A Comparison of U.S.

Corporate Governance and European

Corporate Governance
Abigail Barnett and Dr. Balasundram Maniam, Sam Houston State University, Huntsville, TX

ABSTRACT

This paper describes the corporate governance models of both the United States and Europe. The
shareholder model of the U.S. and the United Kingdom will be compared on terms of recent changes, as instituted
by the Sarbanes-Oxley Act, the Combined Code on Corporate Governance, and various securities exchanges’ listing
rules. The stakeholder model of Germany and how it differs from the shareholder model will also be discussed.
Many of the recent changes in corporate governance standards are the result of regulation changes in the area of
director independence. There is a call to increase the independence of the board of directors and specifically the
audit committee to enhance directors’ ability to perform their duties and protect shareholders’ investments. These
changes have stemmed from recent corporate scandals and it will take time to determine how effective these changes
are.

INTRODUCTION

Corporate governance has been defined in many ways, however, it refers the oversight of corporations and
the methods employed to assure the corporation’s actions meet the interest of concerned parties, or stakeholders.
Corporate governance typically focuses on how mitigate the agency problem that arises when ownership and
management of the firm is separated. This may be mitigated through several means such as the oversight of
management by the board of directors, compensation and incentive arrangements, internal controls, external audits,
and regulatory oversight.

Recent corporate scandals, in both the United States (U.S.) and Europe, have brought about recent changes
in the standards of corporate governance and are primarily intended to prevent fraud and better protect investors. A
majority of these changes have focused on board structure, reporting requirements, and best practices. The focus on
board structure after major corporate scandals is because corporate boards have been seen as inadequate at
protecting both shareholders and stakeholders from these scandals, and change in this area is critical (Murphy and
Topyan, 2005).

Both the United States and portions of Europe have a shareholder corporate governance system, which is
based on the theory that the firm’s objective should be to maximize shareholder wealth. As such, the corporate
governance standards of the shareholder system are aimed primarily at protecting the rights of shareholders. Even
though the U.S. and the UK have a shareholder based system, the rules adopted by both differ and are quite different
from the stakeholder system.

Outside of the United Kingdom (UK), there is another form of corporate governance in Europe, the
stakeholder system. This system aims to protect the rights of all stakeholders, such as employees and lenders, and is
usually demonstrated by the German system. It is important for investors to be aware of these differences in
corporate governance policies as it relates to the risks investors are subject to and how investors’ rights are
protected. An understanding of these systems becomes more important as the global economy expands and more
foreign investments are made.

The purpose of the report is to analyze the recent changes of the corporate governance systems of the U.S.,
the UK, and Germany that are impacting large publicly traded firms. This analysis will include a description of the
three systems and highlight both similarities and differences between each. The report will lend more focus to the
recent changes and trends, as well as the various regulatory agencies, such as the Securities and Exchange
Commission, which are responsible corporate governance changes.

The United States’ Shareholder Model

Corporations within the United States are governed according to the shareholder model which is based on
the theory that the firm’s objective should be to maximize shareholder wealth. Under this model the shareholders of
large corporations elect a board of directors to hire and oversee the management of the firm. The directors are

The Business Review, Cambridge * Vol. 9 * Num. 2 * Summer * 2008 23

representatives for the shareholders and their actions can directly affect the actions of the firm and impact the
shareholders’ investment in the firm.

The board of directors is responsible for a number of functions which include selecting and overseeing the
performance of the CEO and the executive management team, nominating other board members, ensuring the firm’s
compliance with regulations, and overseeing the firm’s auditor selection and the audit process (Mintz, 2006). These
various functions are carried out by a number of committees, primarily the audit committee, the remuneration or
compensation committee, and the nomination or hiring committee. Additionally, in the United States the board of
directors is typically directly linked to the management of the firm through the appointment of the CEO as the
chairman of the board of directors. “In fact, this is the case for approximately 80% of the firms” (Aguilera et al,
2006, 148).

