Pillars and models of Corporate Governance

Pillars of Corporate Governance

In all ramifications of human endeavour, the foundation of corporate governance is the attitude and practice of the society. Inam (2006) postulated that these values are based on the following:

1) Accountability of power, based on the fundamental beliefs that power should be exercised to promote human well-being.

2) Democratic values, which relate to the sharing of power, representation and participation.

3) The sense of right and wrong.

4) Efficient and effective use of resources.

5) Protection of human rights and freedoms, and maintenance of law and order and security of lives and property.

6) Recognition of the government as the only entity that can use force to maintain public orderliness and national security, and

7) Attitude towards the generation and accumulation of wealth by handwork.

Models of Corporate Governance

There are two major models examined in this study and they are the Anglo-American and Non-Anglo American models:

The Anglo–American Model

Corporate governance around the world differs according to the variety of capitalism in which they are embedded. Under this framework, there is the liberal model which is common in Anglo-American countries tends to give priority to shareholders’ interest. It has also been embraced because it appears to be based on laws, rules and regulations.

The coordinated model which is found in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the host community.

However, each model has its own advantage and distinctively competitive disadvantage.

The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition. On this premise, there are important differences between the United State recent approach to governance issues and what has been obtainable in the United Kingdom.

In the United States, a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known as the chief executive officer. The Chief Executive Officer has broad powers to manage the corporation on a daily basis, but needs to get board approval

for certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or other expensive projects. Other duties of the board may

include policy setting, decision making, monitoring management’s performance, or corporate control. The board of directors is normally selected by and responsible to the shareholders. Moreover, the byelaws of

many companies make it difficult for all but the largest shareholders to have any influence over the make-up of the board; normally, individual shareholders are not offered a choice of board nominees

among which to choose, but are merely asked to rubberstamp the nominees of the sitting board. Importantly, perverse incentives have pervaded many corporate boards in developed world, with board members beholden to the chief executive whose actions they are intended to oversee. Ironically, members of the board of directors are, in most cases, CEOs of other corporations so critics of corporate governance see this as a conflict of interest.

The United Kingdom has pioneered a flexible model of regulating corporate governance, known as the ‘comply or explain’ code of governance. This principle is based on a code that lists out

recommended practices, such as the separation of CEOs’ contracts, the introduction of a minimum number of non-executive directors, the independent directors, the designated roles, and audit and nomination committees. All the publicly listed companies in the United Kingdom have to either apply those principles or, explain in a designated part of their annual reports why they have decided not to apply those principles. The monitoring of those explanations is left in the hands of shareholders

themselves. The tenet of this code is that one size does not fit all in matters of corporate governance and that, instead of a statutory regime like that of the Sarbanes-Oxley Act in the United State, the best strategy

is to leave some flexibility to companies in other to enable them make better choices most suitable for their peculiar circumstances. If they have good reasons to deviate from the sound rules, they should be able to

convincingly explain to their shareholders.

Non-Anglo-American Model

In most of the East Asian countries, family-owned businesses dominate the business environment. A study by Claessens Djankov and Lang (2000) showed that the top 15 families in East Asia were found to be dominated by listed corporate assets. In countries like Pakistan, Indonesia and the Philippines, the top 15 families controlled over 50% of public corporations through a system of family cross-holdings, thus dominating the capital markets. Family-owned companies also dominate the Latin model of corporate governance, that is, companies in Mexico, Italy, Spain, France (to a certain extent), Brazil, Argentina, and other countries in South America. The state also has a significant input in corporate governance in a number of East Asian economies. In some economies, it dominates corporate governance completely. Aside from Vietnam and other socialist states that most likely have higher state control levels, China has a high level of state dominance with over 80% of listed companies with state control. Singapore also has a relatively high level of about 50% and Malaysia also has relatively high level.

Accordingly, some renowned countries in East Asia have a relatively high degree of state ownership and control.