Insider versus Outsider: The Convergence of Governance Systems

From United States to Germany, the way corporates are governed is unique in its own. Either the governance mechanism or the ownerships structure in these two countries, in theory, is totally different. However, the phenomenon of globalization is proving all wrong. At this point, or in a near future as trends are pointing out, your corporate in Germany will not be so differently governed from a corporate in the other side of the planet. Firstly, let’s see how these two systems are different.

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Insider versus Outsider systems

In terms of ownership structure, United States (the insider system of corporate governance) is characterized by wide dispersed ownership, where the shareholder value is the ultimate goal. The “one share one vote” democratic principle has set the stage for dispersed shareholder power. Due to the separation of ownership from the management of the company, shareholders were practically unable to control management behavior, which in many cases was driven by self-interest.

United States corporations are characterized by institutional investors, rather than individual investors, whose only interest is the return on investment. The board of directors, in the US corporations, combines both executive and non-executive directors in one single board (one-tier system), and its duties are largely influenced by MBCA (Model Business Corporation Act). MBCA allows for creation of specific committees, to be used as monitoring mechanisms. As a result, the delegation of work to committees made the US model more similar to the German two-tier model.

Germany (outsider system), on the other hand, is characterized by concentrated ownership, where the owners’ interest extends beyond the shareholder profits. There are large blocks of shareholders and they have a greater impact in the corporate performance. The major conflict, however, lies between controlling shareholders and weak minority shareholders.

German corporations are less dominated by institutional investors and the banks tend to have longer relationships with the corporate clients, combining lending and shareholding in a long term connection. Although monitoring management is easier, the controlling shareholders also have the incentive to act in their own self-interest. The board of directors is separated into the executive (executive directors and CEO) and supervisory board (an equal number of shareholder and employee representatives). Different from the United States, corporate employees in Germany play an important role in the corporate decision making.

The Globalization phenomenon

Even though some authors believe that differences between corporate governance regimes will persist due to different economic backgrounds, many existing literature has shown important trends towards convergence, in many corporate governance aspects. By convergence, I refer to the changing patterns of corporate governance in different countries towards a unified global corporate governance system.

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Courtesy of Michigan Municipal League (MML)

The trends towards corporate governance convergence as a result of globalization can be explained through the globalization of financial markets. This process, as some call it “financialization”, has opened the doors to many investors willing to invest in international equity and diversify their portfolios. It not only brought them profits but also it made it possible for them to reduce their risk compared to what was offered in their national financial market.

Therefore, financialization is integrating the international investors in a single financial system, creating the need for common international standards and patterned. American investors, for example, willing to invest in German equities expect some shareholder value as well as respect for some international agreements and standards.

Therefore, the raise in importance of financialization, together with neoliberal policies and the reduced transaction costs of businesses around the world, created some international norms and standards for international investors.

As a spill-over effect, it had a significant impact in the managerial strategies of many companies and forced them to adapt to other systems.

The importance of the convergence process has been an important discussion between many eminent authors of the field. Eventually, as Nestor and Thomson argued, convergence is not about the victory of one system over the other. It is rather a mutual stability of the global financial system, providing clear and sound environments for international investors.

About Edona Bajrami

Edona is an analyst of the issues related to Global Political Economy at FINNBAY. She specialized in international political economy first at Rochester Institute of Technology, New York and then the University of Kent in Brussels.

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