Variationsin the financing and governance of firms play a primary role in determining thelong-term success and the stability of any leading economies. Financing andgovernance of firms encompass a number of factors that make each of them uniqueand fundamental to the overall existence of any particular firm. In particular,corporate governance is responsible for the corporate performance as well asthe economic performance of the firm (Maher & Andersson, 1999). Perhaps,one of the common, most conspicuous variations between firm’s financing andcorporate governance schemes is the dissimilarity in ownership and regulationof the particular firms existing within a specified region or country.
Thedistinct systems of corporate governance can be differentiated firm’s the scopeof ownership and influence, and the individuality of the controllingshareholders (Maher & Andersson, 1999). This way, the latter brings out thereality of variations in the financing and corporate governance of firms as acrucial component of the firm, and whose contribution towards long-term successand stability cannot be denied.Financialmarkets and corporate governance, in addition to investor confidence, havetheir roots way back in the late 1990’s and has quickly been established as aprimary component of firms operations. Basically, the USA’s financial marketsare characterized by widespread ownership structures whereby over 100 millioncitizens of all capacities take part in capital markets.
Such ownershipstructures are thus influenced by typical agency problems of separation ofdecision control assigned to management and the ownership control retained by awide range of shareholders (Rezaee, 2007). Also, almost half of the total U.S.households take part in security markets by means of investment in both publicand private company share, pension and mutual funds. Consequently, followingthe corporate and financial management failure in vast business firms such asWorldCom and Enron, the aspect of financial and corporate governance has takena central role in the determination of long-term sand stability in leadingeconomies, especially during the fall of this giants business establishments(Rezaee, 2007). As a result of the impact that the twoaspects have in firms, multiple studies have been conducted by academics withthe application of a variety of models.
For instance, literature carried out onrelative corporate governance considers generally two primary systems whichtend to explain the emergence of differences in the legal protection ofownership rights: in countries such as the US and the UK that can be referredto have common laws, the court of laws have successfully managed to safeguardinvestors rights, therefore, resulting to more concerted tenure and regulations(Daidj, 2017). This attributed mainly is attributed to the Anglo-Saxon model,which holds on the shareholder value. However, different countries havefinancial systems and corporate governance that shave distinct characteristics,which differentiates it from the constituent elements of other nations.
This paper addresses the issue of financingand governance of firms and the impacts they have on the realization oflong-term success and stability particularly on leading economies, in anattempt to examine the extent to which they affect. As well, the paper will bebuilding on how various frameworks and models impinge on economic growth,development of equity markets, innovation, and the establishment of active SMEsegment. Consequently, the paper will address the dominance of Anglo-Saxonsystems in the USA and the UK, as well as address the success and failures ofdifferent systems, trends, and the influences of financial crises. LiteratureReview The aspect of corporate governance has beenestablished to have its roots in the U.
S. and the UK. It was originallyconcerned with relatively few set of issues, in particular, the way in whichstakeholders could monitor and motivate management to address their interests,shareholder value. This way, corporate governance of firms can be establishedon two pillars: the ability of owners to monitor and intervene in operationswhenever the need arises, and the vigor for the corporate control within variousmarkets (Koen, 2005).
As a result, Bratton and McCahery (1999) posit that insuch times, the corporate’s law presents a major concern of whether or not athere exists a general corporate governance system, which holds a comparativeeconomic advantage. This was mainly attributed to the fact that there wasincreased competition in relation to corporate governance. In fact, it isargued that the US observers during the onset of 1900 depended on the Japanesesystems of governance and practices for guidance on how to execute reforms totheir preexisting systems of governance. Thus, its contribution to success andstability is deep-rooted to the earlier days (Bratton & McCahery, 1999).
Financing of firms is key to thedevelopment, long-term success and stability of the respective firms. Mullineux(2007) states that ever since the onset of 1970s different nations haveexperienced significant liberalization of the banking systems, and hasexperienced some form of financial innovation. This is attributed to re-regulationof the financial institutions, which apparently serves as the pillar of everynation’s financial systems. They serve as the backbone of the country’s economy(Mullineux, 2007). For example, the United State of America ‘s, servicestrade’s GDP in the year 2006 exceeded 1 trillion, thereby accounting for 8.1%of the overall U.
S. GDP, while the security industries accounted for over 175billion U.S. dollars which were approximately 17 percent of the U.S. financialmarket, and lastly the financial sector hired almost 6 million persons by theyear 2005, which was answerable for at least 5% of the overall private sectorservice (Rezaee, 2007). Variations in the financing of firms greatly influencelong-term success and stability since it encompasses several other factors suchas enhancing allocation of a limited resource of investment, facilitatingpublic firms to raise the money needed to expand businesses, and providingfinancial fair for individual investors to invest their capital (Rezaee, 2007). As well, different literature conductedsince the mid-1990s has sought to understand the existing global variations inin corporate governance primarily by establishing the relationship between thatis involved in leading of different firms.
