 Conflict of interest

The occurrence of this governance issue is also guided by Principle 7, which recommends that;

“The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity, and independence for it to discharge its governance role and responsibilities objectively and effectively.”

And Principle 8 of the King report recommends that;

“The governing body should ensure that its arrangements for delegation within its structures promote independent judgment and assist with balance of power and the effective discharge of its duties.”

Conclusion

In conclusion, the board of directors is anticipated to play a key part in assuring corporate governance.

Furthermore, the board has the obligation to present the organization’s policy, elect internal stakeholders, remuneration of executives, and guarantee the corporation’s accountability to its shareholders, investors, and external stakeholders.

Thus, the profitable performance of the proposed practices could help prevent an entity from having to bargain with corporate losses.