Continental model of corporate governance

Continental model of corporate governance
See also

Continental corporate governance model (internal, Japanese) is a system of supervision and control over the corporation common in continental Europe and in Japan.

Main concepts

The main assumption of this system is to rely on banks, as institutions, which mobilize capital for development and investment. Due to the shallow and small financial markets, funding through the issue of shares and bonds is small.

It is characterized by flexible contacts between investors and managers. This is a consequence of the frequent phenomenon of possession by banks and other financial institutions of large amount (often giving control) of shares in the company. Institutional and individual owners, through the selection of members of supervisory boards, are actively involved in the exercise of control over the actions of managers. A characteristic feature of this system for certain countries (e.g. for Germany) is significant role of workers' unions, whose representatives sit on supervisory boards and decide on important matters for the company and for themselves.

Fig.1. German model of corporate governance

Control in continental model is mainly exercised by supervisory council of the company and various committees (the audit, remuneration, etc.). External mechanisms, such as, for example, capital market, are inefficient, and their role is small.

The continental model emphasises the development of the company and its long-lasting effects. Objective of the managers is above all development of the company, only later taken into account are the interests of shareholders and other interested groups.

Fig.2. Japanese model of corporate governance

Main features of continental model

  • Concentrated ownership of the shares,
  • Substantial involvement of banks in the operations of the company,
  • Weak market for corporate control,
  • Shallow, insufficiently liquid financial markets,
  • Orientation on the stability and development of the company,
  • Low transparency in the capital market,
  • Frequent skipping the interests of minority shareholders,
  • The Board of Directors as an internal oversight mechanism
  • Widely seen goal: long term development of the company,
  • The large role of banks in financing of investments,
  • A measure of the success of the company is the satisfaction of involved interest groups.