Corporate Governance (Law 506)

Models of Corporate Governance: Japanese

Model and German Model

Submitted to:
Dr . P.K. Das (Assistant Professor)

Submitted by:
Abhishek Raj
(CUB1413125004)
B.A.LL.B. (Hons.)
IXth Semester
SCHOOL OF LAW AND GOVERNANCE
 TABLE OF CONTENTS

Chapters Page No.

1. INTRODUCTION……………………………………………………………….….….…3

2. WHAT IS CORPORATE GOVERNANCE?...........................................................5

3. DEVELOPMENT OF CORPORATE GOVERNANCE……………………………....7

3.1. DEVELOPMENT IN JAPAN………………………………………………7

3.2. DEVELOPMENT IN GERMANY…………………………………………8
3.3. DEVELOPMENT IN INDIA……………………………………………….8
4. MODELS OF CORPORATE GOVERNANCE ………………………………………9

4.1.THE JAPANESE MODEL…………………………………………………..9

4.1.1. KEY PLAYERS OF JAPANESE MODEL…………………….10
4.1.2. SHARE OWNERSHIP PATTERN……………………………...10
4.1.3. COMPOSITION OF BOARD…………………………………..11
4.1.4. REGULATORY FRAMEWORK……………………………….11
4.1.5. DISCLOSURE REQUIREMENT………………………………12
4.1.6. CHARACTERSTICS OF JAPANESE MODEL.........................12

4.2.THE GERMAN MODEL…………………………………………………...14

4.2.1. KEY PLAYERS OF GERMAN MODEL……………………….15
4.2.2. SHARE OWNERSHIP PATTERN………………………………15
4.2.3. COMPOSITION OF BOARD……………………………………15
4.2.4. REGULATORY FRAMEWORK………………………………..16
4.2.5. DISCLOSURE REQUIREMENT……………………………….16

5. CONCLUSION ……………………………………………………………………..……17

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 Corporate Governance: Development and Its Model in Japan and Germany1

1. INTRODUCTION

Over the past two decades, the investment world has seen a large numbers of scandals
relating to companies which are attributed to failure of governance. This has been caused
due to a combination of factors which can be principally classified into three corporate
sins. The executive directors of the company lost the sense of business ethics and
earnings became the only motive. Directors were not prepared to show losses which led
to the use of unethical practices like forging books of accounts to show higher earnings.

Other directors acted as a puppet in the hands of executive directors, approving improper
financial statements and condoning unfair practice. Managers awarded themselves huge
bonuses and stock options, often at the expense of other shareholders.

Auditors colluded or failed to stop executive directors from using improper accounting
policies. In the process they lost their independence which they surrendered it in return
for high audit fees.

The area of corporate governance has acquired heightened attention in the last decade
because of various notable scandals and collapses cited from the USA (Enron, World
com, Tyco), the UK (the collapse of Maxwell publishing group), Germany (the cases of
Holtzman, Berliner Bank, and HIH), Korea (the widespread banking distress in 1997),
Australia (Ansett Airlines and One Tel), France (Credit Lyonnais and Vivendi), and
Switzerland (Swissair), India (Satyam and Reebok). The world reaction to these
corporate wrongs was massive which led to the development of law and codes for better
corporate governance. Cadbury Committee report 1992 (UK), Greenbury report 1995
(UK), The Combined code 1998 (UK), Turnbull report 1999 (UK), OCED principles of
corporate governance 1999 etc were some of the international initiatives to regulate

1
ABHISHEK RAJ, B.A.LL.B.(H.), SEMESTER IX, SCHOOL OF LAW AND GOVERNANCE, CENTRAL UNIVERSITY
OF SOUTH BIHAR.

2
corporate affairs. Especially the collapse of Enron in the USA in 2001 increased the
importance of corporate governance both in the USA and in other parts of the world.

The need for corporate governance has arisen because of the increasing concern about the
non-compliance of standards of financial reporting and accountability by boards of
directors and management of corporate inflicting heavy losses on investors. Many large
corporations are transnational in nature. This means that these corporations have impact
on citizens of several countries across the globe. If things go wrong, they will affect
many counties, some more severely than others. It is, therefore, also necessary to look at
the international scene and examine possible international solutions to corporate
governance difficulties. Corporate governance is needed to create a corporate culture of
consciousness, transparency and openness. It refers to a combination of laws, rules,
regulations, procedures and voluntary practices to enable companies to maximise
shareholder's long-term value. It should lead to increasing customer satisfaction,
shareholder value and wealth. With increasing government awareness, the focus is shifted
from economic to the social sphere and an environment is being created to ensure greater
transparency and accountability.

