Competitive Advantages Of British And Us Systems Economics Essay

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5/12/16 Economics Reference this

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Writing and researching in the field of Corporate Social Responsibility and Corporate Governance inevitably involves a lot of intelligent and creative thinkers since Corporate Social Responsibility and its link to corporate governance is a much discussed and debated subject in contemporary business. Similarly, differences in financial and corporate governance systems across countries have resulted in making some economies more successful than others. For instance, the United States and the United-Kingdom have demonstrated their dominance throughout the 19th and 20th century. Other economic powers such as Japan, Germany and recently China have developed systems with different foundations and forms of competitiveness and are now widely observed as models to follow. It is then appropriate to investigate each of these models on an individual basis in order to reach an overall conclusion: Which model would be more suited to our economic time?

Keywords: Corporate Governance, US, France, Germany, Japan, Finance, Protestantism, Confucianism, collectivism, individualism…;


Separation of ownership and control:

The role of corporations in society is fundamental and cannot be ignored. For this reason, it is important to look at how companies view and manage their different stakeholders, or every individuals or groups of individual that have a “stake” in the corporation. CSR is predominantly a concept that applies to large corporations and typically owned by shareholders (the owners) and run by employed managers. The separation of ownership and control raises one of the major question which accounts for the differences of corporate governance systems across countries: Whose interest the company should be run on by managers? Should it be just the owners or also the interest of society at large, represented by different groups such as customers, employees or other communities? This point has been argued by Henry Mintzberg, Milton Friedman and Edouard Freeman which will be explained throughout this paper.

Explanation of the existence of differences across corporate governance systems:

Furthermore, evidence suggests that the most individualistic and libertarian countries have demonstrated their competitive advantages over other economies (Hutton, 1995). Geert Hofstede stressed that individualism is a typical characteristics of the United-States and the United-Kingdom respectively. ‘Individualism’ refers to the idea that economic success rests on the individual only and takes its roots from Protestantism, in which, an individual is only answerable to himself and to God (Weber, XXX).

By contrast, other systems such as Japan, Germany and France are more socially or collectivist-oriented and are bank-based as opposed to market-based. ‘Collectivism’ refers to the idea that an individual is not only answerable to himself but to everyone related to him. Confucianism has had an important influence of the idea of collectivism. However, the obvious inherent instability and volatility in the market-based systems of the United-States and the United-Kingdom generated numerous issues in which systems of other leading economies can be seen as more attractive as they promote stability. Indeed, collectivist systems provide an edge in intervention and regulation of markets from a corporate finance perspective, and especially in light of the financial crisis.

Corporate Governance Systems:

Introduction of the concept:

Corporate governance arises from the separation of ownership and management. Shareholders own the company while Managers are employed to serve the interest of the owners. Hence a system of corporate governance is required to check and balance this separation and to ensure that shareholders’ interests are fulfilled. Indeed, managers may be tempted to take decision that will benefit themselves the most which may cause conflict within the organisation.

Common law system

Civil law system

Shareholder’s oriented

Stakeholder’s oriented

Different across systems

Anglosaxon economies

The United States system of finance and corporate governance is highly market based. It requires higher returns and certain flexibility over regulation. Requirements for higher returns create certain dynamism where employment regulation will be minimal and promoting individualism, self reliant approach with a very limited focus on social welfare (Hutton, 1995).

The United-Kingdom has strong similarities with the United-States system of corporate governance. Indeed, the British system of finance demands similar high returns and flexibility (Hutton, 1995). Moreover, the social welfare is slightly more generous in the United Kingdom, but significantly less than in other European countries such as France or Germany. While on this point the United-Kingdom and United-States may differ, the strong cultural and historical links between both nations emphasize that their systems of corporate governance and ownership are similar (Guigler, 2001).

The highly flexible and unregulated system of corporate governance stresses the importance of short term performance. Indeed, performance is key for the success of the model. This may be explained by Protestantism. Protestantism……EXPLAIN….Hence this leads to a focus on short term ambition and objectives. The main purpose is to maximize self-enrichment which provides incentive for the individual shareholder (Dore, 2001). There is therefore a lack of loyalty resulting from this shareholder focus. However it hinders long term relationships that are the main features of corporate finance systems.

