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DIFFERENT MODELS OF CORPORATE GOVERNANCE AND NEPALESE

EXPERIENCE

A Seminar Paper
Presented to
School of Business
The Faculty of Management Studies
Pokhara University

In Partial Fulfilment
Of the Requirements for the Degree
Master of Business Administration

By
Dhurba Bhattarai
Roll No: 16220198

Pokhara
May 2019
Table of Contents
ABSTRACT .......................................................................................................................................................iii
CHAPTER-1 ................................................................................................................................................. 1
INTRODUCTION .......................................................................................................................................... 1
1.1. Background ..................................................................................................................................... 2
1.2. Statement of the Problem............................................................................................................... 2
1.3. Need and Significance of the Study ................................................................................................ 3
1.4. Limitations of the Study .................................................................................................................. 3
CHAPTER-2 ................................................................................................................................................. 4
LITERATURE REVIEW .................................................................................................................................. 4
2.1. Review of Literature ........................................................................................................................ 4
2.2. Analysis of Literature ...................................................................................................................... 5
2.3. Different Model of Corporate Governance ..................................................................................... 6
CHAPTER-3 ............................................................................................................................................... 14
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .......................................................................... 14
REFERENCES ................................................................................................................................................. 15

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ABSTRACT

Companies in different countries are operating in different cultural, legal, social and
economic environments. As a result, each country has developed its own corporate
governance systems that serves its business operations best. With the acceleration of business
globalization in recent years, it is unknown whether there exists one best corporate
governance system for all countries. The purpose of this study was to compare the corporate
governance experiences of United States of America, Germany and Japan. These three
countries were selected because the corporate governance model adopted by them differ from
each other.
The aim of this article is to make a comparative study between the main corporate governance
models used globally by analyzing strengths and weakness for each one. From these
comparisons, we found that although these countries are adopting different corporate
governance models, they have developed some mechanism (such as committees) to narrow
down the difference. Therefore, we may conclude that the corporate governance systems
adopted by different countries are converging.

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CHAPTER-1
INTRODUCTION

Corporate governance is defined as the management and control system of an organization,


in accordance with the principles and best practices in this field. At the entity level, it seeks
the way to structure the distribution of power and responsibilities among shareholders,
directors and the management. Today, the concept is used to describe the action of governing,
the manner of managing, administering, in the states, world organisms, but also businesses.
Mainly, it seeks how the power of various factors of decision and control can be balanced and
the tools for both shareholders and other stakeholders in the capital of an entity can be
implemented.
Corporate governance provides rules and appropriate control mechanisms through which, on
the one hand shareholders can supervise the decisions of managers, and on the other hand
partners can be monitored and motivated. Such a system, within a modern business
environment, should initiate and support research and development activities, contribute to
social stability by building not only human but also cultural capital. It easily detaches the
conclusion that modelling corporate governance should be integrated in strategies
concerning sustainable development, through continuous involvement in restructuring the
main branches of the economy or social sector reform.
Corporate governance systems vary around the world. Basically, corporate governance is seen
as the process by which organizations are run. Corporate Governance structure in each
country is very dynamic. The corporate governance structure of joint stock corporations in a
given country is determined by several factors: the legal and regulatory framework outlining
the rights and responsibilities of all parties involved in corporate governance; the de facto
realities of the corporate environment in the country; and each corporation’s articles of
association. While corporate governance provisions may differ from corporation to
corporation, many de facto and de jure factors affect corporations in a similar way. Therefore,
it is possible to outline a "model" of corporate governance for a given country. In each
country, the corporate governance structure has certain characteristics or constituent
elements, which distinguish it from structures in other countries. To date, researchers have
identified three models of corporate governance in developed capital markets. These are the

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Anglo-US model, the Japanese model, and the German model.

1.1. Background
Historical circumstances, social, legal, and economic conditions form a specific model of
corporate governance in each country, and those models vary in participants, legal
framework, reporting systems etc. According to some common features, all models can be
divided in to three types: Anglo- American, German (Western European), and Japanese.
Anglo- American model, called sometimes as an outsider model, is characterized by heavy
sparsity of the capital and the tendency to increase in outsider shareholders, which are not
connected to the corporation. The model is market- oriented and aiming at the exceptional
satisfaction of shareholder’s interests. As in an outsider model, there are a huge number of
shareholders with tiny shares, and mostly the decisions are made by the manager.
Japanese and German models can be called as insider models, as the ownership rights are
distributed among insider participants, which are somehow connected to the corporation, and
own relatively big shares. Consequently, the relationships between shareholders are
extremely important; the main goal for the insider model is not only to maximize the
shareholders’ benefit but also to maximize the welfare of other stakeholders.
However, the existence of different models of corporate governance does not solve the under-
lying issues on ensuring financial return on investments such as the conflict between long-
run and short-run interests, between management and directors.

