Corporate governance refers to the system through which business corporations are led and managed. The corporate governance structure stipulates the distribution of rights and roles among various participants in a corporation like the board, managers, shareholders and other stakeholders.It also defines the rules and processes for decision-making in corporate affairs. Corporate governance is a series of structures that stimulate the self-interested managers of an organization to make decisions concerning the organization’s operation that capitalize onits value to the owners, such as the suppliers of capital. Nevertheless, currently, corporate governance emphasizes more on monetary aspects and the role of Board of Directors (BoD). It has a wider view and is not limited to the function of BoD and management to meet the interest of stakeholders. Apart from the BoD management and investors, other stakeholders include employees, consumers, the society, and the government. The BoD refers to coordinators that are in charge of governing a corporation according to defined values to meet the interest of stakeholders (Kummamuru, 2016).
Several studies and experiential evidence indicate that some essential mechanisms of corporate governance contribute to an organization’s performance improvement by ensuring access to capital markets that raise investor confidence and competitiveness. Application of the principles of corporate governance increases organizations’ transparency, which is a great concern for managers and authorities. Several empirical investigations utilize a single governance variable in determining the relationship between corporate governance and organization performance (Kummamuru, 2016).
An efficient system of corporate governance in terms of assisting in building a high level of confidence and trust is important for appropriate functioning of a market economy. In addition, good corporate governance is a vital element in enhancing the value and performance of a firm from developed and developing economies. For organizations to survive in a global market, improve performance, become more competitive and profitable, attract investors and customers, and raise capital at a lower price, they should implement corporate governance principles and standards in their strategy and decision making process.
In a more globalized, interconnected planet with increased competition, the manner in whichecological, communal, and corporate governance matters are handled is also a concern of organizations’ general administration attribute needed to compete successfully. Companies that perform better with regards to these issues can increase shareholder value byproperly managing risks, anticipating regulatory action or accessing new markets as well as contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on an organization’s reputation and brands, which is an increasingly important part of its value (Kummamuru, 2016).
Systemsof Corporate Governance in Various Countries
The corporate governance codes created by the Organization for Economic Cooperation and Development (OECD) are offered as a standard but every state defines its governance code according to specific economic, organizational culture, ownership system, state intervention in the economy, and financial and capital market (Cosneanu et al., 2013).
Japanese Corporate Governance System
Japan is among the world’s major economies and industrial powers. However, its system of governance has been distinctive and at times controversial in comparison to norms in developed markets in North America and Europe. The Japanese economy and corporate governance system is based on culture and its major regulations are loyalty, obedience, and solving challenges without hurry. In the conditions of the globalized economy, the regulations are not sufficient to create and hold competitiveness for Japanese organizations and the entire economy. In addition, the practice of creating links between the business environment and politics as well as failure to hire foreign managers and concealing negative information from investors is the major source of challenges and loss of trustworthiness faced by several renowned Japanese companies, such as Olyympus, TEPCO and Toyota (Dallas, 2015).
In the Japanese model of corporate governance, capital market is vital to the nation’s economy. There is a small focus on property but the company is considered an independent institution. In addition, the rewards of managerialpersons are not linked to the accomplishments of companies. The Japanese model of corporate governance is very specific and closed and not known to external subjects. Its uniqueness is associated with the culture whereby relations in one family are examples of the basic values like loyalty and discretion, although there are solutions from Western economies. An example is the assurance of long-lasting position and stabilization as the major objective of an enterprise. Therefore, business and politics are connected to enhance a lastingachievement.
The public companies’ law is collected in a document known as New Japan’s Corporation Law from 2005. Initially, corporations were covered by the Yugen Gaisha Law, Chapter 11 of theCommercial Code and Commercial Code Special Corporations Law founded in 1974. The new document was established to modernize the corporate legislation in new conditions of the societal and economic global situation. The Law is aimed at developing the establishment of new companies and allowing flexible corporate management. In addition, the Law provides some resources for mergers and acquisitions and offers new tools for companies to protect against hostile coup bids. The basis of knowledge for the operation of the Japanese model of corporate governance is founded on two codes: the principles of Corporate Governance and the document worked out by the association of pension funds in Japan (Dallas, 2015).
In Japanese capital groups, there are usually intersections of stocks and therefore companies are closely connected. In addition, structures are usually related vertically and strongly integrated. Stakeholders and workers are the main significant groups in companies, which are associated with the policy of long-term employment. In contrast to the Anglo-Saxon model, stockholders do not only expect financial gains from accomplished investments, but also positive linkages with different participants of a capital group. Additionally, the stable foundation of property results inconcentration in the hands of banks and different companies associated with capital. The system of managing the Japanese companies is one-level, and internal employees are only managers in the board of directors.The Japanese capital market contributes a lot to the economy of the nation since it is the largest and the oldestin the Asia-Pacific region. The model disregards the need of the availability of the market of enterprise control since the deals of hostile coups are not common(Dallas, 2015).
