Financing and Governance

Variations in the financing and governance of firms play a primary role in determining the long-term success and the stability of any leading economies. Financing and governance of firms encompass a number of factors that make each of them unique and fundamental to the overall existence of any particular firm. In particular, corporate governance is responsible for the corporate performance as well as the economic performance of the firm (Maher & Andersson, 1999). Perhaps, one of the common, most conspicuous variations between firm’s financing and corporate governance schemes is the dissimilarity in ownership and regulation of the particular firms existing within a specified region or country. The distinct systems of corporate governance can be differentiated firm's the scope of ownership and influence, and the individuality of the controlling shareholders (Maher & Andersson, 1999). This way, the latter brings out the reality of variations in the financing and corporate governance of firms as a crucial component of the firm, and whose contribution towards long-term success and stability cannot be denied.

Financial markets and corporate governance, in addition to investor confidence, have their roots way back in the late 1990’s and has quickly been established as a primary component of firms operations. Basically, the USA’s financial markets are characterized by widespread ownership structures whereby over 100 million citizens of all capacities take part in capital markets. Such ownership structures are thus influenced by typical agency problems of separation of decision control assigned to management and the ownership control retained by a wide 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 public and private company share, pension and mutual funds. Consequently, following the corporate and financial management failure in vast business firms such as WorldCom and Enron, the aspect of financial and corporate governance has taken a central role in the determination of long-term sand stability in leading economies, especially during the fall of this giants business establishments (Rezaee, 2007).

As a result of the impact that the two aspects have in firms, multiple studies have been conducted by academics with the application of a variety of models. For instance, literature carried out on relative corporate governance considers generally two primary systems which tend to explain the emergence of differences in the legal protection of ownership rights: in countries such as the US and the UK that can be referred to have common laws, the court of laws have successfully managed to safeguard investors 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 have financial systems and corporate governance that shave distinct characteristics, which differentiates it from the constituent elements of other nations.

This paper addresses the issue of financing and governance of firms and the impacts they have on the realization of long-term success and stability particularly on leading economies, in an attempt to examine the extent to which they affect. As well, the paper will be building on how various frameworks and models impinge on economic growth, development of equity markets, innovation, and the establishment of active SME segment. Consequently, the paper will address the dominance of Anglo-Saxon systems in the USA and the UK, as well as address the success and failures of different systems, trends, and the influences of financial crises.

Literature Review

The aspect of corporate governance has been established to have its roots in the U.S. and the UK. It was originally concerned with relatively few set of issues, in particular, the way in which stakeholders could monitor and motivate management to address their interests, shareholder value. This way, corporate governance of firms can be established on two pillars: the ability of owners to monitor and intervene in operations whenever the need arises, and the vigor for the corporate control within various markets (Koen, 2005). As a result, Bratton and McCahery (1999) posit that in such times, the corporate’s law presents a major concern of whether or not a there exists a general corporate governance system, which holds a comparative economic advantage. This was mainly attributed to the fact that there was increased competition in relation to corporate governance. In fact, it is argued that the US observers during the onset of 1900 depended on the Japanese systems of governance and practices for guidance on how to execute reforms to their preexisting systems of governance. Thus, its contribution to success and stability is deep-rooted to the earlier days (Bratton & McCahery, 1999).

Financing of firms is key to the development, long-term success and stability of the respective firms. Mullineux (2007) states that ever since the onset of 1970s different nations have experienced significant liberalization of the banking systems, and has experienced some form of financial innovation. This is attributed to re-regulation of the financial institutions, which apparently serves as the pillar of every nation’s financial systems. They serve as the backbone of the country’s economy (Mullineux, 2007). For example, the United State of America ’s, services trade’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 175 billion U.S. dollars which were approximately 17 percent of the U.S. financial market, and lastly the financial sector hired almost 6 million persons by the year 2005, which was answerable for at least 5% of the overall private sector service (Rezaee, 2007). Variations in the financing of firms greatly influence long-term success and stability since it encompasses several other factors such as enhancing allocation of a limited resource of investment, facilitating public firms to raise the money needed to expand businesses, and providing financial fair for individual investors to invest their capital (Rezaee, 2007).

As well, different literature conducted since the mid-1990s has sought to understand the existing global variations in in corporate governance primarily by establishing the relationship between that is involved in leading of different firms. This way, sit distinguishes amongst two models relating to corporate governance. The Anglo-Saxon model in corporate governance is used to describe the shareholder value as the principal goals of a firm and that only the shareholders enjoy strong solemn relations with the senior management (Koen, 2005). Some of the key features of this model in financing and corporate governance include the stringent requirement for accounting and transparency, financial institutions have only the mandate of dealing with the firm's operations, it presents the board of directors as the internal supervisors, and there are multiple incentives for the managers (Gaur, 2018). Consequently, the Rhineland model also referred to as the bank-based model has every member of the firm having a viable contribution to the firm. Employees, suppliers, customers, and the communities are considered in decision-making and have their interests represented in governance and financing. The two models have been used effectively to gain access to various financial markets (Koen, 2005).

