Continental model of corporate governance

Continental model of corporate governance
See also
Anglo-Saxon model of corporate governance Controlled company Global bank Savings bank World Bank Financial resources Development bank Strategic investor Board of directors

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.

Examples of Continental model of corporate governance

• The Continental corporate governance model is characterized by strong protection of shareholders' rights and the involvement of stakeholders in the decision-making process. In Japan, the system is known as the main bank system, and it is based on the idea of a close relationship between the company and a major bank, which provides financial services as well as advice and guidance. This system is characterized by a high degree of concentration of corporate ownership and an entrenched board of directors.
• Another example of the Continental model of corporate governance is seen in Germany, where the two-tier board system is the dominant form. This system is characterized by having two boards – the supervisory board and the management board – each with its own set of duties and responsibilities. The supervisory board is responsible for overseeing the strategic direction of the company, while the management board is responsible for the day-to-day operations. This form of governance is known to promote long-term growth and stability.
• In Italy, the Continental model of corporate governance is based on a system of co-determination, which gives workers a say in the decision-making process. This system is typically characterized by a high degree of employee involvement in the company’s operations and the sharing of power between the executive board and the workers’ representatives.
• Finally, in France, the Continental model of corporate governance is based on the Monist system, which is characterized by the concentration of power in the hands of the board of directors. This system is known for its strong oversight of the management team and its emphasis on the protection of shareholder interests.

Advantages of Continental model of corporate governance

The Continental corporate governance model has several advantages, such as:

• It emphasizes stakeholder interests, rather than shareholder interests, allowing for greater social responsibility and accountability.
• It encourages board members to take a more active role in the decision-making process, which can lead to better strategic decision-making.
• It provides for greater transparency and disclosure of information, which helps to protect against fraud and mismanagement.
• It emphasizes strong corporate governance standards and a corporate culture of compliance with the law.
• It creates a system of checks and balances that limits insider trading and conflicts of interest.
• It provides more protection for minority shareholders, prevents insider trading and other fraudulent activities, and creates a more stable corporate environment.

Limitations of Continental model of corporate governance

The Continental corporate governance model, popular in Japan and continental Europe, has several limitations. These include:

• A lack of transparency in decision-making, as the board of directors is not required to publicly disclose the reasons behind their decisions.
• A focus on stability over growth, as the board of directors is often more concerned with preserving the status quo than with driving innovation and change.
• A lack of shareholder engagement, as shareholders are often not actively involved in the decision-making process.
• A lack of accountability and responsibility of the board of directors, as the directors are not held to the same standards as in other corporate governance models.
• A lack of alignment between management and shareholders, as the interests of the two are not always aligned.
• A lack of investor protection, as investors are often not adequately informed or protected against potential risks.

Other approaches related to Continental model of corporate governance

Continental corporate governance model is a system of supervision and control over the corporation common in continental Europe and in Japan. It is characterized by strong shareholder protection and board of directors with broad powers. Other approaches related to the Continental model of corporate governance include:

• Stakeholder Model – Stakeholder model of corporate governance is focused on balancing the interests of stakeholders, such as employees, customers, suppliers, and the local community, while still protecting the interests of shareholders.
• Co-Determination Model – This model of corporate governance is based on the idea of shared control between shareholders, employees, and other stakeholders. It is seen in countries such as Germany, Austria, and Switzerland, where workers have a say in the management of companies.
• Family Model – Family model of corporate governance is based on the idea of a family-owned business, where the family has control over the business. This model is seen in countries such as Italy, Spain, and Japan.

In summary, there are several approaches related to the Continental model of corporate governance, including the Stakeholder Model, Co-Determination Model, and Family Model. Each approach has its own strengths and weaknesses, but all are focused on providing strong shareholder protection and board of directors with broad powers.

References

• Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.