Models of Corporate Governance in the World

Corporate Governance Model

The idea of corporate governance was quickly adopted in different parts of the world but with some major variations because circumstances vary from country to country. Consequently, a variety of corporate governance frameworks were developed. Nevertheless, two three Models of corporate governance can be identified, with distinctions arising from the different legal systems at work in different countries.

1. Multi-stakeholder Model

In Countries that followed Civil Law (for example France, Germany, Italy, Netherlands etc) developed corporate governance frameworks that focused on stakeholders. This coordinated or Multi-stakeholder Model is associated with Continental Europe and Japan.

In those countries, the role of corporate governance was to balance the interests of a variety of key groups such as employees / workers, managers, creditors, suppliers, customers and the wider community.

This approach is also known as the insider model of corporate control as it recognized that the greatest control in a firm was held by those who were closest to its actual workings.

2. Shareholder Model

On the other hand, in countries that had a tradition of Common Law (for example Australia, United Kingdom, United States of America, Canada and New Zealand) developed corporate governance structures that focused on shareholders’ returns or interests. In their case corporate governance was supposed to ensure that corporations achieved the objectives set by their owners. Moreover, shareholders could hold a firm’s management responsible for attaining the firm’s goals which include profits.

This approach was known as the outsider model of corporate control as it recognized the distance between the management of a firm and its owners.  The Anglo-American model tends to emphasize the interests of shareholders.

3. Hybrid of Multi-stakeholder and Shareholder Models

This model has been adopted in Countries where both civil and common law was embraced simultaneously In any case, most countries adopted corporate governance systems that were a mixture of the two extreme forms. The adoption of the corporate governance philosophy does not necessarily prevent corporate failures and scandals. Examples of failed or turn-around from receivership corporations include Enron and WorldCom in the United States; the Golden Quadrilateral in India, Uchumi Supermarkets, Kenya Co-operative Creameries, Trust Bank in Kenya Consequently, there has been debate about what needs to be included in a comprehensive corporate governance framework.

Although the two approaches to corporate governance were different, they had a few similarities. For example, they hold that the management boards of firms are elected by shareholders to set policies and then delegate to management the authority to manage the firms.

Some scholars argue that a comprehensive corporate governance framework should include greater use of independent directors, access to outside advice for boards, review of board and executive remuneration and limitations on the power of CEOs.

Corporate governance is now an international topic due to globalization of businesses. It is acknowledged to play a major role in the management of organizations in both developed and developing countries. Nevertheless, corporate governance practices are not uniform across nations. In fact, the Organisation for Economic Cooperation and Development (1998) acknowledges the lack of a single model of corporate governance practice that is applicable to all organizations even within one country. Consequently, every country adopts a unique set of corporate governance procedures that are based on factors such as the country’s legal and financial system, corporate ownership structures, culture and economic circumstances.

 References

National Council for Law Reporting (2002), Corporate governance guidelines. Nairobi.

National Council for Law Reporting (2010), Constitution of Kenya 2010. Nairobi.

Private Sector Initiative for Corporate Governance Trust, Nairobi, Principles for Corporate Governance in Kenya and a Sample Code of Best Practice for Corporate Governance. Nairobi.

International Journal of Business Administration. Vol. 2, 1; February 2011. Corporate Governance Practices in Developing Countries: The Case for Kenya by Benjamin Mwanzia Mulili and Peter Wong. www.sciedu.ca/ijba accessed 22nd May 2013

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One thought on “Models of Corporate Governance in the World

  1. Leah Lieta - July 4, 2014 at 9:33 pm

    Yet another informative article.

    Reply

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