In the U.S., the most prevalent approach to corporate governance setup is the Anglo-American model, which comprises a one-tier board where many of the directors are from outside the company. For example, on Apple’s eight-person board, sits former Vice President Al Gore, a former Boeing CFO and the CEO of Disney.
The one-tier board is one of the most popular models of corporate governance in the world, with a presence that reaches from South America to Europe to Asia. But alternatives to this model exist. In continental Europe, there are two prominent competitors: the German and the Nordic models, both of which emphasize a high degree of separation between the board and the executive. In Japan, boards can reach as many as 60 members and usually have seats reserved for representatives of banks and government agencies.
These established models are modified and customized on an as-needed basis according to nations’ social, political, economic and legal values.
Here is a bird’s-eye view of the fundamentals of the four predominant corporate-governance models:
The Anglo-American model: These boards typically have eight to 12 members elected by shareholders. In the U.S., the chairman is often also the company’s CEO, and the other members are often outside (i.e., non-executive) directors. In the U.K., the CEO rarely pulls double-duty as the chair.
This model is commonly depicted by a triangle equally representing shareholders, the board and management. In the one-tier system, all board directors work together across a single organizational layer, but may break out into permanent and special committees. It is perhaps one of the least bureaucratic models of corporate governance that exists, making it a popular governance choice among high-growth companies.
The mission of the one-tiered board is to maximize shareholder profits. But this approach to corporate governance has some drawbacks. In a critique of the Anglo-American model, Thomas Clarke, the director of the University of Technology Sydney’s Centre for Corporate Governance, writes that this board model allows CEOs to amass incredible wealth and power and gives them an overwhelming amount of influence in stakeholder relations. This kind of governance, Clarke writes, stood at the root of the 2008 U.S. financial crisis.
This system is firmly in place in the U.K., the U.S., Australia and Canada. Boards in former British colonies and common-law countries like India and Malaysia often have some variation of the Anglo-American model. Variations of this model are also present in China.
The German model: The defining characteristic of the German model is that boards are two-tiered, meaning executives and non-executives are separated into a management board and a supervisory board, respectively. “Shareholders appoint members of the supervisory board (other than employee members), while the supervisory board appoints the members of the management board,” writes the World Bank. This also means the boards are larger than the average one-tier board — the average board in Germany has 17 directors (on both tiers combined), though other countries with the two-tier model have smaller boards.
German corporate governance, which is based on the principle of co-determination, allows for labor representation on both board tiers — an element largely absent from one-tier boards. The size of these boards is also ideal for implementing inclusion policies like gender quotas, and can improve the representation of minority stakeholders.
In Europe, companies in most countries can choose between one- and two-tier boards, as often dictated by law. In France, for example, companies can choose between the two, and within the one-tier option, they can choose whether to combine the roles of chairman and CEO, or keep them separate. Peugeot has a two-tier board, while Christian Dior’s board has one tier. Most Scandinavian countries, meanwhile, can choose between the Nordic model and the German model.
The Nordic model, like the German model, has a high degree of separation between the board of directors and executive management. In fact, most boards are entirely composed of non-executive directors. Unlike the German model, the boards are typically small. Sweden’s boards have an average of 6.5 directors, according to the World Bank. These boards also boast a high number of women, and employees have the right of representation.
Another distinction in the Nordic model is that the general meeting, an event where shareholders exercise voting rights, is the highest decision-making body of the company “and the main forum for the shareholders to exercise their ownership rights,” writes Swedish think tank SNS in its publication The Nordic Corporate Governance Model (opens as PDF). The chain of command begins with the general meeting, goes through the board and ends with executive management.
This model is localized in Denmark, Sweden, Norway and Finland.
The Japanese model: If the Anglo-American model is represented by a triangle, the Japanese model is a hexagon representing outside shareholders, the government, management, independent directors, the bank and something uniquely Japanese called keiretsu. The term can be defined as “conglomerate,” as per Smithsonian.com:
“Keiretsu exist as a network of industries, with one- and two-way agreements to favor each other in business deals and share in shouldering temporary burdens that would otherwise cause instability for the group.”
Also uniquely Japanese is the place of the bank or financial institution and the government.
“Japanese regulators play a large role in corporate policies, often because corporations’ major stakeholders include Japanese officials. The central banks and the Japanese Ministry of Finance review relationships between different groups and have implicit control over negotiations,” writes Investopedia.
Japanese boards are huge by comparison to the other three models mentioned — some boards, like that of Panasonic, have upwards of 60 directors. However, in 2015, the Japanese government introduced a new corporate-governance code aimed at improving shareholder satisfaction (as well as attracting foreign investment), as reported by the Financial Times. Although implementation has been slow, it’s believed that the code will result in reducing the number of board members, and increase nominations of more qualified board members. (For reference, Nomura Holdings clearly detailed the changes it would implement in order to comply with the new code.)
Although the Japanese model is solely used in Japan, the country is home to some of the world’s most famous brands, including Toyota, Mitsubishi, Sony, Hitachi, Toshiba, Canon, and Nintendo.
There are many models of corporate governance in the world, but which is best? The answer depends on the goals, motivations, and mission of a company, its managers and its directors. Ultimately, it depends on each nation’s legal, economic, social and political values.