1.2. Statement of the Problem

The purpose of this article is to introduce each model, describe the constituent elements of
each and demonstrate how each developed in response to country- specific factors and
conditions. Readers should understand that it is not possible to simply select a model and
apply it to given country. Instead, the process is dynamic: The corporate governance structure
in each country develops in response to country- specific factors and conditions. To compare
the corporate governance component factors in United States of America, Germany and Japan
also fall under the scope of this study. In addition, corporate governance experienced by the
development- oriented economies like Nepal is also reviewed

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1.3. Need and Significance of the Study
In the current context of globalization, we can no longer talk about increasing organizational
value ignoring the interests of shareholders, employees, business partners, etc. Such interests
may come into conflict, leading to internal conflicts, with negative influence on the entity’s
performance. To avoid such discrepancies, a responsible behavior from managers is
increasingly necessary, which means, in fact, adopting a corporate governance model. The
aim of this article is to make a comparative study between the main corporate governance
models used globally by analyzing strengths and weakness for each one, in the sense to
determine which one is the best one.

1.4. Limitations of the Study


This paper relies on the secondary sources, which are obtained from different articles and
research paper. It lacks real survey and observations.
 Due to the limitation of time, the study is not focused on the detailed analysis of the
paper.
 The paper is not done in the real world; it is based on the review of the articles.
 The scope of the paper is limited to three basic model of CG, namely, Anglo-American
model, German model and Japanese model in context of specific research. The article
may not able to address other types of model which are experiencing by other
countries in the world.

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CHAPTER-2
LITERATURE REVIEW

2.1. Review of Literature


Although several studies have examined corporate governance systems, most of them focus
on the system of a particular jurisdiction only. Very few compare corporate governance
systems across different countries. Among these few, for example, Bleicher, Leberl and Paul
(1989) conducted two extensive research projects to compare the legal requirements and the
actual practices of the corporate governance systems among listed corporations in Germany,
the US and Switzerland. They recommend that some monitoring practices for these
companies be developed (Bleicher et al., 1989, p. 259). They conclude that the
professionalism of corporate managers in these three countries has been improving. This
professionalism enables these managers to be immune to the influence of various monitoring
mechanisms. On the contrary, the professional development of the boards lags a lot behind
that of their manager counterparts (Bleicher et al., 1989, p. 265). Coupled with an
increasingly complex and dynamic management process, a monitoring gap between managers
and the boards emerges. To narrow down this gap, policy makers in these countries should
think about whether they should expand the monitoring roles of non-manager members in the
boards (Bleicher et al., 1989, p. 260). Since policy makers of a particular jurisdiction can
choose the best board model from two most popular ones—the two-tier system and the one-
tier system—to tailor for their particular needs and environments, this results in a
convergence in the ultimate monitoring goals of these two corporate governance systems.
Bleicher et al. (1989, p. 266) consider the structures and preconditions, not the institutional
setting of the monitoring mechanisms as the major problems of how to close this gap. They
suggest that the following measures can be implemented as the first step to close this gap
(Bleicher et al.,
1989, pp. 267-272):
- to improve the composition of the boards,
- to impose more duties on the boards,
- to expand the duties of care and to increase the liability of monitors
- to conduct audits on the performance of managers by external auditors.

