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CORPORATE GOVERNANCE - PAST AND PRESENT
NEW TRENDS IN ECONOMICS,
MANAGEMENT AND FINANCE
The peer-reviewed proceedings of an international academic conference
The First International Conference for PhD Students and Young Researchers in
Economics, Management and Finance
March 6, 2015
Poznań University of Economics
Editors
Piotr Michoń
Agnieszka Poczta-Wajda
Magdalena Osak
Paweł Marszałek
Roderic Gray
Sylwester Białowąs
ISBN 978-83-944645-0-9
Printed and bound in Poland by:
Poznań University of Economics and Business Print Shop
ul. Towarowa 53, 61-896 Poznań, Poland
phone: +48 61 854 38 06, +48 61 854 38 03
Published by
Doctoral Seminars in English,
Poznań University of Economics and Business, Poznań
dse@ue.poznan.pl
First Published 2015
Scientific review
Agata Filipowska, Aleksander Grzelak, Anna Wach-Kąkolewicz, Gary Evans,
Grzegorz Mikołajewicz, Izabela Bludnik, Jarosław Kubiak, Joanna Ratajczak-Tuchołka,
Justyna Rój, Maciej Brzozowski, Maciej Ławrynowicz, Maciej Szymczak, Maciej Żukowski,
Magdalena Andrałojć, Magdalena Stefańska, Remigiusz Napiecek, Tomasz Wanat, Witold Jurek
For information
Piotr Michoń, PhD
Coordinator of Doctoral Seminars in English
Poznań University of Economics and Business
dse@ue.poznan.pl
CONTENTS
Economics and society
Michał Litwiński, Rationality According to Traditional Institutionalism and Neoclas-
sical Economics...............................................................................................................7
Swajan Das, Determinants of Tertiary Level Students’ Overseas Study Decision.............22
Wiktoria Domagała, Self-Discrimination among Women in Poland.................................40
Tadeusz Lewandowski, Personalized Medicine and Finding the Predictive Biomarker:
A Case Study on Avastin...................................................................................................58
Hila Yariv, Pharmacist Prescribing in Israel: International Background and Stakehold-
er Analysis...........................................................................................................................73
Moshe Manor, Reforms to the Israeli Pension System..........................................................89
Human resources
Moshe Margalit, The Relationship between Founders’ Military Background and Or-
ganisational Culture: An Israeli Air-Force Retirees’ Case Study Using Narrative
Research...............................................................................................................................109
Ewelina Pomian, A Construct of Proximity as Evidenced in the Studies on Organiza-
tions in the Aerospace Industry........................................................................................129
Przemysław Piasecki, Workforce Segmentation and its Determinants in Small Com-
panies: The Case of British SMES.....................................................................................143
Moshe Katan, Similarities and Differences between Leadership Development and
Leader Development – Review Of Concepts..................................................................157
Markets and companies
Benjamin Gozlan, Measuring Leanness: A Model for Estimating Leanness at Country
Level.....................................................................................................................................175
Keren Ogintz, Creditors’ Arrangements in a Changing World............................................194
Michał Borychowski, Can the Production of Liquid Biofuels Support the Sustainable
Development of Agriculture? Reflections on the Background of the Development
of the Bioeconomy..............................................................................................................210
4 Contents
Dawid Szutowski, The Impact of Innovation on the Market Value of Tourism Enter-
prises: A Statistical Analysis..............................................................................................223
Tomaszewski Artur, A Game Theory Approach to an Analysis of the Decisions of Two
Competitors on the Polish TV Market............................................................................237
Marcin Flotyński, Target Price Accuracy in the Recommendations of Stocks on the
Example of Companies from the WIG20 Index.............................................................248
Marketing and Consumers’ Behaviour
Marta Grbyś, Neuromarketing Application in Consumer Behaviour Research................271
Agnieszka Marie, Enhancing the Quality of Pathologies in Consumer Behaviour Re-
search by Means of a Systematic Review.........................................................................284
Michaela Otravski, Impact of Social Media on Fashion Conscious Consumers...............300
Filip Nowacki, Marketing 4.0 as a Solution for International Entrepreneurship..............309
Management
Izabela Rekowska, New Marketing Communication Models for Digital Marketplace –
How Brands Can Take Advantage of Digital Media in Their Merketing Strategy.....325
Yaron Shemesh, Corporate Governance – Past and Present................................................341
Lior Ogintz, The Introduction and Implementation of the Failing Company Doctrine
into the Legal and Economic Systems of Israel..............................................................364
Yaron Shemesh
CORPORATE GOVERNANCE – PAST AND
PRESENT
Summary: The awareness of the need for Corporate Governance started between the end
of the 19th
century and the beginning of the 20th
century. Corporate Governance is different
from country to country, because of the state’s historical, cultural and institutional underpin-
nings. The aim of the paper is to describe and assess the evolution and current major models
and the practice of Corporate Governance. In the paper, the description and assessment of
the main corporate governance models is supplemented by analyses of the Israeli practice
and development in this area.
