In different countries, the term of "corporate governance" has different meanings.
· In Anglo-Saxon countries such as the US and UK the term refers to whether firms pursue the interests of shareholders.
· In other countries such as Japan, Germany and France, the term often refers to whether firms are operated in the interests of a wider set of stakeholders, including employees and customers as well as shareholders.
In the U.S. and U.K. it is widely agreed that firms’ objective should be to create wealth for shareholders. In many other countries such as Japan, Germany and France, there is no such consensus. Japan is perhaps the most extreme example. Instead of focusing on the narrow view that firms’ should concentrate on creating wealth for their owners, corporate governance is concerned with ensuring that firms are run in such a way that society’s resources are used efficiently by taking into account a range of stakeholders such as employees, suppliers, and customers, in addition to shareholders. With imperfect markets this broad objective can potentially make everybody better off compared to just focusing on the shareholders’ interests (see Allen and Gale, 2000).
In Japan, managers do not have a fiduciary responsibility to shareholders. The legal obligation of directors is such that they may be liable for gross negligence in performance of their duties, including the duty to supervise (Scott, 1998). In practice it is widely accepted that they pursue the interests of a variety of stakeholders (see, for example, Allen and Gale, 2000).
Corporate Governance Differences in Practice
1. The Board of Directors
In the U.S. and U.K. the board of directors is elected by the shareholders. It consists of a mix of outside directors and inside directors who are the top executives in the firm.
The size of boards is roughly the same in the U.S. and the U.K. and is usually around 10-15 people (Chinese firms have much smaller boards than U.S. firms). In the U.S. a majority are typically from outside the firm while in the U.K. a minority is external. The size of Japanese boards is much larger than in other countries. The nominations of individuals for positions as a director are essentially controlled by the company's CEO.
2. Executive Compensation
One of the most important differences between the U.S. and other countries is the level and structure of executive compensation. Executives in the U.S. are paid much more on average and a greater proportion of their compensation is performance related. This is true even relative to the U.K. and particularly relative to Japan. Senior executives in Japan are among the lowest paid in the world and relatively little is tied to the stock price of the company
3. The Market for Corporate Control
There are three ways in which the market for corporate control can operate. These are proxy contests, friendly mergers and hostile takeovers.
A very significant difference between U.S. and U.K. on the one hand Japan on the other is that hostile takeovers are almost unheard of in Japan whereas they are common in the U.S. and U.K. Historically, cross-shareholdings were put in place by many Japanese companies to prevent hostile takeovers. Although these cross-shareholdings have been reduced significantly in recent years, they remain a formidable barrier.
4. Concentrated Holdings and Monitoring by Financial Institutions
The importance of equity ownership by financial institutions in Japan and Germany, and the lack of a market for corporate control in these countries have led to the suggestion that the agency problem in these countries is solved by financial institutions acting as outside monitors for large corporations. In Japan, this system of monitoring is known as the main bank system. It has been widely argued that this main bank relationship ensures the bank acts as delegated monitor and helps to overcome the agency problem between managers and the firm. However, the empirical evidence on the effectiveness of the main bank system is mixed (see, for example, Hoshi, Kashyap and Scharfstein, 1991, and Aoki and Patrick, 1994). Overall, the main bank system appears important in times of financial distress, but less important when a firm is doing well.
New trends
Corporate monitoring by main banks was almost disappeared.
Continuous and increased pressure from capital markets
§ New type of profit-oriented shareholders
§ Exit or voice as a strategy by the shareholders
§ More and more M&As
· In Anglo-Saxon countries such as the US and UK the term refers to whether firms pursue the interests of shareholders.
· In other countries such as Japan, Germany and France, the term often refers to whether firms are operated in the interests of a wider set of stakeholders, including employees and customers as well as shareholders.
In the U.S. and U.K. it is widely agreed that firms’ objective should be to create wealth for shareholders. In many other countries such as Japan, Germany and France, there is no such consensus. Japan is perhaps the most extreme example. Instead of focusing on the narrow view that firms’ should concentrate on creating wealth for their owners, corporate governance is concerned with ensuring that firms are run in such a way that society’s resources are used efficiently by taking into account a range of stakeholders such as employees, suppliers, and customers, in addition to shareholders. With imperfect markets this broad objective can potentially make everybody better off compared to just focusing on the shareholders’ interests (see Allen and Gale, 2000).
In Japan, managers do not have a fiduciary responsibility to shareholders. The legal obligation of directors is such that they may be liable for gross negligence in performance of their duties, including the duty to supervise (Scott, 1998). In practice it is widely accepted that they pursue the interests of a variety of stakeholders (see, for example, Allen and Gale, 2000).
Corporate Governance Differences in Practice
1. The Board of Directors
In the U.S. and U.K. the board of directors is elected by the shareholders. It consists of a mix of outside directors and inside directors who are the top executives in the firm.
The size of boards is roughly the same in the U.S. and the U.K. and is usually around 10-15 people (Chinese firms have much smaller boards than U.S. firms). In the U.S. a majority are typically from outside the firm while in the U.K. a minority is external. The size of Japanese boards is much larger than in other countries. The nominations of individuals for positions as a director are essentially controlled by the company's CEO.
2. Executive Compensation
One of the most important differences between the U.S. and other countries is the level and structure of executive compensation. Executives in the U.S. are paid much more on average and a greater proportion of their compensation is performance related. This is true even relative to the U.K. and particularly relative to Japan. Senior executives in Japan are among the lowest paid in the world and relatively little is tied to the stock price of the company
3. The Market for Corporate Control
There are three ways in which the market for corporate control can operate. These are proxy contests, friendly mergers and hostile takeovers.
A very significant difference between U.S. and U.K. on the one hand Japan on the other is that hostile takeovers are almost unheard of in Japan whereas they are common in the U.S. and U.K. Historically, cross-shareholdings were put in place by many Japanese companies to prevent hostile takeovers. Although these cross-shareholdings have been reduced significantly in recent years, they remain a formidable barrier.
4. Concentrated Holdings and Monitoring by Financial Institutions
The importance of equity ownership by financial institutions in Japan and Germany, and the lack of a market for corporate control in these countries have led to the suggestion that the agency problem in these countries is solved by financial institutions acting as outside monitors for large corporations. In Japan, this system of monitoring is known as the main bank system. It has been widely argued that this main bank relationship ensures the bank acts as delegated monitor and helps to overcome the agency problem between managers and the firm. However, the empirical evidence on the effectiveness of the main bank system is mixed (see, for example, Hoshi, Kashyap and Scharfstein, 1991, and Aoki and Patrick, 1994). Overall, the main bank system appears important in times of financial distress, but less important when a firm is doing well.
New trends
Corporate monitoring by main banks was almost disappeared.
Continuous and increased pressure from capital markets
§ New type of profit-oriented shareholders
§ Exit or voice as a strategy by the shareholders
§ More and more M&As