This way, sit distinguishes amongsttwo models relating to corporate governance. The Anglo-Saxon model in corporategovernance is used to describe the shareholder value as the principal goals ofa firm and that only the shareholders enjoy strong solemn relations with thesenior management (Koen, 2005). Some of the key features of this model infinancing and corporate governance include the stringent requirement foraccounting and transparency, financial institutions have only the mandate ofdealing with the firm’s operations, it presents the board of directors as theinternal supervisors, and there are multiple incentives for the managers (Gaur,2018).
Consequently, the Rhineland model also referred to as the bank-basedmodel has every member of the firm having a viable contribution to the firm.Employees, suppliers, customers, and the communities are considered indecision-making and have their interests represented in governance andfinancing. The two models have been used effectively to gain access to variousfinancial markets (Koen, 2005). While the financial and governance dynamicsare bound to change significantly, there are theories such as the agencytheory, comparative case studies, and institutional theory that seeks toexploit alternative governance systems and the changing dynamics, as well asexplore the implications it has on the long-term success and stability of afirm (Yoshikawa & Phan, 2001). The agency theory endeavors to address thecomplications which arise in consensual associations whenever the objectives ofa principal and a representative clash, and whenever it is relatively difficultor costly for the principal to authenticate the agent’s undertakings.
Basically, it seeks to provide solutions and thus maintain the firm focused torealize stability and success (Yoshikawa & Phan, 2001). The institutionaltheory, on the other hand, is a framework, which emphasizes that firms attemptto integrate standards in their institutional settings in order for them toacquire stability, legality, improved survival projections and resources.Basically, the instructional theory rejects the rational choice and ratherplaces more emphasis on the legality of the firm such that governance isdependent of rules, illustrations, and belief systems (Yoshikawa & Phan,2001). Finally, the comparative case creates the relationship between twoestablishments mainly to comprehend competitiveness of the products. Caseexamples encourage adoption of strategies that aim at giving a particular firmfinancial and governance competitive advantage (Yoshikawa & Phan, 2001). Evidenceand DiscussionAsa result of globalization, there is a tendency of the convergence of thecorporate governance practices across the globe.
According to Chatterjee(2014), the Anglo-American model of corporate governance is gaining popularityover other models of corporate governance thus influencing other governancesystems to initiate changes towards this model. The Anglo-American model placesmore emphasis on the interests of the shareholders over the interests of otherstakeholders of the organization. Variations in the economic growth ratesacross different countries played a major role in influencing the decisions toreform the governance systems towards the Anglo-American governance system.
Forinstance, when the American economy was strongly growing between 1990 and 2000,there was a stagnation of the European countries’ economies as well as theJapanese economy. This difference in the growth rate of the American economyand the Japanese and the European countries’ economies were attributed to thedifferences in the governance systems and the solution to rectify thestagnation was to adopt the Anglo-American system (Chatterjee, 2014).Similarly,the declining performance of industries in Britain during the same period wasattributed to the widely used personal capitalism in the managerial enterprise(Baumol et.
al., 1994). This was despite the fact that the highest performingmanagers and leaders in America as well as in Germany were using the managerialcapitalism, which was more highly effective than the personal capitalism. The personal capitalism system of governanceis a system whereby the owners of the organization are given the power tocontrol decision-making process regarding the allocation of resources as wellas the making of strategic decisions. The owners of the organizations,therefore, controlled the daily management of the organizations (Baumol, et.al.
, 1994). The poor performance associated with the personal capitalismnecessitated the reforms of the governance system to adopt the managerialcapitalism that was being used in the American economy. Furtherevidence reveals that there is also change in the type of the boards ofmanagement both in the Japanese corporations and the German corporations toadopt the single-tier model of the U.S board of management.
The American boardsusually small in terms of the number of directors and comprise of both theexternal independent directors as well as the insiders. The inclusion of bothexternal independent directors and internal directors as opposed to the earliertypes of boards consisting of internal directors only ensures that theinterests of all the stakeholders have sufficiently been protected. Theconcentration of ownership has also significantly declined over time in theGerman corporations, which is an indication that the corporations are emulatingthe American corporations (Lonien, 2003).Thehistory of research and development in the United States can be dated back tothe time when the U.S was established. The United States has several stateprograms that have been established in support of research and development inthe country. The discoveries made from the scientific research and thetechnical applications that have been developed through research anddevelopment have been recognized as crucial pillars to the development and goodperformance of the United States corporations (Brown et. al.