While the financial and governance dynamics are bound to change significantly, there are theories such as the agency theory, comparative case studies, and institutional theory that seeks to exploit alternative governance systems and the changing dynamics, as well as explore the implications it has on the long-term success and stability of a firm (Yoshikawa & Phan, 2001). The agency theory endeavors to address the complications which arise in consensual associations whenever the objectives of a principal and a representative clash, and whenever it is relatively difficult or costly for the principal to authenticate the agent’s undertakings. Basically, it seeks to provide solutions and thus maintain the firm focused to realize stability and success (Yoshikawa & Phan, 2001). The institutional theory, on the other hand, is a framework, which emphasizes that firms attempt to integrate standards in their institutional settings in order for them to acquire stability, legality, improved survival projections and resources. Basically, the instructional theory rejects the rational choice and rather places more emphasis on the legality of the firm such that governance is dependent of rules, illustrations, and belief systems (Yoshikawa & Phan, 2001). Finally, the comparative case creates the relationship between two establishments mainly to comprehend competitiveness of the products. Case examples encourage adoption of strategies that aim at giving a particular firm financial and governance competitive advantage (Yoshikawa & Phan, 2001).

As a result of globalization, there is a tendency of the convergence of the corporate governance practices across the globe. According to Chatterjee (2014), the Anglo-American model of corporate governance is gaining popularity over other models of corporate governance thus influencing other governance systems to initiate changes towards this model. The Anglo-American model places more emphasis on the interests of the shareholders over the interests of other stakeholders of the organization. Variations in the economic growth rates across different countries played a major role in influencing the decisions to reform the governance systems towards the Anglo-American governance system. For instance, when the American economy was strongly growing between 1990 and 2000, there was a stagnation of the European countries’ economies as well as the Japanese economy. This difference in the growth rate of the American economy and the Japanese and the European countries’ economies were attributed to the differences in the governance systems and the solution to rectify the stagnation was to adopt the Anglo-American system (Chatterjee, 2014).

Similarly, the declining performance of industries in Britain during the same period was attributed to the widely used personal capitalism in the managerial enterprise (Baumol et. al., 1994). This was despite the fact that the highest performing managers and leaders in America as well as in Germany were using the managerial capitalism, which was more highly effective than the personal capitalism. The personal capitalism system of governance is a system whereby the owners of the organization are given the power to control decision-making process regarding the allocation of resources as well as 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 capitalism necessitated the reforms of the governance system to adopt the managerial capitalism that was being used in the American economy.

Further evidence reveals that there is also change in the type of the boards of management both in the Japanese corporations and the German corporations to adopt the single-tier model of the U.S board of management. The American boards usually small in terms of the number of directors and comprise of both the external independent directors as well as the insiders. The inclusion of both external independent directors and internal directors as opposed to the earlier types of boards consisting of internal directors only ensures that the interests of all the stakeholders have sufficiently been protected. The concentration of ownership has also significantly declined over time in the German corporations, which is an indication that the corporations are emulating the American corporations (Lonien, 2003).

The history of research and development in the United States can be dated back to the time when the U.S was established. The United States has several state programs that have been established in support of research and development in the country. The discoveries made from the scientific research and the technical applications that have been developed through research and development have been recognized as crucial pillars to the development and good performance of the United States corporations (Brown et. al., 2005). Other countries such as Germany, Japan, Denmark and Finland have also significantly invested in research and development, which has played a major role in spurring the prosperity of corporations within these countries. As a result, other countries are also focusing on the allocation of more resources to research and development in an attempt to stimulate the performance of corporations within the countries. This indicates a convergence in terms of the importance of research and development to a country between the United States and other countries in the world (Sánchez-Rydelski, 2006).

The financial sector before the 1990s was characterized by few financial instruments as well as less elaborate legal and regulatory framework. Some of the countries such as China, Korea and Japan had a perception that the economy of a country should evolve away from a financial system that is bank-centred (New York: Columbia University Press, 2013). This belief was in contradiction with the United States, which believed that the economy should grow towards a more bank-centred economy. After the 1990s, more financial instruments were availed as more elaborate legal and regulatory framework was established. This was followed by the deregulation of the financial sector that led to the collapse of the U.S economy in 2008 and 2009 when large financial institutions collapsed. The financial institutions in countries that were reluctant to engage in risky financial activities such as Japan were less affected by the collapse of the U.S financial system (Senanayake, 2010).

After the 2008 financial crisis, more stern regulatory measures were taken to monitor the activities of the financial institutions. This was done in an attempt prevent the misconduct in some financial institutions that may lead to a crisis similar to the one experienced in 2008. Despite the fact that the Japan, China and Korean financial institutions were less affected by the crisis, they are heavily affected by misallocation of resources, unlike the U.S financial institutions that have a good reputation in terms of resources allocation. This implies that there is need to reform the financial systems in these countries even if they do not take the American model. Such reforms would imply a convergence towards the American model (New York: Columbia University Press, 2013).

To conclude, the different literature conducted since the mid-1990s has made effort to understand the existing global variations in corporate governance primarily by establishing the relationship between different firms. While the financial and governance dynamics are bound to change significantly, there are theories such as the agency theory, comparative case studies, and institutional theory that seeks to explain alternative governance systems and the changing dynamics, as well as explore the implications it has on the long-term success and stability of a firm.

References:

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