Keywords: Corporate Governance, board of directors, external auditing, audit committee,
internal corporate governance, external corporate governance.
JEL codes: G34, M12, M14, M42, O16.
Introduction
There exist simultaneously various forms of capitalism in the 21st
century. In the
US, there are many independent companies (sole proprietors and corporations),
that compete with each other on the one hand, and with foreign competitors on
the other, for orders and ultimately for market share. Each corporation has its own
chief executive officer (CEO) and every CEO pursues his corporate and strategic
policy [Morck 2005]. The pressure of competition and the desire to have as many
customers and sales as possible can lead to policies that might be excessively risky,
because of bad strategic decisions.
Economic crises are events that happen periodically and might occur, because
of many supply and demand factors. Some of these factors may be due to hyper –
competition pressure and because of the CEO having an excessive desire to increase
the company’s turnover, profitability, number of customers or other performance
measures. In the last two decades, the most profound economic collapses took place
between 1995 and 2001 (the dotcom bubble crisis), and in 2007-2009 (the subprime
mortgage crisis). The last episode was not limited to the stock exchange, but also
contaminated the whole US economy and spread to most developed countries. This
episode was the most serious recession in the post-World War II period.
342 Yaron Shemesh
The dotcom and subprime crises led shareholders and stakeholders to search for
a mechanism that would help them to monitor managers in enterprises, regarding
their decisions and ways of investing both company capital and capital that has been
raised from investors/shareholders.
The aim of the paper is to describe and assess the evolution and current major
models and the practice of corporate governance. Special attention has been devoted
to the Israeli Corporate Governance. The rest of the paper is divided as following:
Section 2 is devoted to defining corporate governance; Section 3 deals with major
corporate models and practice; Section 4 addresses the issue of corporate govern-
ance convergence. The paper is closed by conclusions.
1. Corporate governance defined
Corporate governance can be defined as a framework for maximizing the sharehold-
ers’ value in a corporation, while taking the right steps to ensure fairness to all stake-
holders. Corporate governance is about transparency and raising the stakeholders’
confidence in the way that the company is run [Sharvani, 2011, p. 52]. Other authors
see corporate governance as a set of mechanisms, designed to guarantee the provid-
ers of finance a return on their investments [Alcantara and Merino 2012, p. 223;
Tipurić, Tušek,  Filipović 2009, p. 58]. It consists of a set of rules and regulations
that should guarantee that small investors reduce their risk, due to the misbehavior
of company managers and the controlling shareholders [Lauterbach  Shahmoon
2010, p. 35]. It is also a set of organizational and operational processes that makes
the governance system work [Choi 2011, p. 167].
The above corporate governance definitions indicate a set of rules that executives
as the main decision makers in companies and the controlling shareholders have
to work within. These rules are to create an atmosphere of confidence for all of the
stakeholders and shareholders, and a belief that proper corporate governance func-
tions in the company. In literature, corporate governance mechanisms usually have
been divided into one of the following groups: internal and external mechanism.
Does it come from the board of directors, which is internal, or from external capi-
tal providers? The board of directors, which is located in the center of the internal
control system in the company, looks for a mechanism that will verify efficient
company working processes. External capital providers look for a mechanism that
will ensure a good return on their money. In figure 3, there is a visual description
of the relationship between the internal and external factors in a company [Gillan
2006 p. 382].
Figure 3 demonstrates the link between the shareholders and the board of direc-
tors. The shareholders elect the board of directors’ members. The board of directors’
members have fiduciary obligations to the shareholders [Gillan 2006 p. 383].
343Corporate Governance – Past and Present
1.1. The origins of the corporate governance concept
There is probably no historical recognition of when corporate governance became
an issue and this author is not sure if there ever will be. Corporate governance has
existed since the moment that there were managers in a company on the one hand
and investors who have invested their money in the company on the other. Thus,
the first countries that practically developed and experienced corporate governance
were the pioneers of modern capitalism, namely, Great Britain and the Netherlands
where the first joint stock companies were created in the 17th
Century.