While directors are accountable primarily to shareholders, they are also subject to many corporate
governance standards. Publicly traded firms are subject to the regulations of the Securities and Exchange
Commission (SEC), as well as the listing requirements of any exchange they may be listed on. These regulations are
aimed primarily at protecting the rights of shareholders.

As a result of the recent corporate scandals that have defrauded million of investors, many changes and
rules have been implemented as an attempt to better protect the interests of shareholders. In these recent scandals
executive management teams and boards of directors failed to protect shareholders from fraudulent activities and
violated the ‘duty of care’ required of those positions (Mintz, 2006, 24). Many of these governance changes are
aimed at improving the way in which the board of directors oversees a firm’s management on behalf of
shareholders. In 2002 the Sarbanes-Oxley Act was passed, which has created significant changes in corporate
governance rules for companies registered with the SEC. Many of the changes create by the Sarbanes-Oxley Act
focus on the audit committee and director independence, and the Sarbanes-Oxley Act increases “the oversight
responsibilities of boards of directors of public companies acting through their audit committees” (Grossman, 2007,
422). In addition to the new Sarbanes-Oxley Act, two of the most prominent exchanges in the U.S., the New York
Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ),
both have also adopted new rules regarding board structure.

The heart of these new corporate governance and board structure regulations is an effort to define and
increase director independence. The theory is that by increasing director independence, investor confidence in the
firm’s financial statements will increase. Additionally, with increased independence there will be reduction in the
likelihood of manipulation of the financial statements and the process by which they are audited. “The presence of
independent directors on a board seems to give that board and its committees and appearance of impartiality, an
appearance important to restoring investor confidence in the board’s ability to over see and prevent managerial
impropriety in an environment of stockholder skepticism” (Grossman, 2007, 422). The SEC, NYSE, and NASDAQ
have adopted this theory and have made changes to the corporate governance rules accordingly.

Prior to the Sarbanes-Oxley Act the various securities exchanges had differing rules on the determination of
independence and the requirements of the audit committee. The Sarbanes-Oxley Act has created a standard for
which all publicly traded companies registered with the SEC are required to meet, regardless of which exchange
they may be affiliated with. “These rules are clearly intended to make the board generally, and those committee
members in particular, independent from management and other influences that might affect a director’s
independent judgment in performing her responsibilities” (Grossman, 2007, 420).

The new listing requirements of the NYSE and NASDAQ call for boards to be composed of a majority of
independent directors (Grossman, 2007). The Sarbanes-Oxley Act further extends the independence rules to all
members of the audit committee. All subject companies must have an independent audit committee to effectively
coordinate and oversee the firm’s public auditor (Badawi and Fitzsimons, 2002). Where previously the definition of
independent was subject to interpretation, the Sarbanes-Oxley Act has clearly laid out the appropriate definition. For
each member to be independent, audit committee members may not receive payments for anything other than board
service from the firm or any of its affiliates (Badawi and Fitzsimons, 2002). As noted earlier, these changes are to
enhance directors’ ability to perform their duties and thereby protect the shareholders’ investments.

In addition to establishing independence in the audit committee, the Sarbanes-Oxley Act now requires the
audit committee to disclose regularly as to whether there is at least one ‘financial expert’ is on the audit committee

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or explain why there is not (Cohen et al, 2005). The SEC further defines what attributes a “financial expert” must
contain, which includes a significant amount of accounting knowledge. These numerous rules concerning the
structure of the audit committee shows that the SEC believes that avoiding financial reporting scandals, such as
Enron, can be achieved through corporate governance changes. The reliability of financial reporting impacts not
only investors of the specific firm, but the investment community overall.

Another important change brought about by the Sarbanes-Oxley Act restricting the selection of directors is
the ability of the SEC to block firms from appointing individuals who have a securities law conviction as a director
(Badawi and Fitzsimons, 2002). This rule shows how directors are not only subject to the oversight of the
shareholders, but also to the SEC. Not only has board membership rules changed, audit committee responsibilities
were also expanded with the Sarbanes-Oxley Act and are now primarily responsible for settling any disputes of
financial transactions or reporting that arises between the firm and its auditor (Klein, 2003).