, 2005). Othercountries such as Germany, Japan, Denmark and Finland have also significantlyinvested in research and development, which has played a major role in spurringthe prosperity of corporations within these countries. As a result, othercountries are also focusing on the allocation of more resources to research anddevelopment in an attempt to stimulate the performance of corporations withinthe countries. This indicates a convergence in terms of the importance ofresearch and development to a country between the United States and othercountries in the world (Sa?nchez-Rydelski, 2006). Thefinancial sector before the 1990s was characterized by few financialinstruments as well as less elaborate legal and regulatory framework. Some ofthe countries such as China, Korea and Japan had a perception that the economyof a country should evolve away from a financial system that is bank-centred(New York: Columbia University Press, 2013).
This belief was in contradictionwith the United States, which believed that the economy should grow towards amore bank-centred economy. After the 1990s, more financial instruments wereavailed as more elaborate legal and regulatory framework was established. Thiswas followed by the deregulation of the financial sector that led to thecollapse of the U.
S economy in 2008 and 2009 when large financial institutionscollapsed. The financial institutions in countries that were reluctant toengage in risky financial activities such as Japan were less affected by thecollapse of the U.S financial system (Senanayake, 2010).
Afterthe 2008 financial crisis, more stern regulatory measures were taken to monitorthe activities of the financial institutions. This was done in an attemptprevent the misconduct in some financial institutions that may lead to a crisissimilar to the one experienced in 2008. Despite the fact that the Japan, Chinaand Korean financial institutions were less affected by the crisis, they areheavily affected by misallocation of resources, unlike the U.S financialinstitutions that have a good reputation in terms of resources allocation. Thisimplies that there is need to reform the financial systems in these countrieseven if they do not take the American model. Such reforms would imply aconvergence towards the American model (New York: Columbia University Press,2013). Toconclude, the different literature conducted since the mid-1990s has madeeffort to understand the existing global variations in corporate governanceprimarily by establishing the relationship between different firms.
While thefinancial and governance dynamics are bound to change significantly, there aretheories such as the agency theory, comparative case studies, and institutionaltheory that seeks to explain alternative governance systems and the changingdynamics, as well as explore the implications it has on the long-term success andstability of a firm. ?? ReferencesBaumol,W. J., Nelson, R. R.
, and Wolff, E. N. (1994). Convergence of productivity:cross-national studies and historical evidence. New York, Oxford UniversityPress. Braton,W. and McCahery, J.
(1999). Comparative Corporate Governance and the Theory ofthe Firm: The Case against Global Cross Reference.Brown,L. D., Plewes, T. J., Gerstein, M. A.
& National Research Council(Etats-Unis) (2005). Measuring research and development expenditures in the USeconomy. Washington, DC: The National Academies Press.Chatterjee,D.
, 2014. Regulations and Guidance Issued over the Past Several Years–A VitalAspect of Corporate Governance. SOCIETAS, 2(4), pp.82-97.Daidj,N.
(2017). Strategy, structure and corporate governance. London: Routledge.Gaur,A. (2018). Patterns of Ownership, Finance and Corporate Governance. Egham:Royal Holloway University of LondonKoen,C. (2005).
Comparative international management. London: McGraw-Hill,pp.254-307.Lonien,C. (2003). The Japanese economic and social system: from a rocky past to anuncertain future.
Amsterdam: IOS Press.Maher,M. and Andersson, T. (1999).
Corporate Governance: Effects on Firm Performanceand Economic Growth online Available at: http://www.oecd.org/sti/ind/2090569.pdfAccessed 22 Jan. 2018.Mullineux,A. (2007).
Financial sector convergence and corporate governance. Journal ofFinancial Regulation and Compliance, 15(1), pp.8-19.NewYork: Columbia University Press (2013). How finance is shaping the economies ofChina, Japan, and Korea.Rezaee,Z. (2007).
Corporate governance post Sarbanes-Oxley. Hoboken, N.J.: John Wiley& Sons, Inc.Sa?nchez-Rydelski,M.
(2006). The EC state aid regime: distortive effects of state aid oncompetition trade. London, Cameron May.Senanayake,N.
(2010). Structured Finance and the 2007-2008 Financial Crisis Causes,Consequences and Implications. Yoshikawa,T. and Phan, P.
(2001). Alternative Corporate Governance Systems in JapaneseFirms: Implications for a Shift to Stockholder-Centered Corporate Governance.Asia-Pacific Journal of Management, 18(2), pp.183-205.