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 2. WHAT IS CORPORATE GOVERNANCE?

Corporate governance is the process by which large companies are run. Corporate refers
to the most common form of business organization, one which is chartered by a state and
given legal rights as an entity separate from its owners. This form of business is
characterized by the limited liability of its owners. The process of becoming a
corporation, called incorporation gives the company separate legal standing from its
owners and protects those owners from being personally liable in the event that the
company is sued. The concept of corporate governance is gaining momentum because of
various factors as well as the dynamic business environment. The principles of good
governance are as old as good behaviour, which needs no formal definition. However, in
reference to the corporate world, it has been defined by various persons, some of whom is
described below just in order to satisfy that the vital details and spirit of the term are not
missed out.

Sir Adrian Cadbury Committee, which looked into corporate governance issues in U.K.,
defines Corporate Governance "as the system by which the companies are directed and
controlled. The basic objective of corporate governance is to enhance and maximize
shareholder value and protect the interest of other stake holders".2

According to ICSI, "We may define 'corporate governance as a blend of rules,

regulations, laws and voluntary practices that enable companies to attract financial and
human capital, perform efficiently and thereby maximise long term value for the
shareholders besides respecting the aspirations of multiple stakeholders including that of
the society."3

2
The Cadbury Committee Report, 1992
3
Corporate Governance Reporting, ICSI

4
OECD has defined corporate governance as, “Corporate governance involves a set of
relationships between a company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which the
objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined.”

Good governance is integral to the very existence of a company. It inspires and

strengthens investor's confidence by ensuring company's commitment to higher growth
and profits. It seeks to achieve following objectives:

i. That a properly structured Board capable of taking independent and objective

decisions is in place at the helm of affairs;
ii. That the Board is balanced as regards the representation of adequate number of
non-executive and independent directors who will take care of the interests and
well being of all the stakeholders;
iii. That the Board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information.
iv. That the Board has an effective machinery to sub serve the concerns of
stakeholders;
v. That the Board keeps the shareholders informed of relevant developments
impacting the company;
vi. That the Board effectively and regularly monitors the functioning of the
management team; and
vii. That the Board remains in effective control of the affairs of the company at all
times. The overall endeavour of the Board should be to take the organisation
forward, to maximise long-term gains and stakeholders' wealth.

Corporate governance is a multidisciplinary field of study it covers a wide range of

disciplines – accounting, consulting, economics, ethics, finance, law, and management.
The main function of corporate governance is to make agreements that describe the
privileges and tasks of shareholders and the organization. In case of disagreements

5
because of conflict of interest, it is the responsibility of corporate governance to bring
everyone together. It also has the function of setting standards against which corporations
work can be managed and administered.

3. DEVELOPMENT OF CORPORATE GOVERNANCE

3.1. DEVELOPMENT IN JAPAN:

The corporate governance system in Japan has evolved over centuries. After World War
II, the Japan rebuilt its economy and developed a unique corporate governance structure.
The Japanese model was quite distinct from the German model and the U.S. model and
led to Japan becoming the second largest economy in the world by the 1980s4. It was thus
fashionable to ask whether other countries should be adopting Japan’s model. But the old
model was challenged by the development of globalization and the economic crisis.
Actually, the Japanese government has taken actions to impose corporate governance
reforms in recent years.
Currently, there are three notable characteristics of the Japanese model of corporate
governance. With regard to the ownership structure, first, shareholdings are often held by
a main bank or a keiretsu5 partner in order to avoid the principle-agent problem. Second,
relationship banks in Japan can play a more prominent role in the management within
corporations6. They can intervene in the management of firms especially in times of
financial distress, dispatch representatives to the board of directors and initiate
restructuring activities. Third, the employment system is founded on two main elements7:
first, lifetime employment, in which workers spend their entire career at the same firm,
slowly working their way up the ranks; second, seniority-based pay (age-based pay),
which links wages to length of tenure rather than ability. To protect the interests of
shareholders, creditors and the employees as a whole, the Japanese model of corporate
governance ‘is focused on growth and market share.’