Anglo-America Corporate Governance
The Anglo–Saxon or Anglo- American corporate governance model is specific to companies from UK, USA, Hong Kong, Canada,andAustralia. Business organizations that use this corporate governance model have discrete shareholders, a low financial power concentration, to ensure that managers exercise power. The system is based on the control from external capital markets, which are very active and highly developed, influencing their management and trading securities through mergers and acquisition of listed companies. Based on these conditions, the investors’ protection when no main shareholders exist, signify a continuous concern of a marketing controlling institution through corporate governance practices and policies. The shareholders’-oriented system focuses on a stock-exchange model; the evolution in the process of being considered the synthesis of a listed company performancetherefore making sure that all the actors involved, shareholders, and managers optimize their decisions and behaviors (Cosneanu et al., 2013). To examine the Anglo-Saxon corporate governance model clearly, particular management tools are predicted, which are mostly made in the United State but are utilized in the whole world. They include the following:
- A funding indicator- available cash flow
- A performance indicator-establishing stock value or value for shareholder
- An accounting evaluation principle-fair value
- An incentive tool- awards of alternatives to buy shares
- A disciplinary mechanism-coup bids and exchange
Focusing on the above tools, the corporate governance codes distributed after the crisis from the beginning of the century (Sarbanes-Oxley in the USA and New Combined code in the UK)concentrated on solving problems.The challenges were associated with the independence of non-executive directors and auditors from management, empowerment of independent directors, the presence of a single Board of Directors that persistently monitors activity management, and risk minimization in transactions with affiliated parties, due to loyalty abuse by selfish managers (Cosneanu et al., 2013).
The Anglo-Saxon corporate governance model offers the major financial markets the final control function in enterprise performance; it can establish changes that can be made for regaining commercial companies by buying securities. In this system of corporate governance, institutions arise with the creation of social order, which is the result of collective action and cannot be easily attained in latent groups without some level of social cohesion. However, social order can emerge throughthe growth of an unintended thought style within a group that sustains the current social order. People imbed a pattern of social order in theirthoughts, which leads tosteadyorganizations.
The German Corporate Governance System
The German system of corporate governance is specific to organizations in Germany, continental Europe, and Japan. Its major features, unlike the Anglo-Saxon model, are the availability of a firm shareholding system that significantly impacts the management, the business owners (banks), financial investment firms, and other firms that control the company strategy. To reinforce the management of particular shareholders, a limited issue of new shares is involved. Therefore, shareholders with large amounts of shares in these nations are actively engaged in the management of companies by punishing poor quality management, encouraging economiceffectiveness, and harmonizing the interests of a company’s social partners, including its employees. In addition, human capital is regarded to be vital in this form of governance (Cosneanu et al., 2013).
Property stability enhances lasting development strategies and credits, and not the capital market as in the case of the Anglo-Saxon model, which represents the major source of funds. Though banks in these nations may not have large shares in the funded organizations, they highly influence and control their governance system. Therefore, the advantages of the German model include flexible funding of organizations and effective communication between banks and organizations. Strong engagement of banks in the management of organizations offers this system a great stability and priority orientation towards economic development. Nevertheless this corporate governance system has disadvantages, which include failing to protect minority shareholders, financial power concentration and opportunity for dangerous combinations between the economic and financial power.
Nations tend to criticize the German Anglo-American system for its too mercantile character of the firm- administrator relations. The “Sarbanes- Oxley Act” passed in 2002 creates a stricter control of organization managers, involving the consolidation of investors’ (shareholders’) confidence in the business environment. The laws create new standards for the boards of directors, executives, and accounting firms in the U.S. and severe punishments against individuals that invade the law (Cosneanu et al., 2013).
The difference between the Anglo-Saxon and German corporate governance systems is dissimilar relation between the three actors: manager, shareholder, and minority shareholders and their powers. Unlike the European model that disadvantages the minority and the majority shareholder, the Anglo-American system does not discriminate the minority and majority shareholder, promoting greater fluidity to capital flow and greater stock market effectiveness. The majority shareholder function is disregarded in the Anglo-American system through the voting processes enforced to administrators (Managing director). The Anglo-American system alleviates the majority shareholders’ influence in decision- making, having a corporate social responsibility by reducing their risk desire. Therefore, the administration boards of organizations that adapt the Anglo-Saxon corporate governance system usually use personalities outside the business circles like university lecturers (Cosneanu et al., 2013).
A director of an Anglo-Saxon organization is engaged on contract terms whereas the German one obtains a social mandate from the organization. Recently, the trans-Atlantic methodology transfer is issued from West to East so that the European researchers dealing with future developments can prevent abruptreversal of the contract-based method of administrator employment. Moreover,the European commission planned an auction in April 2006 for an investigation to determine the optimum ratio between shareholders and administrators’ power in a listed organization. The auction offered the EU executive important information in decision-making. Consequently, the comparative analysis of the advantages and disadvantages of corporate governance systems in developed nations implies that an organization’s governance system can be improved. Corporate governance systems in the US, Germany, Japan, and UK are among the best in the world and their differences are not important in comparison to the systems of other nations (Cosneanu et al., 2013).
