Anglo-Saxon model of corporate governance
| Anglo-Saxon model of corporate governance |
|---|
| See also |
Anglo-Saxon model of corporate governance is a system of supervision and control over the corporation, functioning in the United States, Canada, Australia and the United Kingdom. The main feature of this model is to rely on the capital market, as the place of control over the corporation. Supervision is exercised mostly by investors who expressed theirs favour or disapproval for the actions of management by the buying/selling shares of the company and voting during the general meetings of shareholders.
In this model, the management shall not be subject to the strict control within the organization due to the high liquidity of the market. The relationship between managers and shareholders are short-lived and official.
Resources for current investments are collected on the capital markets and over-the-counter (OTC) markets. Due to development of large and liquid capital markets, using this model, companies can be independent from investment banks. Investment banks are rarely used, for example, in a situation where there is planned takeover (MBO and LBO transactions).
Anglo-Saxon model implies a strong emphasis on the results achieved by the company and security of their shareholders. Less importance is put on long-term business development.
Key features of the Anglo-Saxon model of corporate governance
- ownership of shares is distributed,
- banks only slightly engage in the operations of the company,
- stringent requirements for accounting and transparency,
- numerous incentive forms for executives, manifested through high salaries, based on company's results,
- capital is raised on large and liquid capital markets,
- market is an active mechanism of control over the corporation,
- internal supervisory authority is the Board of directors,
- measure of success is the share price and dividend,
- capital markets are characterized by high transparency,
- takes into account the perspective of the increase value for the shareholder,
- growing strength of concentrated share ownership particularly pension funds and institutional investors,
- biggest role is assigned to the implementation of the goals and objectives of shareholders.
Examples of Anglo-Saxon model of corporate governance
- The Shareholder Rights Plan (SRP): The SRP is a mechanism used to protect shareholders from hostile takeover attempts. It works by allowing the board of directors to issue additional shares of the company at a discounted price to dilute the shares of any investor attempting a hostile takeover.
- Board of Directors: The board of directors is the primary corporate governance body in the Anglo-Saxon model of corporate governance. The board is responsible for overseeing the management of the company, setting strategies, and ensuring that the company is adhering to the legal and ethical standards set forth by the company and its shareholders.
- Shareholder Activism: Shareholder activism is the practice of shareholders taking an active role in the oversight of the company. This may include attending annual general meetings and voting on resolutions, submitting shareholder proposals, or engaging in direct dialogue with the board and management.
Advantages of Anglo-Saxon model of corporate governance
One of the advantages of the Anglo-Saxon model of corporate governance is that it provides strong incentives for the management to maximize shareholder value. The model emphasizes the importance of shareholders rights, allowing them to have a direct say in the strategic decisions of the company. It also encourages transparency through disclosure of financial and operational information. Other advantages include:
- Improved accountability and responsiveness of management to shareholders, since it is the shareholders that decide on the appointment and removal of the board of directors.
- Shareholders can monitor and evaluate the performance of the company, by voting on executive compensation, corporate structure and other important matters.
- Shareholders can also influence the company's strategic direction, by voting on mergers and acquisitions, and capital expenditures.
- Shareholders have access to a wide range of financial information, which enables them to make informed decisions.
- Shareholders have the right to sue the company if they feel their rights have been violated.
Limitations of Anglo-Saxon model of corporate governance
The Anglo-Saxon model of corporate governance has several limitations:
- It relies heavily on the capital market as the place of control over the corporation, thus leaving out other stakeholders such as employees, customers and the public.
- This model of corporate governance may be subject to manipulation by shareholders and corporate insiders, as they can easily dominate the voting in the general meetings.
- It does not provide sufficient protection of minority shareholders, as they may have limited voting rights and may be excluded from management decisions.
- This model of corporate governance does not necessarily consider social and environmental responsibility, as the focus is on achieving short-term financial goals.
- It is usually quite expensive to implement, as it requires a lot of resources and expertise.
In addition to the Anglo-Saxon model of corporate governance, the following approaches can be mentioned:
- The Continental European Model – This model is based on the principle of regulating the balance between shareholders, creditors, and other stakeholders. This system relies on the board of directors to represent the interests of all parties.
- The Japanese Model – This model is based on the idea of a strong, long-term relationship between the company and its main stakeholders, such as shareholders and employees. The board of directors plays an important role in controlling the company, while management is responsible for the day-to-day operations.
- The Family Model – This approach focuses on the interests of a single family and provides a more centralized form of control. This type of corporate governance is more common in countries with strong family-based business models.
In summary, the Anglo-Saxon model of corporate governance is one of several approaches to controlling and supervising corporations. Other approaches include the Continental European Model, the Japanese Model, and the Family Model, each of which has its own unique features and focuses on different interests.
References
- Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124.
- Berglöf, E., & Thadden, V. (1999, June). The changing corporate governance paradigm: implications for transition and developing countries. In Conference Paper, Annual World Bank Conference on Development Economics, Washington DC.
- Blair, M. M. (1996). Ownership and control: Rethinking corporate governance for the twenty-first century. Brookings Institution.
- Cernat, L. (2004). The emerging European corporate governance model: Anglo-Saxon, Continental, or still the century of diversity?. Journal of European Public Policy, 11(1), 147-166.
- Williamson, O. E. (1988). Corporate finance and corporate governance. The journal of finance, 43(3), 567-591.