4
Historical Dynamics of the Development of the Corporate Governance in Japan, Journal of Politics and
Law, Vol.2. 2009.
5
Ibid.
6
Ibid.
7
Ibid.

6
 3.2.DEVELOPMENT IN GERMANY

The traditional German corporate governance system has developed against the
background of a pay-as-you-go pension system and the consensus-oriented German
culture. The system that emerged was characterized by influential banks and bank loans
being the main source of outside financing for the corporate sector. However, as the
economic and regulatory environment changed over the last 25 years, the corporate sector
shifted towards more equity financing, and more generally towards more market-oriented
sources of finance8. Simultaneously, the banking sector saw major transformations and
Germany enacted a series of regulatory initiatives to modernize its corporate governance.
As a result, the German corporate governance system developed notably with
international and minority shareholder gaining influence at the expense of banks and
other insiders. While this development – which is strongly influenced by the Anglo-
American governance ideal9, but does not simply adopt a market-oriented blueprint – is
still ongoing, several open issues with room for improvement remain.

3.3.DEVELOPMENT IN INDIA

There have been several major corporate governance initiatives launched in India since
the mid-1990s. The first was by the Confederation of Indian Industry (CII), India’s
largest industry and business association, which came up with the first voluntary code of
corporate governance in 1998. The second was by the SEBI, now enshrined as Clause 49
of the listing agreement. The third was the Naresh Chandra Committee, which submitted
its report in 2002. The fourth was again by SEBI — the Narayana Murthy Committee,
which also submitted its report in 2002. Based on some of the recommendation of this

8
Corporate Governance in Germany: Recent Developments and challenges, Journal of Applied Corporate
Finance, Vol. 27, 2015.
9
Ibid.

7
committee, SEBI revised Clause 49 of the listing agreement in August 2003.
Subsequently, SEBI withdrew the revised Clause 49 in December 2003, and currently,
the original Clause 49 is in force.

4. MODELS OF CORPORATE GOVERNANCE

There are various different models that are applied across the world. There is
disagreement over which is the best or most effective model as there are different
advantages and disadvantages with each model. Models are developed according to the
laws and other factors specific to the country of origin.

The corporate governance structure of joint stock corporations in a given country is

determined by several factors: the legal and regulatory framework outlining the rights and
responsibilities of all parties involved in corporate governance; the de facto realities of
the corporate environment in the country; and each corporation’s articles of association.
While corporate governance provisions may differ from corporation to corporation, many
de facto and de jure factors affect corporations in a similar way. Therefore, it is possible
to outline a "model" of corporate governance for a given country. In each country, the
corporate governance structure has certain characteristics or constituent elements, which
distinguish it from structures in other countries. To date, researchers have identified three
models of corporate governance in developed capital markets. These are the Anglo-US
model, the Japanese model, and the German model. Each model identifies the following
constituent elements: key players in the corporate environment; the share ownership
pattern in the given country; the composition of the board of directors (or boards, in the
German model); the regulatory framework; disclosure requirements for publicly-listed
stock corporations; corporate actions requiring shareholder approval; and interaction
among key players.

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 4.1.THE JAPANESE MODEL

The Japanese model is characterized by a high level of stock ownership by affiliated

banks and companies; a banking system characterized by strong, long-term links between
bank and corporation; a legal, public policy and industrial policy framework designed to
support and promote “keiretsu” (industrial groups linked by trading relationships as well
as cross-shareholdings of debt and equity); boards of directors composed almost solely of
insiders; and a comparatively low (in some corporations, non-existent) level of input of
outside shareholders, caused and exacerbated by complicated procedures for exercising
shareholders’ votes. Equity financing is important for Japanese corporations. However,
insiders and their affiliates are the major shareholders in most Japanese corporations.
Consequently, they play a major role in individual corporations and in the system as a
whole. Conversely, the interests of outside shareholders are marginal. The percentage of
foreign ownership of Japanese stocks is small, but it may become an important factor in
making the model more responsive to outside shareholders.

