Corporate Governance, and the Stakeholder vs. Shareholder Model

Corporate governance is not a term that comes up in everyday conversation, but it is a very informative concept to know. Corporate governance refers to how a corporation is governed. This entails who owns and controls the company, and how it is managed. There are two main models of corporate governance, the shareholder model (which prioritizes the return on investment for a large number of investors) and the stakeholder model (where fewer people own, but more people have a stake in, the company; including customers, competitors, and the external community). These models of corporate governance define capital (finances), labour (employees), and management (employers) in very different ways. These relationships will be explained in the national contexts of the US and Germany below.

The Shareholder Model

The US certainly subscribes to the shareholder model, the major advantage of which is the liquidity of capital markets. Especially since the 2000’s in the US, with the increase of private equity firms, it is relatively easy to secure venture capital to finance one’s business. However, private equity firms limit their own risk by diversifying their portfolios (i.e. by not putting “all their eggs in one basket”), which makes them less concerned about the success of each individual investment. Under the shareholder model, companies also tend to weaken or privatize social protection, yet there are few constraints on CEO pay, which leads to the wage inequality for which the US is now notorious.

Indeed, directors and boards (and, needless to say, employees) have little oversight on management. Therefore, mergers and acquisitions are easy to do because management can act quickly. This means labour has only a weak voice in decisions, especially relative to top management. In fact, even management’s speculative behaviour can cause stock prices to rise or fall.

Another characteristic of this model is its emphasis on a short-term return on investment to the shareholder. With such a prioritization of short-term gains, the long-term approach of developing human capital through specific skills training is discouraged, which explains why there is so much emphasis on higher education (and not apprenticeships) in the US. The shareholder model also adds pressure for labour market flexibility, and discourages employee protections. Therefore, many companies focus on profits for shareholders at the expense of employees.

Stakeholder Model

Germany subscribes to the stakeholder model, in which anyone who influences the company (from investors to customers) are considered stakeholders. In this model, ownership is more concentrated — usually owned by ‘insiders’ such as the state, families, other firms, and banks.

Banks are very important in this model because they have large equity stakes in the companies in which they invest. Therefore, banks play a central role in monitoring firms, even with representation on the board. In fact, in the German stakeholder system, there is codetermination with management, workers, and investors on the board. This kind of oversight explains why there is more egalitarian wage distribution (i.e. more wage equality), especially for middle-management.

The stakeholder model is associated with “patient” (i.e. long-term) capital. This long-term approach encourages management to develop training programmes for labour, contributes to employee retention, and incentivizes investors to protect against hostile takeovers. This kind of protection may help explain the relatively peaceful industrial relations environment in Germany. However, some scholars have criticized the stakeholder model for having too many stakeholders, which may mean that there are too many competing interests.

The Bottom Line

In the context of the different cultures and industrial landscapes of these countries, you can see how these corporate governance systems make sense. You can draw your own conclusions about what these systems say about these countries — and there has been plenty written on that topic. What I will say, however, is that despite the fact that there are pros and cons for each model of corporate governance, if you have a preference, you should take steps to work in an organization that espouses your preferred one.