Analysis on how the introduction of shareholder value orientation impacts upon the traditional practices of European corporations

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Corporate governance
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  3. Examine how the introduction of shareholder value orientation impacts upon thetraditional practices of European corporations. The term Corporate Governance relates to the manner in which an organization should begoverned or managed. The concept is more relevant in the case of companies which have grown based on equity capital taken from investors. Stocks of many such companies are listed in stock exchanges, which exposes them to the public and automatically brings them under closer regulatory scrutiny, the level of transparency required being rather high.All companies are basically valued based on their present performance and expected longterm success in achieving growth and profitability. For this purpose, there has to be a free flow of information (financial and strategic) amongst the shareholders, so that they can measure theeconomic potential and value of  the organization‟s strategies and activities. Also, since people(investors) have their money at stake in these companies, they have a right to decide on theselection of the Directors and influence the manner in which the organization should be run toachieve optimal results. 1  Historically, the principles of corporate governance have evolved in different countries based on their political, economic and cultural philosophies. For example, if a country(e.g.France)has a socialistic ideology, it is somewhat natural that the corporate governance thereis based on inclusion of all stakeholders, especially the employees. InJapanandGermany,if  thebankshave a major financial stake in the organizations, they will obviously give dueweightage to what the banks think could be the best strategic course for the organization.Cultures where capitalism is at the core of strategic management ideology (e.g. USA), would liketo concentrate on increasing wealth of shareholders alone and let the market forces determine thewinner. 2  Of course, these principles change with the passing of time and all countries should learnfrom each other, especially from negative events such as the collapse of huge organizations dueto fraud. 1 2   The increasing dependence of European companies on the global capital markets isforcing them to have a more shareholder value orientation. This is a huge step for theseorganizations because of the many differences between the two corporate governance systems  –   the Anglo-American and European.The Anglo-American corporate governance system is based on shareholder wealthmaximization principles, shareholder interests being considered the primary focus of companylaw. Also this model places a great emphasis on effective minority shareholder protection insecurities law and regulation.Furthermore, shareholders have the right to use their voting power to select the board anddecide on the key issues facing the company, but in practice they rarely exercise this controlwhen faced with an informed and determined management. There is a separation of ownershipand management in this corporate governance model to the extent that managers have a free handin running the affairs of the organization. A solution to this was that the majority of the boardshould be held by Non-Executive Directors. Their task is to monitor the performance of themanagers and take appropriate action to encourage or discourage the strategies being attempted by them.The board is a single tier body with Executive and the Non-Executive Directors comingtogether to chart the course of the organization. In most cases, one of the Executive Directors,who is the Chairman, is also the Chief Executive Officer of the organization. Managers areconsidered as agents of the owners and hence the Non-Executive Directors / Board may terminate these “agency contracts” in case of poor performance. On the other hand, these managers getrewarded for good performance, through bonuses and “free” stake in the organization through stock options etc. 3 Unfortunately, this often leads to short- term orientation and a “micro” minds etof the managers.The large institutional investors (mutual funds, pension funds etc.) are having maximumstake in these organizations and the capital markets are more liquid as equity is the preferredmode of business funding. 4   3 4  The European model of corporate governance gives importance to all stakeholdersincluding the shareholders.The separation between ownership and management is not that clear with boardscomprising of representatives of various stakeholders like majority shareholders, lenders(banks),employees, suppliers etc. The board is a two tier structure with a supervisory board comprising of  Non-Executive Directors which controls decision making by the Executive Directors. 5  The presence of these stakeholders on the board (who are also shareholders) increasestheir influence in the decision-making process. The ownership patterns are more concentrated andcomplex with cross-holdings being common.The relevant financial markets are less liquid and there is higher dependence on debt tofund growth and operations of the companies. 6  The concept of audit committee is existent in the European model also, but thecomposition of the committee is not that strictly laid down such as in the Anglo-American one.Also the Chairman and Chief Executive Officer positions may or may not be held by thesame person.The pulls and pressures by the large stakeholders obviously rein innovation and risk taking ability of the management. This may be good in certain situations but mostly, the lack of  „out of the box‟ thinking may be detrimental to the competitive advantage of t he firm. Theseeffects increase the response time of the organizations making it less lean. 7  In order to better observe the process that a European company has to undergo in order tohave o more shareholder value orientation we could have a closer look on the 1998 merger of Daimler-Benz  –  the most distinguished car company in Europe at the time  –  with US Chrysler Corporation.The merger presented great cultural and governance obstacles which eventually wereovercome. Daimler‟s strengths were in technol ogy and market reach, while Chrysler‟s were in 5 6 7  design and productivity. Though they complemented each other, in this partnership of equals itwas Daimler that emerged on top.The main shareholders in DaimlerChrysler had to adjust their financial relationship. The biggest shareholder of the merged company was still Deutsche Bank but because of the fact thatthe Anglo-American market looked unfavorably on financial institution influence, it graduallyreduced its ownership.Concerning the management of DaimlerChrysler, the boards and employee relationshipshave taken a hybrid German  –  American flavor. The merger was completed under German law,thus retaining the spirit of co-determination and two-tiered boards. The two-tiered nature of German boards, estab lishes a „stronger monitoring rule‟ (Jackson 2003: 292), and a charismatic CEO or chair has fewer opportunities to bulldoze his own criteria through the board than withunitary boards. After the merger, DaimlerChrysler established a unique concept  –  an independent „chairperson‟s council‟ of non -executive directors that would satisfy requirements expected bythe American authorities. The council is chaired by the chairperson of the management board and was established to „combine elements of both American and German corporate governance … and to meet the requirements of the various stakeholders‟. 8  The main obstacles to organizational fit that DaimlerChrysler faced were cultural andfinancial. This issue was partly resolved when most of the Chrysler executives resigned andGerman managers took their places in America. This shows how unequal the merger of equals proved to be.Eventually the companies have blended so good that it could almost be missed. TheChrysler part of the company is becoming more sophisticated thanks to the superior Germanengineering under the hoods of Chrysler cars, while Daimler seems willing to take more risks.The transformation of corporate governance in Europe is a fascinating but clearlyunfinished portrait. 9 The direction of the development of corporate governance in Europe will bedetermined by the extent to which shareholder value orientations and their accompanyingmanagerial practices take hold. 8 Clarke Thomas  – International Corporate Governance: a comparative approach, p. 381 9 Clarke Thomas  – International Corporate Governance: a comparative approach, p. 189
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