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Home > Corporate Governance Best Practice > Corporate Governance in Transitional Countries—Shareholders or Stakeholders?

Corporate Governance Best Practice

Corporate Governance in Transitional Countries—Shareholders or Stakeholders?

by Irena Jindrichovska

Executive Summary

Corporate governance is primarily understood as a set of rules through which corporations are governed. What are the implications of corporate governance and rules of corporate management for the role of business in society? What is the position of transitional countries in today’s system? Can a new approach to corporate governance create some new opportunities for sustainable development? What are the changes of corporate governance in transitional countries?

  • Understanding corporate governance.

  • Corporate governance in the narrow and broad senses.

  • The case of the Postal and Investment Bank in Prague—culture changes and conflicts.

  • Shareholders, stakeholders, and the problem of short-termism.

Introduction

Changes in the global environment, society, and business environment, and even recent issues closely connected with the credit crunch have an impact on countries in transition. Transitional economies represented new markets for global companies in the 1990s, and the early years of the 21st century.

However, transition is not so straightforward. From the standpoint of global corporations, it is not just about the acquisition of new markets and a relatively cheap and qualified workforce. Global companies need to export and institutionalize new corporate governance measures.

Understanding Corporate Governance

Corporate governance “is the way in which are companies directed and controlled” (source: Cadbury Report, 1992). Over the years, corporate governance has become a much broader issue and includes other aspects of a corporation’s management. Many authors also include the broader role of business in society and do not limit their view solely to shareholders’ interests. Moreover, shareholders’ interests are difficult to administer and enforce because of dispersed ownership and the increasing role of institutional investors in wealth management.

Corporate Governance in the Narrow and Broad Senses

Narrow Sense

“Corporate governance is concerned with ensuring the firm is run in the interests of shareholders” (Allen, 2005, p164).

This view is concerned with value maximization for shareholders, and the underlying principle of the “invisible hand” coined by Adam Smith.

Companies must comply with certain rules and regulations and adhere to the directions agreed by the board of directors. They institutionalize and adhere to rules of executive compensation, and are monitored by financial institutions and banks. Company executives and managers on lower levels comply with set rules. This system should ensure that the gap between shareholders and managers is bridged (Jensen and Meckling, 1976) and that managers act in the interest of shareholders.

This principle (running the company in the interest of shareholders) is inherent in the legal systems of Anglo-Saxon countries, and law and regulations play a major role in corporate governance and the enforcement measures of the corporate world. However, there are differences between UK and US-based corporate governance. In the UK, the Cadbury Code interpretation, “comply or explain” is used, and rules are not strictly enforced but principles need to be respected. In the US, corporate governance is rules-driven. This creates a danger that the law must be broken down into rules and regulations for each company, so that companies are able to comply with them. Each measure is administered by a particular set of forms and reports. The danger is that the basic principles can become lost in this jungle of administrative forms, and that companies end up complying only with forms, and that may lead to a simple box-ticking approach. This would effectively mean that the original purpose is lost.

As we witnessed in the early years of the 21st century, this simplified approach and focus on shareholders does not work. Recent faults in the system only confirm that formal adherence to regulations without principles and a broader understanding of the context do not work.

Broad Sense

“Corporate governance is concerned with ensuring that firms are run in such a way that society’s resources are used efficiently” (Allen, 2005, p165).

The Anglo-Saxon model is just one of those that is globally used. However, in other parts of the world, the functioning of companies has evolved from different societal principles.

With broader objectives, corporate governance does not concentrate solely on companies and their owners, but takes into consideration a broader spectrum of stakeholders (for example, shareholders, employees, government, environment, and local community). The objective is that everybody can potentially be better off by using resources accountably and in a reasonable manner. An often-used example in this context can be pollution. If firms took a broader view on corporate governance, they would change their behavior and produce a socially acceptable level of pollution. “In general, although it may not be possible to reach efficiency, it may be possible to achieve a better allocation of resources” (Allen, 2005, p.165). Modern companies now introduce new concepts that are approaching this broader view. These concepts started in the 1990s with the notion of the triple bottom line by J. Elkingdon (1998), which requires that companies now care for broader issues, and, furthermore, that their reports will detail their approach to economic, social, and environmental issues. This leads to broader issues of sustainability and corporate social responsibility (see also Sawitz and Weber, 2006).

In certain European countries (such as France and Germany), Japan, and more recently in India, the broader approach is stressed, and companies in these countries do not to take the creation of shareholders’ value as their major goal.

Again, the operationalization of goals may be a different issue and is practiced differently in companies. Many companies now produce reports on sustainability or corporate responsibility in line with their global reporting initiative (GRI). For example, German and French companies have recently focused on employees but not on all aspects of the sustainability movement.

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Further reading

Books:

  • Claessens, S. “Corporate governance and development.” In Focus 1: Corporate Governance and Development. Washington, DC: World Bank, 2003.
  • Elkington, J. Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Gabriola Island, Canada: New Society Publishers, 1998.
  • Savitz, Andrew W., and Karl Weber. The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social, and Environmental Success—and How You Can Too. San Francisco, CA: Jossey-Bass, 2006.

Articles:

  • Allen, F. “Corporate governance in emerging economies.” Oxford Review of Economic Policy 21:2 (2005): 164–177.
  • Jensen, Michael C., and William H. Meckling. “Theory of the firm: Managerial behavior, agency costs, and capital structure.” Journal of Financial Economics 3:4 (1976): 305–560. Online at: dx.doi.org/10.1016/0304-405X(76)90026-X
  • Kreuzbergová, E. “Banking socialism in transition: The experience of the Czech Republic.” Global Business and Economics Review. 8:1/2 (2006): 161–177.
  • La Porta, Rafael, Florencio Lopez-De-Silanes, and Andrei Shleifer. ”Corporate ownership around the world.” Journal of Finance 54:2 (1999): 471–517.
  • La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny. “Investor protection and corporate governance.” Journal of Financial Economics 58:1–2 (2000): 3–27. Online at: dx.doi.org/10.1016/S0304-405X(00)00065-9
  • Nollen, S., Z. Kudrna, and R. Pazdernik. “The troubled transition of Czech banks to competitive markets.” Post-Communist Economies 17:3 (2005): 363–380. Online at: dx.doi.org/10.1080/14631370500204396

Report:

  • Cadbury, Sir Adrian. “The code of best practice.” Report of the Committee on the Financial Aspects of Corporate Governance. Gee and Co. Ltd, 1992.

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