Corporate governance can be termed as those set of guidelines, laws, traditions, procedures, and institutions that influence the way a firm company or communal organization is controlled or managed. Corporate governance also comprises the relationships that exist among various stakeholders. There are three approaches to corporate governance. These include shareholder capitalism, state ownership, and stakeholder capitalism.
Comparing and contrasting three approaches to corporate governance
In the shareholder capitalism approach to corporate governance, there is a clear distinction between the proprietorship of the business and the process of its decision-making. Under this approach, it is believed that the enterprises of a corporation do their best social contributions and also serve their main purposes if it focuses mainly on maximizing the value of its operations as required by the shareholders. For corporations quoted in the stock markets, share prices do play a major role. The most noticeable feature of shareholder capitalism is a case where it is demanded that constant high returns on investment be achieved over short terms (Brown et al 2001, p.206). The owners of the share capital are the most concerned with the performance of a corporation.
The main concern of stakeholder capitalism is the expectation that companies and corporate organizations should maximize for all the stakeholders and not merely for the benefit of shareholders. In this case, the stakeholders may include but are not limited to employees, vendors, and also shareholders. Under this approach, the implication is that at least some, if not all, of the stakeholders, have certainly created ways through which they can influence corporate management policies, decision making, and actions.
One of the important strengths of this approach is that all the stakeholders are committed to increasing the share value of the corporation. This is guided by the reasons of ownership responsibilities that all the stakeholders have in the enterprise. In stakeholder capitalism corporate governance approach, decision making may not be efficient because all the stakeholders’ interests must be taken into account during crucial decision-making processes, unlike in the case of shareholder capitalism approach where all the operations are guided by just a few owners of share capital (Bruner 2003, p. 63).
State Ownership Approach
This corporate governance approach is solely used by the state. The approach only applies to corporations and companies that are owned by the state. The problem with the state ownership approach is that the main focus may not be profit-oriented; the whole process of governance is subject to political influence and manipulation. In most cases, the corporations under this governance approach do not register profitable financial performance. Amongst the three corporate governance approaches it is the worst form of corporate governance with regards to business growth and share value. This is the reason, in most countries, many corporations are being privatized. In this case, the two other approaches may be applied (Pannier, 1996, pp. 32-38).
It may be argued that adopting the stakeholder capitalism approach to corporate governance denies the shareholders their right to get fair or just returns on their capital investment, unlike the shareholder capitalism approach. It is important to note that the interest of both shareholders and stakeholders are compatible. Whereas adopting shareholder capitalism may only take care of shareholders’ interests and neglect those of others, stakeholder capitalism takes care of all those who have a stake in the enterprises; this includes even the shareholders themselves. The balancing of interests of different groups of stakeholders is crucial for the long-term profitability of a company or corporation.
Taking care of the interests of all those who claim stakes in the corporation leads to the maximization of share value since all those involved in the running and operations of the corporation expect high-value returns from their capital share contributions. The ability of the stakeholder capitalism approach to reconciling the interests of all the participants in a corporation’s financial performance makes it the best approach to corporate governance (Buchholz 2009, p. 31).
Employees of a firm must be represented on the board of directors. The board of directors is charged with the responsibility of making corporate decisions that the employees are required to implement or abide by.
The board of directors needs to know how the decision affects the employees’ operations; this can effectively be done through employees’ representation on board. The representation also gives the employees opportunity to forward their common views to the management. Employee representation is especially important where stakeholder capitalism is the preferred approach to corporate governance. The best case in which employees can be considered for representation in the board of directors is where the employees are part owners of a corporation (Kaufman 2000, pp. 267-270).
Impact of Employee Representation on Governance
When the employees’ interests are taken care of through representation in a corporation’s board of directors, they are likely to increase their concern with the growth of the corporation. Through representation on the board, the employees can trust the top management and will corporate in terms of management and achieving corporate goals and objectives. Such corporations that allow for the representation of employees in their boards of directors are likely to register growth in financial and general performance which in turn may have a positive impact on share value.
Amongst the three corporate governance approaches, stakeholder capitalism is the best since it reconciles the interests of all those who have a stake in a corporation. It is also crucial that a corporation should allow for employee representation in the board of directors. This has the effect of creating a good working relationship between the top management and the employees.
Brown, P. et al 2001. High skills: globalization, competitiveness, and skill formation, New York, Oxford University Press, p 206.
Bruner, R. 2003. The portable MBA, Volume 32 of Portable MBA series, New Jersey, John Wiley and Sons, P. 63.
Buchholz, R. and Buchholz, R. 2009. Rethinking Capitalism: Community and Responsibility in Business. New York, Taylor & Francis, P. 31.
Kaufman, B, and Taras, D. 2000. Nonunion Employee Representation: History, Contemporary Practice, and Policy, M.E. Sharpe, p. 267-270.
Pannier, D. 1996. ‘Corporate governance of public enterprises in transitional economies’, Volume 323 of World Bank Country Study, Washington DC, World Bank Publications, pp. 32-38.