3. Examine how the introduction of shareholder value orientation impacts upon the traditional practices of European corporations.

The term Corporate Governance relates to the manner in which an organization should be governed or managed. The concept is more relevant in the case of companies which have grown based on equity capital taken from investors. Stocks of many such companies are listed in stock exchanges, which exposes them to the public and automatically brings them under closer regulatory scrutiny, the level of transparency required being rather high. All companies are basically valued based on their present performance and expected long term success in achieving growth and profitability. For this purpose, there has to be a free flow of information (financial and strategic) amongst the shareholders, so that they can measure the economic potential and value of the organizations strategies and activities. Also, since people (investors) have their money at stake in these companies, they have a right to decide on the selection of the Directors and influence the manner in which the organization should be run to achieve optimal results.1 Historically, the principles of corporate governance have evolved in different countries based on their political, economic and cultural philosophies. For example, if a country (e.g. France) has a socialistic ideology, it is somewhat natural that the corporate governance there is based on inclusion of all stakeholders, especially the employees. In Japan and Germany, if the banks have a major financial stake in the organizations, they will obviously give due weightage to what the banks think could be the best strategic course for the organization. Cultures where capitalism is at the core of strategic management ideology (e.g. USA), would like to concentrate on increasing wealth of shareholders alone and let the market forces determine the winner.2 Of course, these principles change with the passing of time and all countries should learn from each other, especially from negative events such as the collapse of huge organizations due to fraud.

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The increasing dependence of European companies on the global capital markets is forcing them to have a more shareholder value orientation. This is a huge step for these organizations because of the many differences between the two corporate governance systems the Anglo-American and European. The Anglo-American corporate governance system is based on shareholder wealth maximization principles, shareholder interests being considered the primary focus of company law. Also this model places a great emphasis on effective minority shareholder protection in securities law and regulation. Furthermore, shareholders have the right to use their voting power to select the board and decide on the key issues facing the company, but in practice they rarely exercise this control when faced with an informed and determined management. There is a separation of ownership and management in this corporate governance model to the extent that managers have a free hand in running the affairs of the organization. A solution to this was that the majority of the board should be held by Non-Executive Directors. Their task is to monitor the performance of the managers and take appropriate action to encourage or discourage the strategies being attempted by them. The board is a single tier body with Executive and the Non-Executive Directors coming together to chart the course of the organization. In most cases, one of the Executive Directors, who is the Chairman, is also the Chief Executive Officer of the organization. Managers are considered as agents of the owners and hence the Non-Executive Directors / Board may terminate these agency contracts in case of poor performance. On the other hand, these managers get rewarded for good performance, through bonuses and free stake in the organization through stock options etc.3 Unfortunately, this often leads to short-term orientation and a micro mindset of the managers. The large institutional investors (mutual funds, pension funds etc.) are having maximum stake in these organizations and the capital markets are more liquid as equity is the preferred mode of business funding.4

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The European model of corporate governance gives importance to all stakeholders including the shareholders. The separation between ownership and management is not that clear with boards comprising of representatives of various stakeholders like majority shareholders, lenders (banks), employees, suppliers etc. The board is a two tier structure with a supervisory board comprising of Non-Executive Directors which controls decision making by the Executive Directors.5 The presence of these stakeholders on the board (who are also shareholders) increases their influence in the decision-making process. The ownership patterns are more concentrated and complex with cross-holdings being common. The relevant financial markets are less liquid and there is higher dependence on debt to fund growth and operations of the companies.6 The concept of audit committee is existent in the European model also, but the composition of the committee is not that strictly laid down such as in the Anglo-American one. Also the Chairman and Chief Executive Officer positions may or may not be held by the same person. The pulls and pressures by the large stakeholders obviously rein innovation and risk taking ability of the management. This may be good in certain situations but mostly, the lack of out of the box thinking may be detrimental to the competitive advantage of the firm. These effects increase the response time of the organizations making it less lean.7 In order to better observe the process that a European company has to undergo in order to have o more shareholder value orientation we could have a closer look on the 1998 merger of Daimler-Benz the most distinguished car company in Europe at the time with US Chrysler Corporation. The merger presented great cultural and governance obstacles which eventually were overcome. Daimlers strengths were in technology and market reach, while Chryslers were in
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design and productivity. Though they complemented each other, in this partnership of equals it was Daimler that emerged on top. The main shareholders in DaimlerChrysler had to adjust their financial relationship. The biggest shareholder of the merged company was still Deutsche Bank but because of the fact that the Anglo-American market looked unfavorably on financial institution influence, it gradually reduced its ownership. Concerning the management of DaimlerChrysler, the boards and employee relationships have taken a hybrid GermanAmerican flavor. The merger was completed under German law, thus retaining the spirit of co-determination and two-tiered boards. The two-tiered nature of German boards, establishes a stronger monitoring rule (Jackson 2003: 292), and a charismatic CEO or chair has fewer opportunities to bulldoze his own criteria through the board than with unitary boards. After the merger, DaimlerChrysler established a unique concept an independent chairpersons council of non-executive directors that would satisfy requirements expected by the American authorities. The council is chaired by the chairperson of the management board and was established to combine elements of both American and German corporate governance and to meet the requirements of the various stakeholders.8 The main obstacles to organizational fit that DaimlerChrysler faced were cultural and financial. This issue was partly resolved when most of the Chrysler executives resigned and German managers took their places in America. This shows how unequal the merger of equals proved to be. Eventually the companies have blended so good that it could almost be missed. The Chrysler part of the company is becoming more sophisticated thanks to the superior German engineering under the hoods of Chrysler cars, while Daimler seems willing to take more risks. The transformation of corporate governance in Europe is a fascinating but clearly unfinished portrait.9 The direction of the development of corporate governance in Europe will be determined by the extent to which shareholder value orientations and their accompanying managerial practices take hold.

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Clarke Thomas International Corporate Governance: a comparative approach, p. 381 Clarke Thomas International Corporate Governance: a comparative approach, p. 189