‘CorporateCitizen’ and how it is related to Corporate Governance
Corporate citizenship is a dedication to ethical behavior in an organization’s strategy, operations, and culture. In addition, corporate citizenship has been on the edge of corporate governance and board leadership, mainly associated with corporate reputation. In organizations, corporate citizenship is embedded within their corporate and operational governance with precise roles that handle various aspects of citizenship and sustainability. Effective corporate governance can assist organizations to promote effectual utilization of resources, entice investors, and understand the needs of stakeholders. Therefore, good corporate governance is highly regarded as part of corporate citizenship and is associated with good financial performance. Proper supervision and management assists in reducing risks and increasing shareholder value(Pintea and Fulop, 2015).
Nevertheless, in the current globalized and interrelated world, investors, creditors, and stakeholders understand that environmental, social, and governance roles of an organization are connected to its performance and long-term sustainability. Presently, these aspects assist in determining the benefits of an organization. For organizations to run effectively and maintain growth, boards need to integrate the new aspects into their important decision-making processes.The international financial crisis has increased the need for corporate boards of directors to offer clear strategic guidance and engaged management that entails more than short-term financial performance. These practices help organizations to become corporate citizens and enablethem to handle risks by projecting possible negative impacts on individuals and the environment, and controlling concrete and reputational risks. Good corporate governancecan create wealth by establishing shareholder value through increased business opportunities and wider entree to markets (Pintea and Fulop, 2015).
Organizations have created policies whereby important values that entail human rights, environmental conservation, and anti-corruption measures dictate the board’s administration, relation with the management, and accountability to shareowners. This process is important in enabling organizations to become corporate citizens.
Critical Evaluation of the Coursework Assignment Statement
Establishing aninternational universal system of corporate governance will make sure that companies are considered better corporate citizens and avert the corporate governance scandals that have affected several organizations. Increased corporate scandals and disasters have raised concerns and the need for an efficient corporate governance. The problems were as a result of certain levels of deliberate and irresponsible disregard for an appropriate governance of a corporation. The scandals have raised knowledge and anxiety involving corporate governance in the society, media, administrations, and governing agencies(Alina & Bogdan, n.d).
An important way of handling the issue of corruptionis establishing a worldwide universal corporate governance system. Good corporate governance isaninstrument thatincreases efficiency, enhances access to capital, and promotes sustainability. It is also becoming an efficient anti-corruption tool. In addition, a worldwide universal corporate governance ensures transparency and accountability at a decision-making level to demonstrateclearly the reason and the manner in which decisions are made.
Ethical behaviors of organizations are usually not regarded as a foundation of good corporate governance. However, ethics triggers much of business behavior and current understanding of a business risk indicates that boards are in charge of legal and fiduciary role of managing environmental, social and governance risks. Therefore, the directors need to be knowledgeable and ready to manage the long-term concerns and usual corporate orders. A worldwide universal system of corporate governance also enables boards to address and manage challenges efficiently. This action is important in helping them to position their businesses to succeed financially and obtain a lasting operational license. Acting inappropriatelydamages acompany’s repute.
Many organizations are expanding their internal controls to involve several ethics and integrity issues. The UN GLOBAL COMPACT is the major corporate citizenship and sustainability initiative in the world and many corporations and civil society organizations for severalnations are determined to help align business practices with the universally recommended principles in the areas of humanrights, labor, environment, and anti-corruption (Alina & Bogdan, n.d)
The challenge is ensuring that global and national commitments to anti-corruption and leadership call for anti-bribery at the board level is passed down through the whole company to all employees on the ground in all nations.
In an economy under constant change at national and international level, business sustainability can be enhanced by utilizing a system comprising effectual management, enactment of currentsupervision methods, appropriate motivation of workforce, performance improvement at personal and organizational level, and concentration on outcomes. Because of the currenttendencies on the global market, corporate governance will continue beingthe main concern for the leadership of firms since organizations that implement a clear organizational culture and an effectualgovernance model are able to achieve their goals, whereas the ones that do not do soare likely to experience failure.
The world of business has witnessed cases of corporate failure and severe financial losses arising from weak or lack of corporate ethical cultures and poor governance practices. Like people, organizations do not practice consistent moral behavior. However, with the increasing transparency and accountability in a globalized economy, well-managed, ethical companies obtain clear business benefits in the global market.
Alina, G. and Bogdan, B. (n.d)The role of codes of good practice in corporate governance, The Annals of the University of Oradea, p.681.
Cosneanu, S. Russu, C. Chiriţescu, V. and Badea, L.(2013) Need to implement corporate governance in the Romanian companies, Theoretical and Applied Economics, 18(4 (581)), pp.63-72.
Dallas, G. (2015) Japan’s Corporate Governance Code: a distinctive character, Governance Directions, 67(9), p.567.
Kummamuru, V. (2016) Corporate Governance: A Cybernetic View, IUP Journal of Corporate Governance, 15(2), p.59.
Pintea, M. O. and Fulop, M. T. (2015)Corporate governance-key factor to enhance performance, Knowledge Horizons. Economics, 7(4), p.9.