4.1.1. Key players in the Japanese Model

The Japanese system of corporate governance is many-sided, centering around a main

bank and a financial/industrial network or keiretsu. The main bank system and the
keiretsu are two different, yet overlapping and complementary, elements of the Japanese
model. Almost all Japanese corporations have a close relationship with a main bank. The
bank provides its corporate client with loans as well as services related to bond issues,
equity issues, settlement accounts, and related consulting services. The main bank is
generally a major shareholder in the corporation. Many Japanese corporations also have
strong financial relationships with a network of affiliated companies. These networks,
characterized by crossholdings of debt and equity, trading of goods and services, and
informal business contacts, are known as keiretsu. Government-directed industrial policy
also plays a key role in Japanese governance. In the Japanese model, the four key players
are: main bank (a major inside shareholder), affiliated company or keiretsu (a major
inside shareholder), management and the government. In contrast with the Anglo-US
model, non-affiliated shareholders have little or no voice in Japanese governance. As a

9
result, there are few truly independent directors, that is, directors representing outside
shareholders.

4.1.2. Share ownership pattern in Japanese Model

In Japan, financial institutions and corporations firmly hold ownership of the equity
market. Similar to the trend in the UK and US, the shift during the postwar period has
been away from individual ownership to institutional and corporate ownership. In 1990,
financial institutions (insurance companies and banks) held approximately 43 percent of .
the Japanese equity market, and corporations (excluding financial institutions) held 25
percent. Foreigners currently own approximately three percent. In both the Japanese and
the German model, banks are key shareholders and develop strong relationships with
corporations, due to overlapping roles and multiple services provided. This distinguishes
both models from the Anglo-US model, where such relationships are prohibited by
antitrust legislation. Instead of relying on a single bank, US and UK corporations obtain
financing and other services from a wide range of sources, including the well-developed
securities market.

4.1.3. Composition of Board of Directors

The board of directors of Japanese corporations is composed almost completely of

insiders, that is, executive managers, usually the heads of major divisions of the company
and its central administrative body. If a company’s profits fall over an extended period,
the main bank and members of the keiretsu may remove directors and appoint their own
candidates to the company’s board. Another practice common in Japan is the
appointment of retiring government bureaucrats to corporate boards; for example, the
Ministry of Finance may appoint a retiring official to a bank’s board. In the Japanese
model the composition of the board of directors is conditional upon the corporation’s
financial performance. A diagram of the Japanese model at the end of this article
provides a pictorial explanation. In contrast with the Anglo-US model, representatives of
unaffiliated shareholders (that is, “outsiders”) seldom sit on Japanese boards. Japanese
boards are generally larger than boards in the UK, the US and Germany. The average
Japanese board contains 50 members.

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4.1.4. Regulatory Framework in Japanese Model

In Japan, government ministries have traditionally been extremely influential in

developing industrial policy. The ministries also wield enormous regulatory control.
However, in recent years, several factors have weakened the development and
implementation of a comprehensive industrial policy. First, due to the growing role of
Japanese corporations at home and abroad, policy formation became fragmented due to
the involvement of numerous ministries, most importantly, the Ministry of Finance and
the Ministry of International Trade and Industry. Second, the increasing
internationalization of Japanese corporations made them less dependent on their domestic
market and therefore somewhat less dependent on industrial policy. Third, the growth of
Japanese capital markets led to their partial liberalization and an opening, albeit small, to
global standards. While these and other factors have limited the cohesion of Japanese
industrial policy in recent years, it is still an important regulatory factor, especially in
comparison with the Anglo-US model.

4.1.5. Disclosure Requirement in Japanese Model

Disclosure requirements in Japan are relatively stringent, but not as stringent as in the
US. Corporations are required to disclose a wide range of information in the annual
report and or agenda for the AGM, including: financial data on the corporation (required
on a semi-annual basis); data on the corporation’s capital structure; background
information on each nominee to the board of directors (including name, occupation,
relationship with the corporation, and ownership of stock in the corporation); aggregate
date on compensation, namely the maximum amount of compensation payable to all
executive officers and the board of directors; information on proposed mergers and
restructurings; proposed amendments to the articles of association; and names of
individuals and/or companies proposed as auditors.

4.1.6. Characteristics of the Japanese Model of Corporate Governance

According to Cadbury Report, corporate governance is the system by which companies
are directed and controlled . In other words, corporate governance deals with the

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relationships among the board of directors, management, shareholders and other
stakeholders with respect to the control of corporations. Currently, the major new
phenomenon is the new ‘hybrid’ pattern of corporate governance that involves a mix of
elements from the ‘old’ Japanese model and ‘new’ more the Anglo-American practices.
The notable features of the symbiotic Japanese model can be listedas follows.

