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In many countries most companies are run mostly for the benefit of the shareholders, the rightful owners. But there is another model, where companies are run for the benefit of other significant groupings as well - such as customers, the general public or employees. This is the stakeholder model.
Choosing a board for each of these models - or something in between - requires people with different backgrounds and outlooks. The following table compares the shareholder and stakeholder models:
Shareholders
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Stakeholders
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Maximise shareholder value and look after shareholder interests
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Look after all stakeholder interests, especially public
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Seek profitability and efficiency
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Look for survival, long term growth, and stability
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Hard-nosed and commercial
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Less concerned with profit than value for money
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Narrow Ownership
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Widely Held
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Ownership concentrated in a few hands with strong power over management sometimes through an executive chairman
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Ownership scattered with managers given a great of freedom but subject to market forces such as takeovers and proxy fights
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Minority shareholders poorly protected and need independent director support
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All shareholders need protection with close attention to management actions
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Another difference arises from the boards' traditional structures: the single tier board going usually hand-in-hand with the shareholder model and the two tier board more common in Germany, Eastern Europe, France and a few other European countries.
Single Tier Board
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Two tier Board
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Anglo-Saxon model where executive and non-executive directors sit together
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Continental European model where a Supervisory Board consists solely of non-executives and a lower level management board consists of full-time managing directors.
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Chairman works closely with CEO, and there are board committees for audit, remuneration and nomination.
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Supervisory Board totally independent from management board.
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So which is the right model?
As yet there isn't one. Despite globalisation, corporate governance patterns continue to differ, and that is because business but also social practices are not uniform. Differences are created by: -
- The extent to which laws are enforced
- The treatment of stakeholders such as labour and the community.
- The ways in which executives are compensated
- The frequency and treatment of mergers and takeovers
- Patterns of ownership
- Business customs in the country concerned.
- Significance of the stock market in the country.
- Concentration of ownership. This is still the rule, rather than the exception.
Remember that most financial and money managers - and the investors they represent - would prescribe the following as an essential part of good governance; -
- Observation of shareholder rights
- Maximize shareholder value
- Transparent and frequent reporting
- A watch on management
- A regular honesty check
- Reliable and transparent audits.
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