Industrial Finance and Corporate Governance:

¶ … Industrial Finance and Corporate Governance: strengths and drawbacks

Forms of Industrial Finance and Corporate Governance

When discussing the subject of industrial finance and corporate governance, one must focus the discussion around the core of the subject, which is related to the protection of shareholders and creditors by the legal system. Each country's financial system follows a different approach to the subject, approach that has its advantages and its disadvantages. Corporate governance, in general, has become more and more important, becoming an actual part of a company's management process. The importance of this matter is conferred by the fact that, if used in a suitable manner, corporate governance is able to solve problems regarding the financial, legal, and administrative systems (Sapovadia, 2003).

There are two main forms of corporate governance followed by national, international, and multinational companies: the Anglo-American model, and the non-Anglo-American model. The Anglo-American model is a liberal one that pays a great deal of interest to protecting the interests of a company's shareholders. In addition to this, the Anglo-American model also focuses on protecting the interest of the company's workers, managers, suppliers, customers, and the community in which the company activates. The strength of this model resides in the fact that it promotes and supports radical innovation and cost competition (Wikipedia, 2007). As most specialists in the field agree, innovation is probably the key for having a successful business on a long-term basis. All major companies nowadays encourage and support continuous innovation in all areas: innovation regarding the products and services a company provides for its customers, and innovation regarding the company's management model. If a company does not use innovation in order to get along with the changes that rapidly take place on today's global market, it might be quite difficult for that company to survive and to get ahead of other competitors. Cost competition is another strong feature of the corporate governance form, which presents advantages for both the company and its clients.

The distinctive feature for this type of corporate governance is the fact that the company is conducted by a board of directors. The advantage in this case refers to the board of directors' power to select the chief executive officer based on him meeting a set of requirements necessary for performing a set of tasks. However, the downside of this attribute resides in the fact that the selection of the chief executive officer may be subjective in some cases. Another downside of this corporate governance system is the fact that shareholders have limited interference possibility in the company's management decisions.

In order to diminish the negative effects of the weak points of this system, the United Kingdom has developed a slightly different corporate governance model. This model is more flexible and it is known as the comply or explain code of governance. This corporate governance model grants more power to shareholders and less power to the board of directors and chief executive officer, which have a greater responsibility in explaining their actions to shareholders.

In Asian countries companies the non-Anglo-American model of corporate governance is applied. In such countries, the government involves more in the companies' activity, slightly limiting the companies' power to action. In cases like this, a different approach to corporate governance is required, as it is more difficult to promote a liberal corporate governance model when the government involves so much in the companies' activity.

In order to benefit in the best way from corporate governance standards and to increase the strengths of this practice while diminishing its weaknesses, the International Corporate Governance Network has developed a series of principles that should be applied in global corporate governance. The most important objectives proposed by the ICGN refer to shareholders. Therefore, it is recommended to optimize return to shareholders, which should become the most important objective for a company. In other words, "corporate governance practices should focus board attention on this objective. In particular, the company should thrive to excel in comparison with the specific equity sector peer group benchmark" (ECGI, 2005). Another objective refers to the long-term prosperity of the business. This requires the development and implementation of a corporate strategy that focuses on increasing the equity value on a long-term.

Another recommendation refers to facilitating the exercise of ownership rights by all shareholders. In relation to this, all shareholders must be treated equitably. One of the most important recommendations refers to increasing the shareholders' possibility to be a part in the decision making process for matters of extreme importance to the company's activity.

The importance of corporate governance in general and of investor protection in particular, resides in its influence on real economy. As certain specialists in the field have agreed upon, financial development can be responsible for accelerated economic growth (La Porta et al., 1999). This influence on economic growth can be discussed under three aspects. First of all, investor protection enhances savings. As a consequence, these savings can be directed towards real investments, leading to capital accumulation. And last, but not least, investor protection improves the efficiency of resource allocation. These three directions are very important when linking financial development to economic growth.

The most productive corporate governance systems are considered to be those focusing on the institutions financing firms in the detriment of those focusing on the legal protection of investors. These corporate governance systems that are centered around banks present similar traits to those centered on markets. Such bank-centered corporate governance systems are applied in Germany and Japan. It seems that such systems might be the future of corporate governance, given the great status of the German and Japanese economies.

However, the bank-centered corporate governance system presents a series of advantages that cannot be provided by other corporate governance systems. One of the most important advantages is the fact that far-sighted banks allow companies to focus on long-term investment decisions. In addition to this, banks are able to provide capital to companies that are experiencing financial difficulties, therefore reducing the level of financial stress and preventing the company from taking a series of negative measures that could negatively affect the company, its employees, and its customers. Also, banks have another advantage, that of replacing invasive takeovers with financial intervention.