Corporate governance is a subject that involves a great variety of issues. The most important of them is the administration of the corporations, as well as the maintenance of relations between the shareholders and other players of the corporations. There exist a number of models of corporate governance. Two of these, the Anglo-American and the continental European ones, are worth contrasting. The matter is that the characteristics of these two models are not only different but sometimes even opposing, which makes it interesting to contrast them. Besides, this has to be done to identify which of these two models reflects corporate governance in Africa; this country, as it is known, does not follow a particular model of corporate governance. Before deciding which of two models of corporate governance, Anglo-American or continental European one, better reflects emerging corporate activity in Africa, it is necessary to consider each of these models in more detail; key players, ownership patterns, and regulatory frameworks of Anglo-American and European models of governance have to be characterized, compared, and contrasted.
Anglo-American Model of Corporate Governance
What should be mentioned above all is that the main goal of corporate governance is to ensure that there are always ways for the suppliers of finance to get a return on their investments. With regards to this, corporate governance is mostly concerned with different control and ownership problems, or the problems that emerge between the management of an organization and its shareholders. Such a model of corporate governance is typical for the United States; it is referred to as the Anglo-American model. The Anglo-American model of corporate governance contains certain characteristics of the U.K. and the U.S. models. This model “emphasizes free market operation where the firm is primarily an instrument for achieving the maximization of shareholder value” (Berghe 8). The most important fact about the Anglo-American model of corporate governance is that the interests of the shareholders are valued above all. This model “is based on a respect for individuality as the societal norm; a key factor defining the structure of corporate enterprise is the notion of a contractual relationship between equal individuals” (Solomon 211). Since the greatest attention is paid to the shareholders within this model, less emphasis is placed on the interests of suppliers, managers, customers, employees, and even the community. The raising of the capital for the existing corporations usually takes place through the equity financing, which accounts for the Unites States having the most developed capital market in the world and London Stock Exchange being one of the largest stock exchanges in the world.
The players of the Anglo-American model of corporate government are numerous. They include directors, management, shareholders, stock exchanges, consulting firms, etc (Three Models of Corporate Governance 2). However, among all these, three former players are the most important. The Anglo-American model is based on the work of management, shareholders, and directors who altogether create a so-called “corporate governance triangle” where the board of directors is the base. Managers and shareholders have approximately the same rights and interests, whereas the board of directors plays the key role in governing the corporation. Nevertheless, though the board of direction oversees the work of the management, it does that on the part of the shareholders; in this way, shareholders are more important than management, especially taking into account the fact that the board of directors is dependent on them (because shareholders elect the members of the board of directors). This being the reason, there is some divergence between the interests of management and shareholders.
Ownership pattern of the model under consideration accounts for its regulatory peculiarities. The matter is that, in the postwar period, most of the corporations, both in the US and in the UK, have been owned by individual shareholders. Closer to the turn of the century, the biggest part of the shares was owned by the institutional shareholders (Three Models of Corporate Governance 2). This entailed certain regulatory changes that, of course, were beneficial mostly for the shareholders. At present, the Anglo-American system of corporate governance is market-based. It “represents dispersed ownership by holders of large blocks of shares, weak markets for corporate control, and rigid labor markets” (Huse 103). Therefore, this model of corporate governance can be characterized by high ownership dispersion. Since the ownership in the United States and the United Kingdom is institutional, the shareholders are rarely the members of the board of directors. As a rule, they even avoid becoming the board members because this limits their access to the outside information thus making them unable to trade shares (Huse 104). This often accounts for the board composition in the Anglo-American system of corporate governance. In general, the board of directors consists of the insiders (the executive directors) and outsides (the independent directors). Since these two kinds of directors have access to different kinds of information (either inside or outside one), the board of directors in any corporation usually has a mix of the insiders and outsiders.
The increasing number of outsiders within the U.S. and U.K. corporations has recently made the Anglo-American model of corporate governance an ‘outsider’ model. The greatest attention is paid to the regulation of capital markets, which is favorable mostly for the shareholders. This accounts for the regulatory framework of the model: “Disclosure requirements are high and interventionism on the part of the authorities … is considerable. The direct regulation of intra-firm relations through corporate law is, on the contrary, weak” (Aglietta and Reberioux 59). In general, the relations between the board of directors, managers, and shareholders are regulated by a number of bodies and regulatory laws. Among the regulatory bodies in the US, there is the Securities and Exchange Commission (SEC) that “regulates the securities industry, establishes disclosure requirements for corporations and regulates communication between corporations and shareholders as well as among shareholders” (Three Models of Corporate Governance 4). As far as the UK is concerned, it has the Securities and Investment Board and a number of self-regulatory organizations.
European Model of Corporate Governance
Considering the peculiarities of the continental European model of corporate governance with regards to the same characteristics allows tracing the differences between this one and the Anglo-American model. First of all, it should be mentioned that continental European model of corporate governance has emerged relatively recently. Corporate governance has been enhanced in the European countries only in 2003 when the European Commission introduced an action plan that recognized “the need for shareholders to be able to appreciate fully the relationship between the performance of the company and the level of remuneration of directors, as well as to make decisions on the remuneration items linked to the share price” (Pepper 45). The continental European model of corporate governance differs much from the Anglo-American one in key players, ownership patterns, and regulatory framework.