A. Ownership Structure
While the wider dispersion of ownership is characterized by the U.S. model, the Japanese
model of corporate governance has been described as the keiretsu model, because it
contains a high degree of cross-shareholdings. In Japan, shareholdings are often not held
by individuals or institutional investors who have no relationship to the company, but
rather by dominant shareholders, such as main bank or a keiretsu partner which form part
of a group of companies. Corporate governance in Japan is characterized by cross-
shareholding, albeit there is a reduction from 50% of total market capitalization in 1990
to 20% in 2006 Fiduciary duty of management exists in both the Japanese model and the
U.S. model that involve different mechanisms. In theory, the board of directors represents
the interests of the owners (shareholders) and is intended to control the management. The
management is accountable to the general meeting of shareholders. In the U.S., the
critical problem of the modern corporate governance is the principle-agent problem
arising from the separation of ownership and control in that sometimes the managers may
ignore the profits of the numerous and dispersed shareholders and breach their fiduciary
duties. As a result, the owners of the company may lose money that they have invested at
the hands of dishonest or reckless managers. In order to control this agency problem, the
strong stock market and the takeover mechanism are used as instruments for aligning the
benefits of shareholders with managerial interests. Conversely, Japan has developed an
alternative governance mechanism. Since the ownership is concentrated in the hands of a
keiretsu partner or main bank, who plays a more important role in monitoring the
management, most companies in Japan are shield from takeovers and both ownerships
and the control of the management are fused in practice.

B. Relationship Banking System

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Banks in Japan can play a more prominent role in corporate governance than those in
other countries-not only do they allocate the pool of available savings to the most
productive projects , but also monitor the management within corporations. ‘In any
economy banks serve as intermediaries in channeling savings into spending (investment
and consumption).
Indirect finance is ubiquitous across the world, although in the advanced capitalist
countries such as the U.S., direct finance (stocks and bonds) plays a proportionately more
important role in corporate finance.’ Hence direct or indirect finance itself is nothing
unique about Japan’s heavy reliance on bank loans.But one key feature of the Japanese
model of corporate governance is the concentration of shareholdings or loans from main
banks that are characterized as long-term and stable creditors. The other feature of the
Japanese model is that the main bank system has supplemented Japanese-style
management as an instrument of corporate governance. First, as noted, the Japanese
model of corporate governance can mitigate the principle-agent problem by introducing
relationship banking. This is because of the special nature of ties between firms
and banks in Japan. A main bank has especially close ties to its customers through
lending, shareholdings, and the board representation and other personal placement. This
can give main banks relative easy access to the same information about the firm’s
opportunities upon which managers rely to make investment decisions. ‘Several aspects
of the keiretsu financing can help overcome problems with asymmetric information that
contribute to adverse selection.’ Thus, main banks can intervene in the management of
firms, especially in times of financial distress. They can dispatch representatives to the
board of directors and initiate restructuring activities.

4.2.THE GERMAN MODEL

The German corporate governance model differs significantly from both the Anglo-US
and the Japanese model, although some of its elements resemble the Japanese model.
Banks hold long-term stakes in German corporations, and, as in Japan, bank
representatives are elected to German boards. However, this representation is constant,
unlike the situation in Japan where bank representatives were elected to a corporate board
only in times of financial distress. Germany’s three largest universal banks (banks that

13
provide a multiplicity of services) play a major role; in some parts of the country, public-
sector banks are also key shareholders.

4.2.1. Key Players of German Model

German banks, and to a lesser extent, corporate shareholders, are the key players in the
German corporate governance system. Similar to the Japanese system described above,
banks usually play a multi-faceted role as shareholder, lender, issuer of both equity and
debt, depository (custodian bank) and voting agent at AGMs. In 1990, the three largest
German banks (Deutsche Bank AG, Dresdner Bank AG and Commerzbank AG) held
seats on the supervisory boards of 85 of the 100 largest German corporations. In
Germany, corporations are also shareholders, sometimes holding long-term stakes in
other corporations, even where there is no industrial or commercial affiliation between
the two. This is somewhat similar, but not parallel, to the Japanese model, yet very
different from the Anglo-US model where neither banks nor corporations are key
institutional investors.

4.2.2. Share ownership pattern in German model

German banks and corporations are the dominant shareholders in Germany. In 1990,
corporations held 41 percent of the German equity market, and institutional owners
(primarily banks) held 27 percent. Neither institutional agents, such as pension funds
(three percent) or individual owners (four percent) are significant in Germany. Foreign
investors held 19 percent in 1990, and their impact on the German corporate governance
system is increasing.

