Comparison of the Us, Uk and Other European Models

Up to now no specific world-wide common understanding or single definition for “corporate governance” has been established. More generally, corporate governance can thus be understood as the totality of all national and international regulations (e.g. Sarbanes-Oxley Act), rules, values and principles (e.g. UK’s “Code of best practices”) that apply to businesses and determine how they are steered and monitored. Corporate governance can be complex and includes mandatory and voluntary measures such as the adherence to laws and regulations, the follow accepted standards and recommendations, as well as the develop and compliance with a company’s own corporate guidelines. Another aspect of corporate governance is the design and implementation of management and control structures. Ensuring good corporate governance contributes to the long term success: Avoid:

 Corporate Fraud (eg. Longtop)
 Accounting Scandal (eg. Enron)
 Excessive compensation (eg. CEO Bonus)
Gain:
Premium on market price
Sustainable growth
Investors’ trust and shareholder value

While building a corporate governance system the assumption is reigning that the separation of owner and management creates an “agency problem” that needs to be solved. Corporate Governance in the U.S.

The US model of cCorporate gGovernance, also referred to as the Anglo-Saxon model is shareholder-centric. Thus the model is built to ensure that the interest of the owners in the goal of the company’s operations although the owner might not steer the business himself. The Board of Directors as the committee that supervises the executive operations is the most important controlling mechanism. It is comprised of company executives, founder or founder family, representatives of big investors (e.g. Hedge Fund) and independent directors. Labor union and mutual funds are typically not on the board of directors in the U.S. model. An independent director according to NYSE rules and Sarbanes-Oxley Act is a non-executive director who has no material interests in the company other than their directorship and who’s judgment is thus objective. Independent auditors can’t have any economical or personal interconnection with the business concerned. Note that NYSE requires a listed company to have a majority of independent directors.

The board of directors typically forms committees to work on specific topics. One of the columns of the U.S. model is thus the audit committee of the board of directors. This committee is keeps up close communication towith external auditors. These external auditors report to the audit committee of the board of directors and ensure the integrity of published financial statement. Thus auditors are an integral part of Corporate Governance by providing information to the investors.

Comparison U.S. Model and UK Model
The U.S. and the U.K. model of corporate governance show many similarities e.g. both are sharetakeholder centricfocused. However, the main differences that make the U.K. model a bit freer in terms of adopting suggested regulation due to legal obligation are summarized underneath:

Whereas the U.S. model gives clear rules for minimal requirements to be met by listed companies the U.K. model is more focused on providing guidance and explanation if the advises are not adopted. In 2002 e.g. the institutional shareholders committee of the U.K. suggested that institutional investors in the UK should take more advantage of their rights and show more engagement. In exchange however, institutional shareholders may also disclose why they will not interfere and what their procedures for corporate governance interference are. Corporate Governance: A European Topic

Whereas the duties of directors show strong similarities in all corporate governance systems their obligations are different and thus the structure of supervisory bodies. The U.S. and the U.K. model follow in general the principle of shareholder value that has been criticized recently to have lack a long-term perspective and favor short term profit over sustainability. In Europe the idea of stakeholder focus as a contra position of corporate governance as a shareholder approach is popular, also due to the tradition of countries such as Germany, Switzerland and Spain to follow the French system of civil law. In this tradition values such as employment and the idea that a business has not only an obligation to its investors but also to society, its employees, the environment and the government is apparent. Comparing to UK Code, the German code e.g. was established as legislation and is much less flexible. Germany mandated a two tiered board structure that clearly separates executive leadership functions from the supervisory functions.

As the German system emphasizes on the preservation of jobs, labor representatives have a strong influence on the boards and are granted a stable 50% of seats for large companies (listed or < 2000 employees). Also banks and insurance companies have historically more presence in the board of German corporations due to the complicated credit structures after the German unification. Until now offering seats to the house bank is a custom that is seen to ensure corporation and control over the reasonability of businesses operations/ investments. Processes in the German system are defined or need to be defined mandatorily by the company. Whereas the southern European countries have developed systems more similar to the German and the French idea of Corporate Governance, the Netherlands – a traditional trade nation, with a large service sector and only limited labor intensive production – are more oriented to the Anglo-Sachsen model.

There is even a unique breed of organization, called British-Dutch Company, which operates under a joint, stakeholder-oriented charter of the UK and the Netherlands. In contrast, the Scandinavian countries such as Norway show an even stronger regulatory influence of the government on the composition of the supervisory bodies with a stress on employee participation and women in the board of directors. Economists like to use the maturity and orientation of the capital market as a reason for the different orientations of the European models. Countries that have a lively equity market are seen to be more likely to follow a shareholder approach as countries that have strong depth markets. At European level, the European Commission has to consider the best method to align the member states regulation. In October 2004, a “European Corporate Governance Forum” has been set up, which aims to promote the convergence of national corporate governance codes and advise the Commission.

In April 2011, the Commission presented the Green Paper “European Corporate Governance Framework” and hereby various innovations, particularly in the area of shareholder participation and the appointment of directors with the goal of reducing the short-term thinking of the share-holders on one hand and on the other hand revolutionize the structure of the Board of Directors with regard to the introduction of a quota for women and other diversity measures.

The Commission’s proposals are controversial among experts. In particular, the inclusion of a diversity clause in the Code is , in the opinion of many experts, a violation of the principle of subsidiarity, because the Commission is heavily intruding member state structures, for which there is no basis for authority.

Overall, there is an agreement that action is needed in the area of corporate governance. Accordingly, future legal changes are expected.