The Dichotomous Nature of Corporate Governance - Essay Example

?Introduction The recent emphasis on the corporate governance has made it one of the key strategic variables to be managed by the organizations. It is argued that the corporate governance is a multi-faceted subject with implications on different aspects of the organizations and their role within a given society. However, the overall purpose and orientation of corporate governance could also change due to the ways organizations are owned and managed by the shareholders in different parts of the world. The hypothesis of dichotomy of the world therefore outlines that there can be two relatively different parts of a same aspects. The parts may be essentially same in their basic purpose however, their orientation may be different and therefore the overall implications can also be different too. The dichotomy hypothesis therefore suggests that the world views may be divided into two different parts which are non-overlapping and mutually exhaustive in nature. These characteristics of the dichotomy suggest the views on the corporate governance could also be dichotomous in nature. Based on this, the corporate governance models are divided into two models of Anglo- American and Eurasian models. This paper will aim to study and explore the dichotomous nature of corporate governance and whether Russia is consistent with any of the models defined under dichotomous nature. Corporate Governance Before discussing dichotomous nature of the corporate governance systems, it is important to discuss corporate governance as a subject and its implications for the organizations. Corporate governance is considered as a multi-faceted and interesting subject considering the fact that it deals with the diversified range of issues faced by the organizations. Corporate governance as a discipline suggests that it is a set of processes, policies, laws and procedures which govern the overall behavior of an organization within a given society. Corporate governance therefore outlines that corporations need to design and develop set of values and procedures which can outline its overall presence and actions in a responsible manner. (Peng) The overall interest in the corporate governance as a mechanism became more renewed specially after 2001 in the aftermath of the large corporate scandals in the history of US. Companies like WorldCom and Enron continued to defraud different stakeholders by engaging themselves into activities which may not be considered entirely ethical Due to this, legislations such as Sarbanes Oxley were enacted in order to ensure that organizations are discouraged from engaging themselves into unethical behavior. The current financial crisis was also one of the key reasons for the renewed emphasis on the corporate governance as a process. The large scale failure of financial institutions outlined that the corporate governance may be a process which could have ensured that organizations engage into the activities which are favorable for all the stakeholders without actually jeopardizing the overall interests of all stakeholder groups. Dichotomous World Hypothesis Corporate governance as a model is practiced under two different aspects of the same concept. The dichotomous world hypothesis outlines that there are two different models of corporate governance systems. One model is based on the American shareholders model whereas another model is based on the German model of stakeholders. This hypothesis therefore identifies the corporate governance as a phenomenon which is perceived under two different schools of thoughts or opinions on the nature of the corporate governance systems. Dichotomy as a concept outlines something which can be divided into two halves however, each half remain mutually exclusive from other. What is critical about this concept is the fact that the halves remain independent however, they form the part of the whole and such re-enforce ach other. (Peng,) The groups of stakeholders which are often associated with an organization include shareholders, government, executives, employees, general public, pressure groups, unions etc. As such corporate governance systems attempt to safeguard the interest of these stakeholders in the organization. It is however, important to note that there are two different approaches to the corporate governance system and under the dichotomous world hypothesis, the corporate governance systems are divided into the two systems based on the German and Anglo-American models. Both these models however, outline as to how the different stakeholder groups will be served and how organization will behave and interact with these stakeholder groups. The key differences between the two approaches therefore are based upon factors such as concentration of shareholders, market based orientation etc. (Heugens and Otten) Anglo-American System Anglo-American system is based on the lesser concentration of shareholders in the overall ownership structure of the firms. The number of shareholders is small and the overall ownership is in the hands of institutional investors who invariably invest on behalf of the retail general shareholders. This concentration of the shareholders in the Anglo-American system therefore can outline that the institutional investors can have significantly more influence in the way organization behaves and perform its corporate governance role. It is also important to note that these models are market based and high tension models which are purely based on the notion of competition. Thus the overall corporate governance and its implementation are largely based upon how a firm evaluates its commercial significance to the firm. Market based models also allow the managers to design and develop policies and procedures which could be changed over the period of time based upon how the overall market consensus changes. (Aguilera and Jackson) These models also rely on the exit based external mechanism in order to find an exit from a different situation. The overall influence therefore on such firms is always generated externally and the resulting changes also become the direct response of the changes forced from external world. External mechanisms include the proxy fights, competition as well as the claims on the liability management. It is also important to note that in Anglo- American region many firms are publically traded and as such maintain a very little contact with their shareholders over the period of time. It is also important to note that Anglo-American models are faced with the problem of free riders and are mostly based on the over-investments. This therefore effectively creates the problem of control within the organizations thus making the organizations more prone to the unacceptable behavior. German Model This model is usually followed in the Europe and Japan and is famous for having a heterogeneous