An investment process in a company that is not controlled by the investors creates
a conflict of interests. After World War II, the US economy experienced a very quick
and extensive expansion, as is described in Figure 1. At that time, internal govern-
ance in companies was not a high priority and the phrase corporate governance was
not common. By the middle of the1970s, the federal Securities and Exchange Com-
mission (S.E.C.) brought corporate governance into the spotlight [Cheffins 2012].In
1974, the S.E.C. started proceedings against three directors from the Penn Central
Company, claiming that they had not properly presented the company’s financial
situation, according to the federal securities law. In 1976, the S.E.C. began to treat
managerial responsibilities as one of the issues that should be monitored [Cheffins
2012, p. 2]. The history of corporate governance development differs from country
to country. This can be seen by studying cases of the development of corporate gov-
ernance in each of the seven leading industrialized countries (G7), namely: Canada,
France, Germany, Italy, Japan, the United Kingdom and the United States as well as
in the Netherlands – the oldest capitalist economy [Morck 2005].
Figure 3. Corporate governance and the
balance sheet model of the firm
Source: Gillan [2006]
344 Yaron Shemesh
1.2. Internal corporate governance
One of the outcomes of the governance failures that took place during the end of the
1990’s and the beginning of the 2000’s was the Sarbanes-Oxley (SOX) Act, binding
in the US from 2002. The new SOX rules formalized the idea that the CEO and CFO
have responsibility for publishing accurate financial reporting. The responsibility
of both the CEO and CFO is also to oversee the whole process of establishing,
maintaining and evaluating internal control and reporting, regarding the evalua-
tion process. The reporting must take place in both quarterly and annual financial
statements [Hoitash, Hoitash,  Johnstone 2012, p. 768].This might be seen as an
indispensable element of internal corporate governance. According to Misangyi
and Acharya [2014, p. 1682], internal governance consists of: executive incentives
and the board of directors. It can also consist of: the board of directors, managerial
incentives and anti-takeover measures [Gillan 2006, p. 383-385]. CEOs play a leading
role in internal financial control compliance. However, even if the CFO and CEO
were to obey all SOX regulations, it would not eliminate the possibility of a CEO
making accounting errors [Hoitash, Hoitash,  Johnstone, 2012; Mitra, Jaggi, 
Hossain, 2013]. In the past, researchers tried to categorize the internal mechanisms
in different ways, but now there is consensus in the literature [Hoitash et al. 2012,
p. 768] that internal governance is an indispensable mechanism for controlling the
agency problem. The agency problem can be defined as follows:
The main issue in the agency problem is the separation of management and
finance or, in other words, ownership and control. After raising money from a fi-
nancer, the question is: how can the financer be sure that he will get a good return
on his money? Thus, they will usually sign a contract. This contract is supposed to
settle what the manager will do with the raised money. Will the contract be able to
forecast all the decision-making situations that the manager might find himself in?
[Shleifer  W. Vishny 1997, p. 740-741].
The agency relationship will consist of a contract between the two or more people,
who will be engaged in a venture. First, there is the owner and second, there is the
agent. The owner engages the agent to perform some activities in the company, on
behalf of the owner. The owner can prevent the agent from taking dangerous ac-
tions by paying for monitoring, which will limit the agent. In addition, sometimes
the owner will prefer to pay the agent just to prevent him from taking dangerous
actions [Company, Jensen,  Meckling 1976, p. 308].
The internal monitors, who are the main players in the internal corporate gov-
ernance mechanism, are the directors on the board, working together with the
company’s top management [Misangyi  Acharya 2014].In this monitoring way, the
internal mechanism will be more efficient and accurate. The board, as the internal
monitor in the corporate governance mechanism, is the link between the company
owners and the management, and is presumed to be monitoring and controlling
the management[Tipurić et al. 2009].
345Corporate Governance – Past and Present
1.3. External corporate governance
The firm does not work in a vacuum; it is connected to the market and must react
to the market. The right hand side of Figure 3 introduces the external governance
elements. These elements rise in importance, according to the firm’s needs to raise
capital. The separation between capital providers and capital management creates
the demand for a monitoring mechanism. This structure is defined as external
corporate governance [Gillan 2006, p. 382].
Albuquerque  Miao [2013] proved that proper external corporate governance
leads to good internal governance. It can also be found that the board’s independ-
ence is low in companies where external corporate governance is more effective
[Adams  Ferreira 2009].
Following modern literature, it is possible to distinguish the major factors and
the good practices in external corporate governance:
–– External auditing is seen as an indispensable and reliable source for the proper
validation of a company’s financial information. It is emphasized that external
auditors should cooperate with the internal audit committee [Mitra et al. 2013;
OECD 2014; Tipurić et al. 2009].
–– Based on the agency theory, it is expected that major external shareholders
(shareholders that hold above 10%) are needed to affect decisions regarding
the managers’ compensation. With these decisions, they can insure that the
managers will act according to their interests [Voulgaris, Stathopoulosand
Walker, 2010, p. 516].