4.2.3. Composition of Board in German Model

The two-tiered board structure is a unique construction of the German model. German
corporations are governed by a supervisory board and a management board. The
supervisory board appoints and dismisses the management board, approves major
management decisions; and advises the management board. The supervisory board
usually meets once a month. A corporation’s articles of association sets the financial

14
threshold of corporate acts requiring supervisory board approval. The management board
is responsible for daily management of the company. The management board is
composed solely of “insiders”, or executives. The supervisory board contains no
“insiders”, it is composed of labor/employee representatives and shareholder
representatives. The numbers of members of the supervisory board is set by law. In small
corporations (with less than 500 employees), shareholders elect the entire supervisory
board. In medium-size corporations (defined by assets and number of employees)
employees elect one-third of a nine member supervisory board. In larger corporations,
employees elect one-half of a 20-member supervisory board. While the supervisory board
includes no “insiders”, it does not necessarily include only “outsiders”. The members of
the supervisory board elected by shareholders are usually representatives of banks and
corporations which are substantial shareholders. It would be more appropriate to define
some of these as “affiliated outsiders”.

4.2.4. Regulatory Framework in German Model

Germany has a strong federal tradition; both federal and state (Laender) law influence
corporate governance. Federal laws include: the Stock Corporation Law, Stock Exchange
Law and Commercial Law, as well as the above-mentioned laws governing the
composition of the supervisory board are all federal laws. Regulation of Germany’s stock
exchanges is, however, the mandate of the states. A federal regulatory agency for the
securities industry was established in 1995. It fills a former void in the German
regulatory environment.

4.2.5. Disclosure Requirement in German Model

Disclosure requirements in Germany are relatively stringent, but not as stringent as in the
US. Corporations are required to disclose a wide range of information in the annual
report and/or agenda for the AGM, including: corporate financial data (required on a
semi-annual basis); data on the capital structure; limited information on each supervisory
board nominee (including name, hometown and occupation/affiliation); aggregate data
for compensation of the management board and supervisory board; any substantial
shareholder holding more than 5 percent of the corporation’s total share capital;

15
information on proposed mergers and restructurings; proposed amendments to the articles
of association; and names of individuals and/or companies proposed as auditors.

5. CONCLUSION

The countries differ in their own settings and that economic, political, social and local
traditions are affected the system and regulation build by these countries related to
different issues including systems related to companies affairs. The Japanese corporate
governance was historically heavily influenced by its legal origin, which has not been
taken as a direct reason but an indirect reason. The courts in Civil Law countries could
not resist governments’ power and therefore gave politics opportunities to influence the
development of the Japanese corporate governance directly. In the second place, the
strong political forces favored financial institutions in corporate governance finance and
employees during the war years and occupation, but the pressure from the globalization
especially in the 1990s called for the corporate governance reforms. Currently, some
political influences are weak or have disappeared and central planning structure is
discredited. It is time for Japan to make certain changes. In the third place, Japan has
undertaken massive reforms of the corporate governance mechanism from the 1990s but
it could not drop everything that is deeply rooted in its traditional culture. Hence, it is
proposed that the keiretsu system and the lifetime employment should not disappear in
the future albeit certain reforms are necessary in Japan.
While the German corporate governance system developed notably with international and
minority shareholder gaining influence at the expense of banks and other insiders. While
this development – which is strongly influenced by the Anglo-American governance
ideal10, but does not simply adopt a market-oriented blueprint – is still ongoing, several
open issues with certain room for improvement.
In many countries, companies are run mostly for the benefit of the shareholders, the
rightful owners. However, there are circumstances in which the corporation is also run
for the benefit of other interest groups such as customers and employees or the general

10
Ibid.

16
public at large. Governance refers specifically to the set of rules, controls, policies and
resolutions put in place to dictate corporate behavior. Good corporate governance creates
a transparent set of rules and controls in which shareholders, directors and officers have
aligned incentives. Most companies strive to have a high level of corporate governance.
For many shareholders, it is not enough for a company to merely be profitable; it also
needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices.

In summary, all of these historical dynamics including legal, political and cultural
systems have promoted and shaped the Japanese model as well as the German Model of
corporate governance in particular ways.

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