11.1 Corporate Governance Structures and Mechanisms

Corporate governance systems shape how companies are directed and controlled. These systems include boards of directors, ownership structures, executive compensation, and external auditors, all working to align management with shareholder interests.

Different models of corporate governance exist globally, each with unique characteristics. The Anglo-American, Continental European, and Japanese models vary in ownership structure, stakeholder focus, and legal protections, influencing strategic decisions and long-term competitiveness.

Corporate Governance Models and Mechanisms

Components of corporate governance systems

Top images from around the web for Components of corporate governance systems

• 

  Corporate Governance in Nigerian Banks: a Theoretical Review - Research leap View original

  Is this image relevant?

• 

  Corporate Law and Corporate Responsibility – Business Ethics View original

  Is this image relevant?

• 

  Corporate Governance | Bell Resources Limited | 2024 View original

  Is this image relevant?

• 

  Corporate Governance in Nigerian Banks: a Theoretical Review - Research leap View original

  Is this image relevant?

• 

  Corporate Law and Corporate Responsibility – Business Ethics View original

  Is this image relevant?

1 of 3

Top images from around the web for Components of corporate governance systems

• 

  Corporate Governance in Nigerian Banks: a Theoretical Review - Research leap View original

  Is this image relevant?

• 

  Corporate Law and Corporate Responsibility – Business Ethics View original

  Is this image relevant?

• 

  Corporate Governance | Bell Resources Limited | 2024 View original

  Is this image relevant?

• 

  Corporate Governance in Nigerian Banks: a Theoretical Review - Research leap View original

  Is this image relevant?

• 

  Corporate Law and Corporate Responsibility – Business Ethics View original

  Is this image relevant?

1 of 3

• Board of Directors elected by shareholders to represent their interests
  • Hires, monitors, and fires top management
  • Sets executive compensation aligning with shareholder interests
  • Approves major strategic decisions (mergers, acquisitions, divestitures)
  • Ensures legal and ethical compliance (financial reporting, regulatory requirements)
• Ownership structure determines concentration of control
  • Concentrated ownership with controlling shareholders (founding family, institutional investor)
  • Dispersed ownership among many small shareholders
• Executive compensation aligns management incentives with shareholder interests
  • Includes base salary, bonuses, stock options, and long-term incentive plans (restricted stock units)
• External auditors independently review financial statements and internal controls
  • Provide assurance to shareholders and regulators (SEC, stock exchanges)
• Regulatory environment shapes corporate governance practices
  • Laws, regulations, and governance codes vary across countries and industries (Sarbanes-Oxley Act, UK Corporate Governance Code)

Global corporate governance models

• Anglo-American model prevalent in the United States, United Kingdom, and other common law countries
  • Dispersed ownership with many small shareholders
  • Strong legal protection for minority shareholders (class action lawsuits)
  • Active market for corporate control enables hostile takeovers
  • Focuses on maximizing shareholder value
• Continental European model found in Germany, France, and other civil law countries
  • Concentrated ownership with controlling shareholders
  • Weaker legal protection for minority shareholders
  • Less active market for corporate control
  • Balances interests of shareholders, employees, and other stakeholders
• Japanese model unique to Japan's business environment
  • Cross-shareholding among affiliated companies forms keiretsu
  • Fosters long-term relationships with key stakeholders (banks, suppliers)
  • Board of Directors dominated by insiders and affiliated outsiders
  • Emphasizes consensus decision-making and employee welfare

Impact of governance on strategy

• Board composition influences strategic decision-making
  • Independent directors provide objective oversight and reduce agency costs
  • Diverse boards with varied expertise improve decision-making quality (industry knowledge, financial acumen)
• Ownership structure affects strategic priorities
  • Controlling shareholders can prioritize long-term goals over short-term market pressures
  • Dispersed ownership may lead to greater focus on quarterly earnings and share price
• Executive compensation impacts managerial incentives
  • Performance-based pay aligns management with shareholder interests
  • Excessive compensation may encourage risk-taking and short-termism
• Stakeholder considerations shape corporate strategy
  • Balancing interests of multiple stakeholders leads to more sustainable strategies
  • Overemphasis on short-term shareholder returns may harm long-term competitiveness

Effectiveness of governance mechanisms

• Board monitoring aligns management and shareholder interests
  • Regular performance evaluations and succession planning
  • Sets clear performance targets and holds management accountable
• Shareholder activism influences corporate policies
  • Institutional investors engage with management on strategic and governance issues
  • Proxy contests and shareholder proposals challenge status quo
• Market for corporate control disciplines underperforming managers
  • Threat of hostile takeovers incentivizes efficiency
  • Anti-takeover provisions (poison pills, staggered boards) may entrench management and reduce accountability
• Disclosure and transparency inform shareholder decisions
  • Timely and accurate reporting of financial and non-financial information (sustainability reports)
  • Helps shareholders assess management performance
• Regulatory enforcement deters misconduct
  • Penalties for violations of securities laws and governance codes (fines, delisting)
  • Protects shareholder interests from fraud and abuse