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Charkham (1994) describes the corporate governance systems of five major industrial
societies: Germany, Japan, France, the US and the United Kingdom (UK). His discussions
focus on the structures and practices of business organizations and their business
environments. He establishes two basic principles of good corporate governance: dynamism
and accountability. An enterprise is said to be dynamic if its corporate governance system
allows its managers to run the enterprise as they wish without undue fear of displacement,
government interference or litigation. The principle of accountability refers to the situation
where while managers of an enterprise are free to exercise their power to make any decisions
and to take any courses of actions that they consider to be the best for the enterprise, the
outcomes of these decisions and the actions taken should meet at least certain pre-defined
standards. When these outcomes cannot meet the standards, appropriate remedial actions can
be taken in a timely way (Charkham, 1994, p.354).
Charkham suggests that there is virtually no government interference policy in the UK, very
little in Germany, many in France and the most in Japan. He ascertains that the US is adopting
specific pork barrel politics (Charkham, 1994, p. 356). This means that US politicians act in
the best interests of their voters in order to win their support in the next election. Litigation
is only common in the US. Derivative lawsuits, class actions and contingency fees are unique
to the US. The threat of litigation keeps US managers on their toes and makes them acutely
conscious of the possibility of any potential lawsuits. In other countries litigation is much
less prevalent. Finally, German and Japanese systems are more effective against
mismanagement. Therefore, the decisions of German and Japanese managers are far less
influenced by the potential responses of stock markets and the threats of takeovers
(Charkham, 1994, p. 358).

2.2. Analysis of Literature


Bleicher et al. conclude that the monitoring goals and measures adopted by all the countries
studied by them conform with their propositions. Only the constitutional structures of these
countries differ.
Charkham (1994, p. 361) concludes that although German and Japanese corporate
governance systems are not perfect, they emphasize more accountability in general. In
particular, he considers that with all its faults and failings and with its tendency towards

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rigidity, German system works more consistently (Charkham, 1994, p. 363). He also
considers that the Anglo-US-French cultures are more tolerable for either small or large
businesses to deviate from their corporate governance standards temporarily.
The dilemma of adopting the one-tier model is to find a balance among the possibility of the
emergence of a consciously strong leader, participation of committed outside directors and
monitoring of managers by these directors.
The US board model is incompatible with German co-determination law, because in Germany
the employee representatives are not executive managers and the co-determination happens
in the supervisory board only.

2.3. Different Model of Corporate Governance


Anglo-American Model
Anglo-American model is used as basis of corporate governance in USA, UK, Canada,
Australia, and some common-wealth countries. The shareholders appoint directors who in
turn appoint the managers to manage the business. Thus, there is separation of ownership and
control.
The board usually consist of executive directors and few independent directors. The board
often has limited ownership stakes in the company. The Anglo-US model, developed within
the context of the free market economy, assumes the separation of ownership and control in
most publicly-held corporations.
A single individual holds both the position of CEO and chairman of the board. This system
relies on effective communication between shareholders, board and management with all
important decisions taken after getting approval of shareholders (by voting).

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Elect.
Shareholders Board of Directors Stakeholders
(Supervisor)

Appoints and Supervises

Officers
(Manager)
Monitors
&
Manage
Creditors regulates Regulatory/ Legal
System
Company

Fig: Anglo American Model

The German Model

The continental European countries, including Germany, Austria, France, Netherlands etc
have a two-tiered Board of Directors.
In the two-tiered board:
 The management board, made up of company executives, generally runs day-to-
day operations.
 While the supervisory board, made up entirely of non-executive directors who
represent shareholders and employees, hires and fires the members of the executive
board, determines their compensation, and reviews major business decisions.
Usually a large majority of shareholders are banks and financial institutions. The
shareholder can appoint only 50% of members to constitute the supervisory board. The
rest is appointed by employees and labor unions. The size of the supervisory board is set
by law and cannot be changed. The supervisory board includes labor/employee
representatives.

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Supervisory Board

Appoint and
Supervises

Employees Management Board Shareholder

Manages

Company

Fig: German Model

Japanese Model

Japanese corporate governance system is a one tier board. Employees play a less important
role than that in the German co-determinant system. The model centers around a main
bank and a financial/industrial network or Keiretsu. Almost all Japanese corporations have
a close relationship with a main bank.

The bank provides its corporate client with loans as well as services related to bond issues,
equity issues, settlement accounts, and related consulting services. The main bank is
generally a major shareholder in the corporation. The board of directors of Japanese
corporations is composed almost completely of insiders, that is, executive managers,
usually the heads of major divisions of the company and its central administrative body.
If a company’s profits fall over an extended period, the main bank and members of the
Keiretsu may remove directors and appoint their own candidates to the company’s board.
Another practice common in Japan is the appointment of retiring government bureaucrats
to corporate boards; for example, the Ministry of Finance may appoint a retiring official
to a bank’s board.

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In both the Japanese and the German model, banks are key shareholders and develop
strong relationships with corporations, due to overlapping roles and multiple services
provided. This distinguishes both models from the Anglo-US model, where such
relationships are prohibited by anti-trust legislation. Instead of relying on a single bank,
US and UK corporations obtain financing and other services from a wide range of sources,
including the well-developed securities market.