And not only has director selection been impacted, executive compensation has also been affected by the
Sarbanes-Oxley Act. Changes have been made to better protect shareholders from actions taken by the board and
management executives. Corporations are no longer allowed to make personal loans to board directors or
management executives. In the case of a financial restatement, the CEO and CFO must repay to the company
incentive compensation received the year following the restatement (Badawi and Fitzsimons, 2002). Furthermore,
the Sarbanes-Oxley Act has given the federal court system the ability to grant shareholders compensation for losses
in the event a firm violates a securities law (Badawi and Fitzsimons, 2002).

Again, it is clear from the recent changes to board structures that the American corporate governance
system is aimed at improving the role of the board or directors, whose job is to serve the interests of shareholders,
above all other stockholders. The trend in the U.S. is to move towards more laws and regulations as to how
shareholders are to be protected. This trend is in contrast to leaving the board structure definitions up to the
corporation itself, which is more common in European firms.

European Models
Corporate governance in Europe is diversified with different countries across the continent operating under
differing systems. These differences are driven by both different cultures and laws among European countries.
While there are many different rules among the countries in Europe, there are two main corporate governance
models: the shareholder model as employed by the UK and the stakeholder model which is most commonly depicted
by the German system. These two models have significantly different goals and structures.

The UK system is similar to that in the United States, in that the goal of the firm is to maximize shareholder
value. In Germany the firm’s goal is seen “in terms of a wider ‘social interest’ through which the interests of
different corporate constituencies are reconciled” (Deakin and Hughes, 1997, 2). Thus, corporate governance
practices in Germany are not only purposed with protecting shareholders, but also a wider array of constituencies,
such as shareholders, employees, banks, lenders, and various other stakeholders. To meet these differing goals,
Germany has developed a corporate governance structure that is much different that that in the United States or the
UK.

While this paper will focus on the individual UK and German systems of corporate governance, it is
important to note that there have also been efforts by the European Union (EU) to both improve corporate
governance practices and bring convergence in standards from European countries. However, cultural and legal
differences, as well as other factors, will continue to create distinct systems across countries.

The United Kingdom’s Shareholder Model

The UK system of corporate governance is very similar in principle to the United States shareholder model.
These similarities include “the primacy of shareholders as beneficiaries of fiduciary duties, the importance of equity
financing, dispersed share ownership among uncommitted shareholders, active markets for corporate control as a
mechanism of managerial accountability and flexible labor markets” (Aguilera et al, 2006, 148). These similarities
in corporate environment and ownership have led to similarities in the United States and UK’s corporate governance
strategies. And just as in the United States, the main goal of the UK’s shareholder model is to protect and increase
shareholder wealth.

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 As with U.S. corporations, corporations in the UK have a board of directors elected as representatives of
the shareholders to oversee the firm’s management. These directors carry out their duties through audit,
remuneration, and nominating committees. However, there are a number of significant differences corporate
governance rules from the U.S. that are partially attributable to different regulatory bodies and laws. In the United
States compliance with corporate governance standards are required by law, where as in Europe there is a system of
“comply or explain”. There are many recommended best practices in Europe that firms are encouraged to adopt. If a
firm chooses not to adopt the best practices, the firm must disclose this and the reasoning in the annual reports,
along with an explanation as to how the firm implemented those practices adopted. This “comply or explain” system
allows firms to focus and implement controls that are best suited to the firm, as opposed to requiring U.S. firms to
adopt all rules which “can create a ‘tick-the-box’ mentality” towards regulation compliance instead of focusing on
the intent of the rules to protect shareholders (Mintz , 2005, 583). This approach to the shareholder model is one of
the most significant differences from corporate governance model in America.

