This article was first published in Quantum magazine.
Competing models of corporate governance have grown up as cross-border ownership of major financial institutions becomes more prevalent. Dr Fahad Toonsi analyzes the strengths and weaknesses of the different systems in play round the world.
Ownership and Governance
As cross-border ownership of banks, other financial institutions, and companies becomes more common—particularly as Asian and Middle Eastern organizations buy more Western institutions than ever before—questions inevitably arise about the impact on their corporate governance culture.
In principle the ownership structure is the primary determinant of a corporate governance system. Dispersed ownership can make it difficult for shareholders to monitor what is happening, while concentration of ownership in the hands of large block-holders gives them greater incentive to do so.
The recent surge of interest in understanding corporate ownership has revealed many differences in trans-national corporate governance systems. The variety of labels given to them reflects their different characteristics, for example, dispersed ownership market-based Anglo-American systems; concentrated ownership European and Asian systems; rules-based and relationship-based systems; and market- and bank-based systems.
In market-based outsider systems, ownership is dispersed and completely separated from control, companies benefit from sophisticated capital markets and thus incur lower debt-to-equity ratios, stakeholders are rarely formally represented and do not participate in company management.
A hostile takeover is the severest sanction for management misconduct. Outside investors in these systems are less interested in the strategic long-term goals of the company than in the short-term returns available in the market. The United Kingdom and the United States are the prime examples of the outsider system.
By contrast, ownership in insider systems is concentrated and closely associated with the managerial control of companies. Companies have closer relationships with banks, which means higher debt-to-equity ratios and a higher rate of bank credit. Stakeholders—including other companies, banks and employees—are formally represented on the board of directors. Takeovers are rare and there is often a dense network of supportive relationships with related businesses. Europe, the Middle East and Asia-Pacific are primary examples of this insider system of corporate governance.
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