Different Models of Corporate Governance - Essay Example

?Management Introduction The system of corporate governance varies depending in different countries around the world. Variation in the system of governance depends on the factors that affect the governing structure within each country. In some cases, corporate governance of a country emphasizes on the connection between a company and its shareholders, in some other countries it focuses on the structure of the management board and practices, while in other countries the system highlights the governance of social responsibilities followed by corporations (Terjesen, Sealy and Singh, 2009). These models have the potential to influence the market forces in the future thereby, affecting demand for products, such as, oil and natural gas. This article intends to critically discuss the models of corporate governance and evaluate the implications of these models on the growing demands of energy and natural resource companies over the next decade. Models of corporate governance The difference of contexts, in which the governance is made, brings variations in corporate governance model. It is not a single rigid structure that might describe the pattern of corporate governance in every country in the world (Morck, Wolfenzon and Yeung, 2005). There are three distinguished models of corporate governance: The Anglo-US Model Equity financing is commonly used as a technique of raising capital by private corporations in the US and the US. By virtue of this practice, the US is known for having the world’s largest capital market. A causal relationship exists between equity financing and the size of capital market which affects the development process of Anglo-US corporate governance system. The important participants in the Anglo-US model are the board of directors and the shareholders or institutional investors. Government agencies and other regulatory organizations also form a part of corporate governance model. However, the key players together form the “corporate governance triangle." Figure 1: Corporate governance triangle (Source: Emergingmarketsesg, 2011) Under this model, ownership of publicly-held organizations is separated from the body that controls it. The cost of such “separation of ownership and control” (Aras and Crowther, 2009) is known as agency costs. Japanese model The Japanese model exhibits high stock ownership by private companies and banks. In this model, a banking system is characterized by strong and long-term links with corporations operating with the banking system. Equity financing holds an important position in the workings of Japanese corporations. However, the major shareholders in these corporations are the insiders and their affiliates. In this model, interests of the outsiders are marginal. A very small percentage of Japanese stocks are owned by foreign investors. In Japanese corporate governance, as contrasted with Anglo-US model, non-affiliated shareholders do not have a concrete position. Hence, truly independent directors, representing the outside (or foreign) shareholders, are present in very few numbers (Li, et al., 2012). Figure 2: Open-ended hexagon (Source: Emergingmarketsesg, 2011) German model The German model of corporate governance differs remarkably from both the models discussed above. There are certain distinctive elements of the German model, which distinguish it from the other models discussed in this paper (Ahrens and Khalifa, 2013). In most German corporations a traditional preference towards bank financing is noticed over equity financing. This shows that stock market capitalization in Germany is much smaller compared to the size of German economy. In addition, individual stock ownership is also very low in Germany, which is indicative of the factor that German investors are risk averse and adopt conservative investment strategy. Corporate governance structure in the country is strong intention of preserving long term relationships among the key economic agents, i.e, the banks and private corporations (Emergingmarketsesg, 2011). The system is inclined towards protect the interests of the key participants. Apart from the chief players, this model also provides scope to the minority shareholders, to participate in the process of making shareholder proposals. Implications of these models on growing demand for energy and natural resource The demand for energy is growing fast and it is expected to grow faster over the coming two decades. According to forecasts made by research analysts, the bulk of this rise in demand is going to come from the emerging nations of the world (Young and Thyil, 2008). Although emphasis is being put on finding alternative sources of energy (oil and gas) and exploiting them commercially, one important is to adapt with the changing role of technology in production systems (Mallin, 2007). Oil and gas would remain the chief source of energy and the imminent challenge is to leverage technology in such a way that sustainable methods of extracting oil and gas might be developed as well as new sources might be discovered (IBM, 2010). Several wide-ranging changes are impacting the oil and gas industry globally. These are the evolving status of global business, changing behaviours and shifting preferences of consumers and variations in the level of governance in difference nations around the globe. Hence, there is strong necessity for the oil and gas companies to reconsider their governance policies and their position in the international market. The models of corporate governance have to adapt themselves with these changes and leverage the use of technologies. This is needed for improving the exploitation of oil and gas resources from existing oil fields, reducing environmental footprint made by business corporations and for finding out new sources of hydrocarbon energy. Conclusion The models of corporate governance described earlier affect the future demand for oil and natural gas in five ways. These are enhancing performance management, managing enterprise-wide risk, focusing on operational excellence, increasing capacity by implementing effective tactics of people management and designing more flexible business models. These models describe the codes that were developed during the 1970s with particular reference to the needs of the private sector. All the three models represent the corporate ownership structure, shareholder activities and growth of the institutional investor and effect of privatization on the future demands for the energy. The US investors are highly inclined to make investment in stock market. Therefore, natural resource companies might make huge investments in R&D for developing new methods of digging oil and exploiting natural resource. The Japanese corporations follow equity financing and emphasize mainly on the insider shareholders of the company. Oil companies in Japan make their financing through cross-shareholdings of debt, which would allow the companies to invest substantially in developing new avenues of exploitation of oil and natural resources. The German governance model, on the other hand, shows that the companies are highly risk averse and adhere to the traditional methods of producing oil and natural gas. These companies would follow these methods for meeting the demand for energy in future. Reference List Ahrens, T. and Khalifa, R., 2013. Researching the lived experience of corporate governance. Qualitative Research in Accounting & Management, 10 (1), pp. 4 – 30. Aras, G. and Crowther, D., 2009. Global perspectives on corporate governance and CSR. Farnham: Gower Publishing, Ltd. Emergingmarketsesg, 2011. Three Models of Corporate Governance from Developed Capital Markets. [pdf] n.p. Available at: < http://www.emergingmarketsesg.net/esg/wp-content/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf > [Accessed 25th October 2013]. IBM, 2010. Oil and Gas 2030: Meeting the Growing Demands for Energy in the Coming Decades. [pdf] IBM Corporation 2010. Available at: < http://www-05.ibm.com/no/solutions/chemicalspetroleum/pdf/chemicals_petroleum_summary.pdf > [Accessed 25th October 2013]. Li, W., Xu, Y., Niu, J. and Qiu, S., 2012. A survey of corporate governance: International trends and China's mode. Nankai Business Review International, 3 (1), pp. 4 – 30. Mallin, C. A., 2007. Corporate governance. Oxford: Oxford University Press. Morck, R., Wolfenzon, D. and Yeung, B., 2005. Corporate governance, economic entrenchment and growth. Journal of Economic Literature, 43 (4), pp. 655-720. Terjesen, S., Sealy, R. and Singh, V., 2009. Women directors on corporate boards: A review and research agenda. Corporate Governance: An International Review, 17 (2), pp. 320-37. Young, S. and Thyil, V., 2008. A holistic model of corporate governance: A new research framework. Corporate Governance, 8 (1), pp. 94 – 108. Read More