Another difference between the U.S. and the UK that has helped to shape the differing governance systems
is the composition of institutional investors. Institutional investor ownership is higher in the UK and encourages UK
firms to take a long-term perspective on risk and payoffs (Aguilera et al, 2006). So while both countries have a
system whose primary focus is maximizing shareholder value, different governance practices have emerged from the
different shareholder characteristics. “The tendency in the UK is thus for institutional investors to hold shares for a
relatively longer period of time than their US counterparts, to subject portfolio companies to more rigorous scrutiny,
and to have a closer and more consultative relationship with top management and the board” (Aguilera et al, 2006,
151). In the UK the tendency is for more active oversight of the board of directors by large institutional investors
than in the U.S. This extra oversight adds a layer of governance for directors of companies in the UK.

As in the United States, there are multiple sources of corporate governance regulation in the UK. All
companies are subject to common law rules, as well as the Companies Act of 1985. Listed companies in the United
Kingdom must additionally comply with The Listing, Prospectus and Disclosure Rules (issued by the Financial
Services Authority); Combined Code on Corporate Governance; and the City Code on Takeovers and Mergers. And
just as in the United States, recent corporate scandals across the world have led to recent changes in corporate
governance standards in the UK. Many of these changes focus on the board of directors and independence, which is
yet another similarity with the American shareholder system.

The Financial Reporting Council in the UK issued a new Combined Code of Corporate Governance (the
Combined Code or the Code) in 2003 and has instituted many changes in the area of independence. Other areas of
change focus on board composition, performance, and compensation of directors (Kay 2). Just as U.S. listing rules
require, companies in the UK are now required by the Combined Code that a majority of directors are independent
non-executives, excluding the chairman (Mayo, 2003). Previously the standard was less stringent as one third of
directors were required to be independent non-executives (Mayo, 2003). The Combined Code also requires that the
audit and remuneration committees be completely independent and that the majority of directors on the nomination
committee be independent (Kay, 2005). This is also very similar to the new Sarbanes-Oxley requirements for
completely independent audit committees. The UK has too adopted the theory that increased independence will lead
to better board oversight and protection of shareholder’s values and rights.

In addition to an increase in independence, there is also a new standard for independence in which firms
need to follow. Charles Mayo in his article, UK Corporate Governance, describes the new independence standard
as a test of the directors to determine whether a director “is independent in character and judgment” and if there is
currently the potential for a situation to arise that will compromise, or be construed as to compromise, the director’s
independence (Mayo, 2003). This new definition of independence differs somewhat from the new standards in the
United States. The Sarbanes-Oxley Act defines independence in terms of compensation, while this European
standard is applicable in a broader sense and will consider the impact of other variables on independence, such as
board tenure. In fact with respect to board tenure, this new definition of independence will have a stronger impact on
the length of non-executive terms than the previous rule. Any director in place over six years will be contingent on a
thorough review to determine if there is a compromise of independence (Mayo, 2003). This potential limitation on
board tenure is a benefit of the broader independence standard in the UK. Additionally, this check on tenure will
benefit shareholders by limiting the ability of directors to use their tenure as a means power or the potential to
empire build.

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 Another recent change in the UK is the requirement for at least one director on the audit committee to have
“recent and relevant financial experience” (Mayo 2). In the United States, the Sarbanes-Oxley Act only requires
that the company disclose if there is an expert or not, but the UK has gone further in requiring a financial expert be
on the audit committee. This requirement is another example where the UK has instituted a more stringent rule than
the U.S. to better protect the shareholder.

One more significant difference between the corporate governance system in U.S. and the UK is “the
greater amount of constraint on the exercise of CEO power in the UK vs. the U.S.” (Aguilera et al, 2006, 148). As
mentioned before, for a majority of U.S. firms the CEO is also the Chairman of the Board. However, in the U.K. a
majority of firms split the role of Chairman and CEO, as recommended by the Combined Code on Corporate
Governance. Combining these roles is “likely to inhibit effective monitoring,” and by separating these duties, UK
firms are “enhancing the power of the board of directors to operate independent of management and effectively
monitors executive action” (Aguilera et al, 2006, 148). The effort to separate executive management from director
oversight is a trend that other European countries follow, as will be seen in the discussion of Germany’s corporate
governance system.