Statutory Auditors

Bank Independent
Accountant Auditors

Shareholders Boad of Director/


Business

Customers Employees

Suppliers/ Creditors

Fig: Japanese Model

Nepalese Model

Emerging market countries like Nepal improving corporate governance can serve a
number of important public policy objectives. Good corporate governance reduces
emerging market vulnerability to financial crises, reinforces property rights, reduces
transaction costs and the cost of capital and leads to capital market development. Weak
corporate governance frameworks, on the other hand, reduce investor confidence and can
discourage outside investment. Over the past several years, the importance of corporate
governance has been highlighted by an increasing body of academic research (World
Bank, 2005)Similarly, impact of improvements in corporate governance quality on
traditional measures of real economic activity—GDP growth, productivity growth, and the
ratio of investment to GDP—is positive, significant, and quantitatively relevant, and the
growth effect is particularly pronounced for industries that are most dependent on external
finance (IMF, 2006).
Nepal is passing through a transitional phase of institutional and governance reform. The

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high concentration of corporate ownership structure and dominance of family business
groups in corporate affairs have become major constraints in exercising good corporate
governance. Nevertheless, a number of governance reforms are underway and some
positive symptoms have been observed in the banks and financial institutions.
For instance,traditionally, the same person has served as both chairman of the board of
directors and chief executive officer (CEO) of the corporation. In many instances, this
practice led to abuses, including concentration of power in the hands of one person.
Although Company Act does not define whether Chairman should be executive or non-
executive, NRB has changed its policy that Chairman should be non-executive for banks.
The model of corporate governances found in Nepal can also be said - a mix of the Anglo-
American and German models. In Nepal also there is a trend of family model of corporate
governance.

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Convergence and Divergence of Different Systems Worldwide used

The study on models of corporate governance in various countries provides the image of the
features specific to Anglo-American, German, and Japanese. Viewed in parallel, the features of
those three models have important similarities and differences, as shown in the following
table

2.3.5.1 The main features of Corporate governance models


Anglo American German Japanese
Objective Maximize the shareholders’ Maximize Shareholder’s Ensuring firms are run by
profit profit using society’s resources
efficiently and taking into
account a range of
stakeholders.
Oriented towards Stock Market Banking Market Banking Market
Interest party Shareholder Shareholders Shareholders, employees,
Suppliers and Customers
Shareholders Low, Shareholders group High, Shareholders group High, majority o fthe
Concerntration hold small percentage of hold large percentage of total companies are founded
total shares number of shares and ran by the families
Management Executive directors and non- Supervisor Board and Board Board of Directors and
executive directors of Directors revision commission
Control Control is concerntrated in Control is concerntrated in Control is concerntrated
the hands of a small number large number of anonymous in majority shareholders
of investors with a variety of investors
interests
Agency Problem Interest between managers Interest between controlling Interest between
and dispersed shareholders sharesholders and powerless managers and firms
minority shareholders
Insider/ Outsider System Outsider system Insider system Insider system
Decision Making Management Shareholders with large Subject to the influence
percentage of shares of employees and owners
Majorituy of the board External directors Internal directors Internal directors
Compensation Wages based on the nature Wages and allowancec for Wages based on the stock
of job done person circumstances prices and allowances for
personal circumstances.
Accounting System GAAP IFRS GAAP and IFRS
Influences Foreign influences Government or familal Government or familal
control and local control control and local control
Evaluation of Financial performance Return on Social capital Return on human capital
Governance efficiency

A review of the three main models of corporate governance shows that there are at least two
dimensions that may provide a basis for comparison between them: the first considers the
system (for example, the claims are priority) and the second relates to the evaluation
governance effectiveness (how well supported priority requests are). Maximizing the
owners’ assets is interpreted differently in each system, because they, as well as the holders
of claims are different from one country to another.
The American system emphasizes the role of free market, based on it to exercise a control
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over the companies’ owners. Japanese model focuses on business network acting in an
interdependent way and on the own interests of all involved parties, especially through
mutual control. In the German system, the company is considered an entity that produces
richness, so that the market is closely monitoring its economic activity, the yield being the
engine of national wealth. Interests of employees and creditors are a control factor and
stimulation in obtaining gain.

