What is corporate governance? Anglo/American versus
German model - Comments on which model is likely
to lead to superior performance

by: Michael A. Braun
 

Recently the image of top-managers has been attacked by several cases of fraud. To name only some, Enron and WorldCom are probably the best known ones. In both companies, managers acted impudent shameless and greedily. And this seems to be dreadful not only for shareholders and stakeholders of that particular firm, but also for the entire economy. Therefore Biggs, a strategist at Morgan Stanley, says, ‘corruption and greed have poisoned the climate at Wall Street.’ (Cited in N.N., 2002, p1) Based on this, the essay is dealing with the question of corporate governance. Therefore, after a further introduction, the basic idea and especially its two concepts will be explained. Later on, these models will be contrasted against each other and an evaluation which model is likely to lead to better corporate performance is made.

Breuer argues such mentioned situation of greed, boundlessness and breach of trust that is found currently comes from an individual lack of moral and ethics. (Breuer, 2003, pp42) And after all these scandals, politicians, bankers and managers have to co-operate to gain back trust. Thus they are looking to improve corporate governance. But maybe, the problems can be compared with the ones in the end of the ‘Golden Twenties’. (N.N., 2003, p20) They ended 1929 with a crash at the stock exchanges, which was followed by a huge depression. And, after this stiff time, strong balance checks and as well as a stock exchange committee were introduced in the US. But, spoken generally, what is ‘corporate governance’? And why are there different ways to execute this concept? To explain sufficiently, it might be appropriate to expand. Nowadays ownership and control of large companies, but not necessarily only in joint stock ones, often is separated. A reason might be, that there is, on one hand, a huge demand for money, which mostly cannot be financed alone by a single person or even one family. On the other hand, these firms need specific managerial skills that are often not in-house. Additionally, especially joint stock companies have got several advantages, such as the sharing of total risk as well as the relatively easy generation of risk capital. However, the interests of managers and owners diverge. Managers are assumed to search for prestige; power and good wages, while shareholders only are looking for profits. (Douma and Schreuder, 2002, p110)

Especially this fact of managers’ aims makes the current system of corporations rather complex. (Douma and Schreuder, 2002, p119) The higher the number of shareholders is, the lower is the incentive for a single one to monitor top-management’s behaviour. (Monks and Minow, 2001, p95) There would be so many free riders that benefit from such action as well while the monitor has to bear these agency costs alone. However, because of a small number of shares hold, monitors’ influence within the firm might be limited. And therefore the success of monitoring is low. In addition to the effort of individual monitoring, Farrar defines corporate governance as a complex circle of different aspects. (Farrar, 2001, pp4) This contains, as the very basis for everything, the legal regulations, which monitor indirectly as well. Followed by stock exchange listing requirements and statements of accounting practise. Additionally guidelines of best practise and codes of conduct play a role. Furthermore, individual and business ethics seem to be the overall framework of business behaviour.

Nevertheless, corporate governance as ‘the system by which companies are directed and controlled’ (Cited in Smerdon, 1998, p11) consists of more. It also deals with the balance of all different driving forces within a company and how their competences and control are allocated. Additionally questions of remuneration, as a motivation of managers, are asked as well as of transparency within the firm. (Witt, 2000, pp159) But finally can be argued; corporate governance is looking at the ‘right’ balance between principals and agents. In this context, corporate governance means the organisation of management and control. (Witt, 2000, pp159) Therefore especially the yet mentioned question of manager-motivation seems to be interesting. Mainly this was the problem for the two mentioned corporations. Their top-managers tried to get much more compensation than they should, related to their contracts.

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