The deregulation and high flexibility of Anglo-Saxon economies, including the requirement to provide information publicly inevitably allows competition based on equal terms between firms and positions this system at a considerable competitive advantage over systems that pose barriers to open and fair trade. The intense competition itself may act as a boost or incentive to innovate and develop (INSERER DU TEXTE DE MON ESSAY QUE J’AI FAIT SUR TECHNOLOGIE). In addition, the individualist structure of the Anglo Saxon system is relatively appealing and seductive prospect given a increasingly materialistic world (Dore, 2001 and Arable, 2003). However, the intense competitiveness environment has its pros and cons. The constant preoccupation with competitiveness leads to serious issues such as excessive risk-taking and high pressure (Krugman 1994, Dore 2001) to succeed over competitors using whatever means in hands and even frequently results in scandals and unethical trade practices defying principles of transparency to fulfil shareholders needs.

Furthermore, the individualistic stance in the Anglo Saxon capitalist system for the purpose of self enrichment is a very appealing and seductive (Dore 2001, Arable 2003) prospect given an increasingly materialistic world. However, this preoccupation with competitiveness leads to serious issues such as pressure and excessive risk-taking (Krugman 1994, Dore 2001) to succeed over the competition using whatever means possible, and ever frequently results in scandals and unethical trade practices defying principles of transparency to fulfil shareholders needs, notably that involving the failure of Enron (CNN MONEY). The minimally intrusive system of the Anglo-American corporate finance model leaves room for abuse. (Clarke 2007) These misgivings have played a major role in the resulting of the current business context, in which the Gross Domestic product of both the US and the UK is currently in decline in the current economic crisis (Isidore 2009, CNN Money 2009), presenting a serious argument against the competitive advantage of the US and UK systems of corporate governance and finance. The reality of the situation is shown in the case that both the U.K. and the U.S. government have had to intervene in their respective free market economies through ‘bank bailouts’ (Barr 2009) in the U.S. and U.K. by nationalising major banks, which is a direct contrast towards the core principles of the market based Anglo American system, suggesting a failure in their systems of finance and corporate governance.

The Japanese Model

Other systems of finance and corporate governance in leading economies include that of Japan and Germany, known as “stakeholder” models. (Jackson 2002, Gospel 2005). German corporate governance is characterised by lesser reliance on capital markets and outside investors that is promoted by the Anglo American system, but a stronger reliance on large inside investors and financial institutions and ‘codetermination’, placing more importance on stakeholders such as employees rather than shareholders (Gugler 2001, Gospel, 2005). Similarly, the main features of Japanese corporate governance consist of favouring of employees over financiers leading to lifetime employment, strong relationships between firms over a long term focus, a strong role of the government, and a lack of focus on profits. (Hutton 1995, Guigler 2001, Gospel 2005). The human capital of both Germany and Japan is one that is highly skilled and trained, and thus considered valuable to their respective organizations. (Hutton 1995, Dore 2001, Dicken 2003)

These characteristics point to a more collectivistic and less individual culture, in which a sense of social awareness and nationalism is more prevalent in both Germany and Japan (Dore 2001). Correct implementation of government regulation, seen in both economies post Second World War also helps stability. The main benefit of the systems of the stakeholder model proposed by Germany and Japan is that it represented co-operation, stability, high productivity and efficiency (Hutton 1995) that became a model to explain the serious growth of both economies after the devastating losses and need for rebuilding they faced after the end of the Second World War. The impressive recovery of these two economies from the post World War II period onwards, and their comparative strength in the 1980’s have resulted in a lot of research into the positive features of Germany and Japan involving corporation between workers, skilful workers, high quality products and a focus on the long term (Dore 2001). In contrast, in the 1980’s the Anglo American Corporate Finance model was criticised for its casino like and erratic short term behavior. (Clarke 2007) However, the inflexibility to change of both financial and corporate models due to its focus on collective rather than individual accomplishment is a disadvantage that became increasingly evident during an increasingly uncertain external environment in the 1990’s (Hutton 1995). In essence, the inflexibility to change in the case of strong employment protection laws and steady, long term relationships (Hutton 1995) due to the strong social factors in Germany and Japan may hinder the restructuring of firms and new entrants in the market which can prove detrimental to competition and innovation in a fast changing world. (Dicken 2003, Clarke 2007) Further weaknesses involve high barriers to entry, especially of Japan, of foreign companies into their respective economies. (Hutton 1995, Clarke 2007). Finally, and in contrast to the failures of liberal market economies, it is clear that the codetermination of Germany also has serious misgivings, as proven in the scandals that Germany faced involving powerful national firms such as Siemens, Europe’s largest engineering firm (Clarke 2007, The Economist 2008) in recent times, revealing serious weaknesses in the German system, in this case involving a lack of transparency or even corruption between stakeholders.

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