The purpose of this essay is to critically analyze, describe and compare the two fundamental governance methods while finalizing and summarizing on the most efficient and dynamic model. The rules governing the structure of the corporation and the distribution of power and control in a business are generally referred to as corporate governance. According to a definition of Shleifer and Vishny (1997) “corporate governance deals with the way in which suppliers of finance to corporations assure themselves of getting a return on their investment” Consequently, corporate governance will only be necessary in a situation where the suppliers of finance (the shareholders or owners of the company) do not run the company themselves but hire a management team that is responsible for the daily activities of the company.
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Corporate governance is a field that concentrates on the relationship between boards, stockholders, top management, regulators, auditors and other stakeholders. The principal characteristics of effective corporate governance are: transparency, protection and enforceability of the rights and prerogatives of all shareholders and directors capable of independently approving the corporation’s strategy and major business plans and decisions and of independently hiring management, monitoring management’s performance and integrity and replacing management when necessary. Of importance to this study is the recognition that boards of directors are essential to most definitions of corporate governance. Cadbury (1993:9) states that it is “the ability of boards of directors to combine leadership with control and effectiveness with accountability that will primarily determine how well companies meet society’s expectations of them. Maassen (2002). Over the years, the traditional one-tier management system was expanded and developed into a more complicated and advanced two-tier management system. The well-known one-tier system derived from the Anglo-Saxon or Anglo-American system which is characterized by the lack of enthusiasm in employee participation and strong corporate perceptions. In contrast, the two-tier management system (known as Continental or dualistic) is heavily influenced by labor law and owes its basic organizational features in Germany. The way in which corporate governance is organized in different countries, depends on the business context which it prevails. This entails a separation between ownership and management. The diversity of board roles in the governance of corporation differences in the leadership structure, the organization structure and the composition of boards provide a wide range of prototypes. However, both management and directors also share another more fundamental goal, to develop a board which can bring the most informed and most objective advise available. Thus, after the knowledge was drawn from corporate governance lecture for the “competition” among the two different systems of corporate governance we will provide a preliminary evaluation. Distinctive perspectives of corporate governance give rise to differences in the definition of boar’s roles in the governance of corporations. We are going to examine their advantages and disadvantages referring examples in European countries.
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