Further differences between the U.S. standards and those in the UK, include director responsibilities to
shareholders. The Combined Code lays out some of the particular duties required of directors, such as chairman’s
responsibility to ensure that the board is aware of the opinions of shareholders on actions and decisions of the firm
(Mayo, 2003). And unlike in the United States, the Combined Code requires annual meetings of only the
independent directors, as well as annual meetings of only the independent directors and the board chairman (Mintz,
2005, 591). Another specified responsibility of board directors is solicit approval from shareholders for major
changes to current or new incentive compensation plans, as allowed by the Listing Rules (Mintz , 2006). The Listing
Rules further expand the responsibilities of UK directors to include preparing financial statements and the review of
internal controls, which in the U.S. is an explicit role only management, may fill (Mintz, 2006).

While the Combined Code of Corporate Governance and the Listing Rules specify practices that listed
companies must comply with, there is a set of Listing Principles which are designed to complement the Listing
Rules, both of which are issued by the Financial Services Authority and subject to its enforcement. These principles
are aimed at guiding the corporation to fair treatment to its shareholders, and if the FSA determines any director was
‘knowingly concerned’ and/or involved in the violation of the principles is subject to penalty and punishment (Kay
and Fowler, 2005).

In reviewing these principles, it is clear to see the focus of the United Kingdom’s corporate governance
system is to protect the shareholder. Three of the six Listing Principles specifically address a company’s
responsibilities toward the shareholder and potential shareholders, as would be expected with a shareholder
corporate governance system. The remaining three Listing Principles detail the manner in which the corporation
must fulfill its obligations, specifically to the board of directors and with the Financial Services Authority itself (Kay
and Fowler, 2005).

Germany’s Stakeholder Model

The corporate governance system in Germany is stakeholder model which does not limit its focus to the
protection of shareholders. The German stakeholder system emphasizes “cooperative relationships among banks,
shareholders, boards, managers and employees in the interests of labour peace and corporate efficiency” (Mintz,
2005, 588). Historically, German companies have been governed by law, as in the United States, until the passing of
the 2002 German Corporate Governance Code. The German Justice Ministry, through the 2002 German Corporate
Governance Code, created a ‘comply or explain’ system similar to that in the UK. Under this new system, German
companies must disclose in their annual reports, or on the company’s website, a statement of compliance which
explains how the code has been applied. In this respect the German corporate governance system is similar to
United Kingdom’s.

While Germany has a compliance structure similar to the United Kingdom’s, a very different corporate
governance model is needed to balance the interests of all stakeholders. To achieve this goal Germany has instituted
a two-tiered board structure, which is arguably the most striking difference between the German system and those
employed by both the United States and the UK. German companies have two boards of directors, a management
board and a supervisory board, that together oversee the actions of the firm and represent the interests of various
stakeholders. While this paper will focus on the structure and system employed in Germany, it is important to note

The Business Review, Cambridge * Vol. 9 * Num. 2 * Summer * 2008 27

that other countries in Europe also have a stakeholder corporate governance models with two-tiered board systems.
These other countries include France, Belgium, Italy, Portugal, Sweden, and Switzerland (Albert-Roulhac and Breen
22). In Germany this two-tiered board structure is required of all companies.

In Germany the management board is responsible for managing the firm to the benefit of many
stakeholders, not only shareholders, and the management bard is responsible for the day-to-day management and
operations of a firm (Mintz, 2006). Included in the management board’s responsibility is the establishment and
approval of internal controls (Hopt and Leyens, 2004). The fact that the German management board is responsible
for managing the interests of various stakeholders is not any different from the roles that U.S. and UK executive
managers fulfill. Regardless of the system of corporate governance, executive management decisions will involve
the balancing of various stakeholders’ positions. However, by establishing the senior management as a board, the
management of the corporation has been officially distinguished from the oversight of management in Germany
(Mintz, 2005). In the United States and in the UK, there is one board system comprised of both independent
members and executive management. Unlike in the United States and UK, the German Corporate Governance Code
has not formally defined director independence (Hopt and Leyens, 2004). Germany, however, has separated the
management and oversight roles into distinct groups with the two-tier system, which adds a degree of independence
in the supervision of management decisions and allows the managers to focus on the operations of the company

