Corporate Governance: Stakeholder Theory

Comparative studies of corporate governance: Anglo-Saxon (Shareholder) model vs. German/Japanese Stakeholder model.

Notes from Allen, Franklin and Douglas Gale. “A Comparative Theory of Corporate Governance.”

Anglo-Saxon corporate governance (US, UK) is based on the Adam Smith model of organizing the economy. “The role of the firm in society is precisely to create wealth for shareholders and this is embodied in the legal framework.”

  • Wages are based on the job itself, regardless of the individual receiving those wages and what his/her personal situation is (family, etc.)
  • Masahiko Aoki calls the traditional US firm “H-mode” (hierarchical), “characterized by hierarchical separation between planning and implemental operation and an emphasis on economies of specialization.”
  • Employees can be hired and fired at will — that’s the nature of the job market.
  • Managers have a lot of freedom and are disciplined by the free market — presumably if they are bad managers, the shareholder value will be affected and they will be replaced.
  • CEOs can spend a long time at the top because they don’t have to pass through all the lower ranks to get there.
  • “Short-termism” of outlook, in part because the management is not heavily invested in the firm. The firm’s time horizon is dominated by the manager’s term of employment, because there is no incentive for managers to look beyond that.
  • Conflict can arise between the interests of the managers and the shareholders.

Stakeholder corporate governance (Japan, Germany, France) accepts that firms’ duty is to more than just their shareholders; that is, they are responsible to all stakeholders. “The firm is a group of people working together for their common benefit.”

  • Wages and compensation (incl. time off) take into account individual situations, including families, small children, etc.
  • Aoki contrasts the Anglo-Saxon H-mode with the stakeholder “J-mode,” which “stresses horizontal coordination among operating units based on the sharing of ex post on-site information.”
  • “In the absence of outside control mechanisms internal incentives are crucial. It is suggested that among other things ìlifetime employment, seniority advancement and management discipline through competition over ranking by corporate profits are important.”
  • Employees can’t be fired at will — lifetime employment combines with an inflexible job market.
  • Decisionmaking is often made through consensus, managers are a collective, not individual agents.
  • All managers have to pass through the ranks to reach the top.
  • There is a lower degree of inequality in compensation than in the shareholder model.
  • A group of managers working collaboratively can (through departures and replacements) have as long a time horizon as the firm itself, encouraging long-term strategy. “Short term opportunism is avoided in the J-mode.”
  • If firms want to remain viable, they must keep attracting young employees, and the non-self-interested (“rent-seeking”) managerial style of the J-mode firm can do that.
  • Because the firm is expected to act in the public interest, hiring and firing at will is not a feature of the job market in a stakeholder economy. “Lifetime employment … help[s] ensure that cooperation is more likely. Firms are particularly reluctant to lay off people in Japan. The same is true but perhaps to a lesser extent in other countries with stakeholder capitalism such as Germany and France.”

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