Each model has emerged from the need to increase economic efficiency, measures in this
respect and including measures to streamline the system of governance being significantly
different.
2.3.5.2 Strengths and Weakness of governance models

Anglo- American German Japanese


Strengths Continuous Multiple risk Decrease
Discipline carriers optimism
Transparency Mutual benefit Direct influencce
of owners
Weakness Failure Slow reaction Resistancce to
change

In the U.S. corporate success is primarily measured by financial return on invested capital.
The Japanese system focuses on capital efficiency and the German concentrates on human
capital performance. The fact that these systems have endured economic and social
transformations, demonstrates that despite all the differences and specific weaknesses, each
has enough strengths to support the existence and influence a nation's own economy. Table
above shows, in parallel, the main strengths and weaknesses of the three discussed models.

2.3.5.3 The degree of influence of the participants according to the legal system

The table below shows how the influence of the participants in enterprise activity varies
according to claims recognition in the legislation of each country

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Legal System U.S.A Germany Japan
Individuals Business network Banks
Institutions Banks Business network
Business network Government Employees
Importance of the Employees Institutions Government
Participants Government Individuals Individuals
Banks Employees Institutions
Isssues covered by Capital market Transactions Corporations network
governance
Evaluating the Financial performance Return on social capital Return on human capital
governance efficiency

The Japanese system is difficult to understand for outsiders. From a historical perspective, it
is based on legal recognition at national level, a mixture of public and private property, in
which to each citizen is accepted the right to a fair share of all those things strictly necessary
for the welfare. Power of property and rights of debts are equally divided between
participants only theoretically.
Although corporations in Japan resemble the structure of those of the United States, here the
interest of shareholders overrides. Their status is clearly different in the two models, those
in Japan who have only one quarter of action simply does not matter, particularly because of
a weak capital markets and with no influence.
Models of governance in Germany and Japan are characterized by the strong presence of
interested parties (stakeholders), especially banks, which increases the efficiency of
corporate governance and provides competitive advantages of the two countries. In
opposition, the populist policy of the United States inhibits the influence of such
stakeholders, leading to inefficiency and increased agency costs. German and Japanese
systems focus on expanding public-private partnership that leads to possible competitive
advantage by reducing costs of risk capital.

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CHAPTER-3
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

Each model was developed based precisely on cultural, historical and technological features,
and they show the way and means in which the models appeared under the influence of
national economic and social specific conditions. It turned out that no model of governance
is perfect and even better, their existence over time shows that each one is effective in its
own way, and corporate governance structure specific to a country is difficult to transfer to
another country.
In some European countries (Belgium, Spain, Portugal, Italy etc.), and also at the
international organizations level (OECD), the objective of developing mechanisms of
governance is improving the information provided on the capital market and improve
company performance, competitiveness and/or access to capital. For countries with tradition
in the field and liquid capital markets (UK, France, Germany, etc.), the main objective of
these mechanisms relates to the Board of Directors’ work, meaning improve its quality and
the quality of provided information about corporate governance.
Good governance is still difficult to measure, organizations carrying out such assessments
need more representative criteria so that entities must notify their management processes in
an efficient manner. The implemented model essentially depends on the firm’s theory of
voluntary or mandatory approach, but also on the boundaries between markets, entrepreneurs
and civil society. The literature cannot provide yet a general method which to base on a
comparative study, because the measurement techniques of social responsibility
performance are not rigorously founded.
The fact is that it is not possible to simply select a model and apply it to a given country.
Instead, the process is dynamic: the corporate governance structure in each country develops
in response to country-specific factors and conditions. With the globalization of capital
markets, each of these three models is opening (albeit slowly) to influences from other
models, while largely retaining its unique characteristics. Legal, economic and financial
specialists around the world can profit from a familiarity with each model.

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REFERENCES

CHARKHAM, J.P. (1994), Keeping good Company. A Study of Corporate Governance in Five
Countries, Oxford/New York: Oxford University Press.

CORN, I.G., JR. (1978), The Role of the Chairman of the Board. In NACD Corporate
Director’s Special Reports Series, Washington, D. C. (Vol. 6), pp. 4-11.

Martynova, M., Renneboog, L. (2011) Evidence on the international evolution and convergence of
corporate governancce regulations, Journal of Corporate Finance, Volume 17, issue 5, p. 1542

Ungureanu, M. (2006), Models and Practicecs of Corporate Governance Worldwide, Alexandru Ioan
Cuza University of Lasi, Romania

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