While the management board is in charge of the activities of the corporation, “the supervisory board
controls the management (not the corporation), its compliance with the law and articles of the corporation, and its
business strategies” (Hopt and Leyens, 2004, 141). Just like the board of directors in the United States and UK, the
supervisory board is responsible for appointing and overseeing members of the management, but in Germany’s case
the supervision is limited to the management board. By definition, members of the management board cannot also
be members of the supervisory board. However, it is possible to have former members of the management board on
a company’s supervisory board, but the German Corporate Governance Code recommends restricting this practice to
two members (Hopt and Leyens, 2004). It is common practice though for the chairman of the management board,
upon retirement, to assume the role of chair of the supervisory board, as an attempt to pass on former manager’s
knowledge (Hopt and Leyens, 2004).

Steven Mintz is an author of several articles which compare the Germany corporate governance system
with that in both the U.S. and UK. He points out that there are two other characteristics of German corporations, in
addition to the two-tiered board structure, that distinguish itself from that in the U.S. and UK: employee co-
determination and the pattern of ownership and control (Mintz (2006). Both of these characteristics are exhibited
through the composition of the supervisory board, and thus have a significant and unique impact on the governance
of German corporations.

The membership of the supervisory board, however, is quite different than the boards of the shareholder
models. One of the differences is driven by the co-determination system of Germany. Under this co-determination
structure at least half of the supervisory board members must be employees or employee chosen union
representatives (Mintz, 2005). Through the inclusion of employees or their representatives on the supervisory
board, employees’ interests can be represented. The representation of interests other than shareholders’ interest is
central to the stakeholder model of corporate governance. Another benefit, from the corporation’s view, is that co-
determination improves company/labor relations, reduced conflicts, and has served as a means to reduce the
occurrences of labor strikes (Hopt and Leyens, 2004). Employee performance plays a critical role in the success of a
company and Germany recognizes the need to consider the interests of this stakeholder in board decisions.

While co-determination has proven to be beneficial in some ways, it has created some limitations for the
supervisory board. Because half of the supervisory board must be comprised of employee or representatives,
Germany has not established financial literacy requirements, such as in the United Kingdom. If Germany were to
institute a financial literacy rule, the ability to select employee representatives for co-determination would be
severely limited (Hopt and Leyens, 2004). This situation not only constrains the ability to set financial literacy
requirements in corporate governance standards, but it also can potentially limit the ability of supervisory boards to
properly protect stakeholders from inappropriate management actions. This is in contrast to recent rules adopted in
the United Kingdom that at least one member of the audit committee be classified as financial expert.

Co-determination may also be an undesirable risk to investors as well. With co-determination it is possible
for the board of directors to make certain decisions that will benefit employees at the shareholder’s expense. As

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often is the case, the employee representatives on the supervisory board are concerned with protecting the rights of
the company’s workforce. While pursuing this goal, these directors will rarely approve major cost cutting strategies,
such as out sourcing, or international reorganizations that would benefit the corporation and shareholders, but result
in job losses (Hopt and Leyens, 2004). In this type of decision, shareholders may be forced to pay the costs of higher
labor through lower dividends because the outsource decision was not supported by the employee representatives on
the supervisory board. If investors, particularly foreign investors, perceive the risk of this type of situation to be
high, they may choose to invest in other countries. This is a serious downfall to the co-determination aspect of the
stakeholder system.

The third distinguishing aspect of the German corporate governance system, the pattern of ownership and
control, is exhibited by bank representation on the Supervisory board. “In Germany, the banks owning shares in the
listed firms are frequently also the main bank of these firms,” and they often “exert control by directly participating
in the management of their borrowers through representation on a borrower’s supervisory board” (Mintz, 2006, 31).
Banks thus may serve on supervisory boards to represent shareholder interests or lender interests and is another
example of how the interests of stakeholders, other than shareholders, are represented in German corporate
governance practices. There are pros and cons of having lenders represented on a firm’s board. The information
banks obtain through lending may enhance the stakeholder’s decision, but “a possible downside is that banks may
emphasize their creditor relationship with the borrower to the detriment of shareholders” (Mintz, 2005, 590). How
these competing interests are balanced is unique to the firm and an important trend that investors should be aware of.

