International approaches to governance — study companion

Accounting Ahead | Original study resource | accountingahead.com.au

Two families of governance systems

MODULE 3 | PART C.1 | STUDENT COMPANION

Market-based (outsider, shareholder) Relationship-based (insider, stakeholder)

Where United States, United Kingdom, Australia, New

Zealand

Germany, France, Japan and much of Asia

Ownership Widely spread among individuals and

institutions

Concentrated: families, banks, related

companies, the state

Who watches

managers

Outsiders using public information Insiders using close, private relationships

Main finance Equity markets; banks lend at arm's length Bank finance, often with high debt

Information Strict public disclosure for everyone Deeper, selective sharing among insiders

Takeovers A real threat that disciplines managers Rare, because of stable cross-holdings

Main

governance risk

Dispersed owners struggle to control

managers

Minority shareholders exposed to insiders

Unitary and two-tier boards

UNITARY (ONE-TIER) BOARD TWO-TIER BOARD (E.G. GERMANY)

Shareholders

elect

One board

Executive and non-executive directors sit

together; independent directors monitor

delegates

Chief executive and management

Shareholders and employees

Large firms: employees hold half the seats

elect

Supervisory board

Oversees, and appoints the management board;

no executives

appoints and oversees

Management board

Runs the company

ETHICS & GOVERNANCE | M3 PART C.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Country snapshots and reform

MODULE 3 | PART C.1 | ORIGINAL SUMMARIES

Country What stands out

United States Largest capital market; majority-independent boards required by the main exchanges; chair and

chief executive often combined, usually with a lead independent director; committees since the

1980s.

United Kingdom Market-based model with a principles-based code applied on a comply or explain basis.

Germany Concentrated ownership; two-tier boards; employee representatives hold half the supervisory

board seats in companies with more than 2,000 employees.

France Cross and circular shareholdings; highly concentrated ownership; one person often both chair

and chief executive; choice of one-tier or two-tier board.

Japan Boards traditionally drawn from senior management; keiretsu groups linked by

cross-shareholdings around a main bank; codes for investors (2014) and listed companies

(2015).

India Anglo-American legal base but strong family control; the key challenge is protecting minority

shareholders from dominant ones, with stronger enforcement.

Collapse or

scandal Trust falls Inquiry and debate New laws or codes

Australia, early 2000s

Ramsay Report on auditor independence (2001) | ASX Corporate Governance Council principles (2003) | CLERP 9 audit and

disclosure reforms (2004)

Germany, Wirecard

June 2020: about EUR 1.9 billion of reported cash probably did not exist; insolvency followed. 2021: new law requiring audit firm

rotation, expert audit committees and a stronger regulator.

Real cases: Wirecard AG insolvency (June 2020) and Germany's Financial Market Integrity Strengthening Act (2021); Olympus

Corporation (2011). Study guide reference: Module 3, Part C, sections 3.7 and 3.8.

ETHICS & GOVERNANCE | M3 PART C.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 3 | PART C.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - which family?

Mark each feature M (market-based) or R (relationship-based).

Feature M or R Feature M or R

(a) Strict public disclosure for all investors (f) Banks hold shares in the companies

they lend to

(b) Cross-shareholdings between

companies

(g) Hostile takeovers discipline managers

(c) Shareholder interests come first in

company law

(h) Employees elect supervisory board

members

(d) Information shared privately among

insiders

(i) Strong protection of minority

shareholders

(e) Widely spread share ownership (j) Family-controlled conglomerates

Question 2 - compare and evaluate

(a) Explain one key difference between a unitary board and a two-tier board. (b) Give one strength and one

weakness of market-based systems, and one strength and one weakness of relationship-based systems.

ETHICS & GOVERNANCE | M3 PART C.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 3 | PART C.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1

Market-based (M): (a) strict public disclosure, (c) shareholder interests first, (e) widely spread ownership, (g)

takeovers discipline managers, (i) strong minority protection.

Relationship-based (R): (b) cross-shareholdings, (d) private information sharing, (f) banks as shareholders and

lenders, (h) employee-elected supervisory board members, (j) family-controlled conglomerates.

Test to apply: who watches the managers? Outsiders using public information point to market-based;

insiders using private relationships point to relationship-based.

Question 2

(a) In a unitary board, executive and non-executive directors sit on one board, with independent directors

monitoring. In a two-tier board, a supervisory board with no executives oversees and appoints a separate

management board that runs the company, so supervision and management are formally separated.

System Strength Weakness

Market-based Deep, liquid markets and transparency;

strong minority protection; takeover

discipline

Short-term pressure; dispersed owners

struggle to control powerful managers

Relationship-based Patient, long-term capital; stability;

employee and stakeholder voice

Less transparency; entrenched insiders;

minority shareholders exposed

Other well-reasoned strengths and weaknesses are acceptable if they follow from the system's features.

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