The first important fact to mention is that, in terms of the key players, two models of corporate governance hardly have any differences; it is the powers of these players that differ. In case with the continental European model, the key players are also shareholders, management, and the board of directors. However, the concentration of power and the role of each of the players differ. In contrast to the Anglo-American model of corporate governance, the power in the continental European model is not concentrated in the hands of one player. Within this model, “the CEO runs the company and oversees operational management and the chairman runs the board and oversees the CEO” (Pepper 47). This means that the board is less independent in case with the European model, which not only leads to mutual control among the players, but minimizes the divergence of the interests between the shareholders and the management. They all are approximately equal when it comes to making the decisions and their actions are mostly aimed at cooperation:
In … Anglo-American model, the governance of the corporation is based on the notion that shareholders are entitled contractually to claim the residual profit as the ultimate risk-takers of the corporation. In the continental European … model, however, management and employees are recognized as institutionally cooperative in the context of corporate governance. (Solomon 211)
What else should be mentioned, is that certain differences between these two models can be observed in their ownership patterns. The continental European model of corporate governance can be characterized by “large shareholders in the form of banks, other companies or families, an illiquid capital market, long-term lender-borrower relationships, control of the firm in the hands of the largest shareholder and a less active market for corporate control” (Oxelheim and Wihlborg 14). Therefore, unlike the Anglo-American model, the European one is more individualized in terms of ownership. In addition, ownership dispersion in the countries that follow the Continental European model of corporate governance is much lower. While in the Anglo-American model the shareholders are rarely represented in the board, in the companies following the continental European one the owners are actively involved with the board and ownership concentration is quite strong (Huse 104). Besides, even the employees are often the representatives of the board, whereas the Anglo-American model pays attention to the interests of the shareholders only almost ignoring the interests of the employees. Lastly, what is the most important, continental European model is an ‘insider’ model that favors internal regulation of the corporation.
And finally, regulatory framework in these two models is different. The continental European model pays special attention to the protection of the creditors and minority shareholders, which is why “companies are to a large extent regulated by mandatory provisions of company law” (Mantysaari 47). The existing legislation focuses on a number of areas of the companies’ performance. Some of them are “maintenance and alteration of capital; the representation of the company in its dealings with third parties; financial reporting; and disclosure of information to investors” (Mantysaari 47). Apart from this, corporate governance codes are also used. Among the most widespread ones is the Cadbury Code that “lays down standards of corporate governance and emphasizes the responsibilities of the board of directors, and more specifically the monitoring role of non-executive directors” (Barca and Becht 260). Thus, Anglo-American and continental European models also differ in the legislation regarding the corporate governance.
Corporate Activities in Africa
To the surprise of those who believe that there cannot be any business in Africa, the markets of this country have recently shown increased corporate activity. This means that in the near future this country will have to work out definite corporate governance practices to ensure proper administration and development of the companies. In addition, certain corporate governance mechanisms will also have to be developed in order to protect the existing shareholders. It seems that, among two models of corporate governance that have been discussed above, the continental European one will reflect the emerging corporate activity in Africa more accurately.
Firstly, the continental European model seems to be the most suiting for Africa because it is based on relative equality among the key players. Equality in the corporations’ administration is what Africa needs to begin the development of corporations. Secondly, since the corporate activities in Africa are not stable enough yet, the minority shareholders will need increased protection from the listed public companies. Since the enforcement of laws is rather slow in Africa, the SEC, a regulatory body within the Anglo-American model of corporate governance, will hardly be of any help to the minority shareholders. The legislation that is currently used by the corporations that follow the continental European model of corporate governance, in its turn, is able to ensure a proper level of protection to the minority shareholders. And thirdly, the ownership in Africa is highly concentrated (Hirsch 194). Most of the firms are either family or multinational, which makes it difficult to acquire a controlling stake in most of the listed corporations. This means that the Anglo-American model of corporate governance, in which the ownership is greatly dispersed, is simply inapplicable to Africa. In contrast, the continental European one corresponds to the concentrated ownership in Africa because the ownership within this model is more individualized. Therefore, it can be definitely stated that the continental European model of corporate governance is able to better reflect the emerging corporate activities in Africa than the Anglo-American model the characteristics of which hardly coincide with the current corporate governance in Africa.
Conclusion
A detailed consideration of two different models of corporate governance, the Anglo-American and the continental European one, has shown that similarities between them are almost absent, while differences are numerous. The models have been considered with regards to some of their most important characteristics, such as key players and their roles, ownership patterns, and regulatory framework. It has been discovered that, though the key players within both the models are the same, their powers are more equal in the continental European model; moreover, in the Anglo-American model ownership is dispersed, whereas in the continental European one it is concentrated. And, lastly, regulatory legislation in these models differs; at this, the legislation of the continental European model is oriented towards the protection of minority shareholders and other individuals apart from the key players. This all makes this model closer to the corporate governance that can currently be observed in Africa.
Works Cited
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