Corporate Governance Models in the UK and the US

Introduction

Corporate governance is identified as a set of rules, laws, and regulations that are interwoven with the common law and help govern a company’s day-to-day business practices (Mitchell 13). Typically, corporate governance revolves around several parameters, which include the relationships between different stakeholders and shareholders, the community, the government, and the company (Don 34). These relationships are largely determined by various cultural, historical, and development nuances of the countries of origin. The purpose of this paper is to compare and contrast corporate governance systems in the US and the UK.

Corporate Governance Models, Ownership, and Control Patterns

US companies favor a rules-based model, which revolves around following a set of predetermined actions and a large number of rules and regulations to comply with local, state, and federal laws (Tricker 149). Although in the beginning, the US system had many similarities with the UK model, it was later made to purposefully differentiate itself from its colonial past. Independence from Britain and the promotion of freedom in business and the market became part of its culture. This model is largely tied to the US legal case system, which is based on case laws. In other terms, every case won or lost in the Supreme Court becomes a precedent to be used in disputes (Tricker 149). This system is relatively inflexible and is accompanied by high levels of litigation, with legal penalties issued for directors that refuse to comply. The benchmark document for the US corporate governance system is the 2002 Sarbanes-Oxley Act, which enforces law penalties for improper governance as well as exorbitant and cumbersome disclosure requirements. Despite the relative strength of the US economy and its high liquidity rates on the financial markets, its initial public offering levels are relatively low.

UK corporate governance model is based on a set of principles. Unlike the US model, which seems to have a rule or a law for almost everything, this model features a much smaller list of direct rules and regulations and more principles, which are meant to guide the companies in their governing efforts. This system is inherently more flexible, as the principles are more open to interpretation, within reasonable margins (Tricker 151). Although the UK law enforcement system is also based on case laws, the reasons why the UK corporate governance model is principles-based is largely tied to the accounting standards and economic models present in Europe.

The UK is characterized by an ownership model dominated by financial markets. It suggests dispersed ownership and a high prevalence of institutional investors in the control structure. During the 1960s, individual investors made up for over 50% of the entire ownership pool, in the late 2000s, it fell below 20% (Kluyver 77). Nevertheless, the ownership and control landscape in the UK remains highly fragmented, due to the central role of financial markets. Because of this, most corporations lack a concentrated authority between shareholders, which allows the directorial board to determine the direction of the company. This presents a weakness in the existing corporate governance system in the UK – dispersed ownership and a lack of incentives to perform direct monitoring leave room for power abuse by strong block holders.

The situation in the US corporate governance is similar to that of the UK; only the shareholders are even more dispersed. While in the UK, strong block holders are the primary players and determinants of corporate directions, in the US there are no strong block holders due to the highest dispersion rates in the world (Meier and Meier 7). As a result, the directorial board has plenty of power, and no individual shareholder is strong enough to influence them. Because of this, CEOs and high-ranking directors have almost unlimited control over their corporations and are associated with their successes and failures.

Influence of the Economic Models

One of the reasons why the US corporate governance model is centered around CEOs, directors, and strong leaders, whereas the UK model revolves around block holders is because of differences in the economic landscape (Madhani 8). The US market culture is characterized as aggressive and rife with unbridled competition. The government’s role is to provide a fair playing field for the companies to compete in. The UK borrows from the German economic model, which emphasizes cooperation between the government, the stakeholders, and the shareholders of the company. Thus, the UK model leaves some room for employee determination, whereas the US governance systems almost completely exclude employees from the corporate governance process and decision-making (Madhani 9).

Conclusions

Corporate governance systems in the UK and the US have some similarities regarding ownership dispersal and the connections with the legal systems. Nevertheless, they were later influenced by different forces, with the UK system moving towards European standards while the US system was left to develop on its own. Critical differences between them lie in the rules vs. principles model as well as the power of the owners vs. managers.

Works Cited

Don, Johnson. Corporate Governance. Emerald Publishing, 2017.

Kluyver, Cornelis A. Corporate Governance. Saylor Academy, 2012.

Madhani, Pankaj M. “Diverse Roles of Corporate Board: A Review of Various Corporate Governance Theories.” IUP Journal of Corporate Governance, vol. 16, no. 2, 2017, pp. 7-28.

Meier, Heidi H., and Natalie C. Meier. “Corporate Governance: An Examination of U.S. and European Models.” Corporate Board: Roles, Duties & Composition, vol. 9, no. 2, 2013, pp. 6-11.

Mitchell, Lawrence E., editor. Corporate Governance: Values, Ethics, and Leadership. Gower, 2009.

Tricker, Bob. Corporate Governance: Principles, Policies, and Practices. 3rd ed., Oxford, 2015.