population of shareholders. One of the key elements of this model is the fact that the corporate governance is based on the network based approaches and are mostly bank oriented. It is also important to understand these models rely mostly on the internal mechanisms and the voice based approaches. Internal mechanisms therefore largely focus on the role of board of directors, the way compensation structures are designed and developed, stock ownership of the mangers as well as the proper discharge of the management function. One of the key differences between these two models is rooted in the fact that this model is based upon stakeholders capitalism as against the shareholders capitalism followed under the Anglo-American model. This aspect of the model therefore makes it important in order to achieve and win the trust of different stakeholders involved in the organization. It also signifies that the firms following this type of model tend to become more influenced by their stakeholders and take into consideration a wider audience while implementing corporate governance decisions. Dichotomy of corporate governance systems Though theoretically these models are identified as being practiced by the firms located in these geographical regions however, it may be difficult to clearly identify as to which company is using which corporate governance system. It is also relatively more difficult to identify and appreciate the role of external as well as internal mechanisms in achieving the balance between the interests of different stakeholder groups. Though it may be possible that under the situation where the external mechanisms loose their overall effectiveness, more emphasis may be placed on the internal mechanisms however, this also suggests that both the arrangements could be transitory in nature. It outlines that the organizations can adapt to any of the model under a given situation and it may not be a hard and fast rule for the organizations to stick to a particular set of values and processes in order to comply with the corporate governance issues. It is also important to note that institutions in these countries are relatively transparent and considering their overall ethical conduct within the societies in which they operate, it may be irrelevant as to which system they are following as long as they are implementing effective corporate governance mechanisms. Is the Russian Federation consistent with any of these models? The case of Russia within this context may be relatively different as it is making its transition towards a market based economy. Over the period of time, it has remained a communist country with central control over the resources of the country. No one was allowed to own private property therefore corporate governance mechanisms, if any, were directly imposed by the government on State owned enterprises. However, with its transition towards the market based economy, Russia could be on its way to follow corporate governance mechanisms. It is critical to understand that Russia is making its transition towards the capitalism therefore the issues like transparency in maintaining the financial records is still a new concept. However, the recent changes and inclination towards the more transparency is only witnessed in order to comply with the international standards and ensure that global investors are satisfied in terms of having access to transparent information. Some studies suggested that the Russian firms are still not open and accountable to their shareholders and are continuously hiding their assets and cash flows especially from their minority shareholders. This attitude therefore signifies that the Russian firms may not be feeling themselves responsible or accountable towards their shareholders therefore the overall concept of keeping the interest of stakeholders dear may still be new in the country. The largest companies within the country tend to openly violate the laws and did not even engage independent audit firms to perform annual audits. Further, firms also issue incomplete financial statements and due to the weaker implementation of legal requirements, investors often seek further protection in order to safeguard their interests. (Vasilyev) It is also interesting to note that Russia has also not adapted the international financial reporting framework which is widely adapted by almost major countries for reporting the accounting information to their shareholders. This lack of adaptation of the IFRS therefore suggests that Russian firms may still not be ready to take on the global challenge to become serious competitors to other global firms based in US and OECD region. The above discussion therefore indicates that both the Anglo-American as well as Eurasian models of corporate governance may not be suitable for Russia. These two models require a certain degree of transparency and particular type of relationship between the organization and its stakeholders. However, Russian firms tend not to have such relationship and are still striving to adapt the basics of the capitalism. The stringent requirements, the role of stakeholders in implementing changes as well as the role of government are still some issues which need to clarify in Russia before Russia can actually adapt any such model. Further, there are very few Russian firms which are of global size therefore the overall implementation in smaller firms may still be a dream in Russia. Conclusion Dichotomous hypothesis of world suggests that there are two different models of corporate governance based on Anglo-American and Eurasian models. Both these models differ in the way they are being influenced by the overall composition of the shareholders. The overall extent of control, the nature and degree of investment as well as the nature of the model are some of the key differences. Anglo American models are market based models however, Eurasian models are based upon the networks. Studies suggest that it may be difficult to claim that this hypothesis is true considering the fact that firms can adapt different approaches at different times. These models however, may not be still applicable on Russia as Russian firms still need to implement basics required for implementing corporate governance mechanisms. Bibliography Aguilera, Ruth V. and Gregory Jackson. "The Cross-National Diversity of Corporate Governance: Dimensions and Determinants." The Academy of Management Review 28.3 (2003): 447-465. Heugens, Pursey P. M. A. R. and J A Otten. "Beyond the Dichotomous Worlds Hypothesis: towards a plurality of corporate governance logics." Corporate Governance: An International Review 15.6 (2007): 1288–1300. Peng, Mike W. Global Business. London: Cengage Learning, 2008. Peng, Mike, W . Global Strategy. London: Cengage Learning, 2008. Vasilyev, D. V. Corporate Governance in Russia: Is There Any Chance of Improvement? 2000. 04 May 2011 . Read More