Other important differences between the German corporate governance system and that of the United States
and UK are with respect to board committees. While committees are not required in Germany, a majority of large
German corporations have established audit, nomination and remuneration committees, or are considering such
committees. (Hopt and Leyens, 2004). The absence of a required audit committee may seem striking as so much
emphasis is placed on the audit committee in the United Kingdom and the United States, particularly since the
Sarbanes-Oxley Act was passed. However, while an audit committee is not required, the German Corporate
Governance Code does recommend that audit committees be established by the Supervisory Board (Mintz, 2005).
And while many German companies are adopting audit committees, it is important to note the different role the
German audit committees fulfill, as opposed to those in the U.S. and UK. The audit committee of a German
company is responsible for the selection and supervision of the auditor (Hopt and Leyens, 2004). However, unlike in
the United States and the UK where the audit committee is responsible for resolving issues between the auditor and
management, the dispute resolution duty is limited to the management board and not the audit committee. The audit
committee is responsible for establishing the auditor’s independence and maintenance of that independence (Hopt
and Leyens, 2004). These are very important differences in how the accuracy of the financial statements is ensured
under the stakeholder and shareholder corporate governance models.

SUMMARY AND CONCLUSIONS

As we have seen there are striking differences in the corporate governance structures in the United States
and Europe. Even within Europe there are two drastically different systems in place, with the shareholder model in
the UK and the stakeholder model in Germany, France, Belgium, Italy, Portugal, Sweden, and Switzerland. The
shareholder model, which both the United States and the United Kingdom follow, is based on the principle that the
goal of the firm should be to maximize shareholder value, and thus the governance standards are aimed at protecting
the shareholder. In contrast to this is the stakeholder model, used by Germany, which believes that the firm has a
duty to protect all stakeholders, such as employees and lenders.

The United States’ shareholder model has seen many recent changes in the way of new mandates by the
Sarbanes-Oxley Act. There have been many similar updates to the regulations in the UK as well with the passing of
the Combined Code on Corporate Governance. These new regulations in both countries have made significant
changes with the goal to protect shareholders and prevent fraud by the management. More stringent definitions of
director independence, coupled with the requirement for more director independence, have been seen as significant
means of accomplishing these goals in both countries. Other changes, such as the Combined Code’s
recommendation that the CEO and Chairman of the Board be separated show how in some cases the UK’s
governance standards differ from those in the United States.

The German stakeholder model has not undergone such sweeping changes recently, despite recent
corporate scandals. The stakeholder system aims to protect multiple stakeholders through a two-tiered board

The Business Review, Cambridge * Vol. 9 * Num. 2 * Summer * 2008 29

structure. There are management boards and supervisory boards, which serve to formally separate the management
of the company and the oversight of management. The supervisory board is comprised of directors and employees
or employee representatives per the co-determination system. The co-determination system is the method through
which employee interests are governed. Banks and lenders often serve on the supervisory board as well and
represent the interests of lenders and/or shareholders. It is through this board structure that the interests of more
than just shareholders are protected.

As evidenced by recent changes in corporate governance standards, the field of corporate governance is
evolving and will need to continue evolving as the business environment changes. Technology advances and the
continued growth in a global economy will continue to change how companies conduct business and how investors
and stakeholders interact with these corporations. All of these changes will drive changes in how corporations
govern themselves, as well as drive changes in the rules of regulatory bodies. Investors and stakeholders need to
keep apprised of these changes to ensure an understanding of the risks and costs of protecting their investments.
Only time will tell if the recent changes created through the Sarbanes-Oxley Act, the Combined Code and other
regulations will be more effective in preventing fraud and protecting shareholder investments than previously.

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