–– Only specialist external shareholders should be involved in managerial decision
monitoring. These external shareholders should allow the managers to create
value for the shareholders and not be disturbed by the stakeholders’ interests.
[Gnan, Hinna, Monteduro andScarozza 2011, p. 911].
Following the above factors and conditions, the decision making process in
the company will be monitored properly and be more efficient. The efficiency will
develop from: the external auditing process, specialized shareholders and big block
holders. The external mechanism will not allow any of the forces involved in the
decision making process (the management, the shareholders or the stakeholders)
prioritize their own interests as a target. The decisive target will remain what is “
best for the company”.
2. Corporate Governance models
2.1. The Anglo-Saxon model
Contrary to modern custom – one share, one voting right – in the 19th
century, the
rights of the major shareholders were limited. These limits came from a desire to
346 Yaron Shemesh
protect the minor shareholders. The ways of doing so in that century were based
on one or both of the following options (Pargendler  Hansmann 2013, p. 582]:
first, capping how many shares any shareholder could own; second, the number
of votes that any shareholder could cast was less proportionally than the quantity
of shares that he/she actually owned. For example: the Leeds and Liverpool canal
charter limited any shareholder from owning more than 100 shares. Another ex-
ample is the Stroud Water Navigation company, that limited ownership not only to
15 shares for one shareholder, but also imposed regressive voting rights [Pargendler
and Hansmann 2013].
After the UK’s Labour Party lost in the 1979 and 1983 General Elections to
Mrs. Thatcher’s Conservative Party, the Labour Party adopted market governance
as a policy. At that time, there were debates about the differences between econo-
mies such as Japan and those in continental Europe [Siepel and Nightingale 2014].
Moreover, in the mid 1990s, economic globalization and Europeanization renewed
the debate. The debate shifted towards a new approach in which more attention was
devoted to national specificities, regarding corporate governance and its movement
towards a harmonized model. According to Cernat [2004], two corporate govern-
ance types were identified in Europe: a company based system and an enterprise
based system. This variation is equivalent to the difference between shareholders
and stakeholders. The difference across Europe in corporate governance systems
is reflected in the regulations and social aspects in each country. For example, in
the UK, hostile takeovers through the stock market are an important issue. In the
European Union, the UK economy is seen as similar to the US. The reforms that
were introduced by Thatcher and Blair brought the UK even closer to the American
model. By contrast, in Germany, there is almost no threat from hostile takeovers. In
other continental countries, as in Germany, there is also a similar way of thinking,
regarding hostile takeovers[Cernat 2004].
Over the years, many reports have been written and published around the world,
describing the corporate governance situation in specific countries. Each report
analyzes and assesses the situation in a particular country and advises on the main
activities, which are necessary to improve corporate governance. The reports started
in 1992 in the UK and more were subsequently published in South Africa, Aus-
tralia, the US and other countries. In the Australian Institute of Company Directors,
there is a list of all the published reports, regarding corporate governance [http://
www.companydirectors.com.au/director-resource-centre/useful-links/corporate-
governance-major-reports, 29/9/15].
In May 1991, the Financial Reporting Council, the London Stock Exchange and
representatives of the accountancy profession set up the Cadbury committee in the
UK. This was the first of many such committees, with others later being set up all
over the world. The main reasons for setting up the Cadbury committee were: the
low level of financial reporting and auditors’ inability to act as safeguards from the
347Corporate Governance – Past and Present
accounting perspective. According to the Cadbury report, these concerns arose,
due to the unexpected failures of major companies. The Cadbury draft report was
published in May 1992 for public comment [Cadbury 1992, p. 13]. According to
Jones  Pollitt [2004, p. 163], the Cadbury report has a high level of analysis and
gives practical suggestions on how to solve the problems that the committee was
set up to solve. This report is recognized worldwide and is considered a part of the
development of corporate governance in the UK and elsewhere. Some of the Cadbury
report’s suggestions have been incorporated in the OECD’s Corporate Governance
principals [Jones  Pollitt 2004].
According to William J. Wales, Vinit Parida,  Patel [2013, p.300], one more
interesting issue in the U.S. is the retired CEO. Usually, in the U.S., the serving CEO
has the position of chairman of the board of directors. No matter how successful the
CEO may have been and how good the company’s performance is, after his retire-
ment, the CEO leaves his positions as CEO and chairman of the board of directors.
Then, these positions are held by the newly nominated CEO. In this situation, all
of the experience that the successful, retired CEO has acquired over the years goes
down the drain. The retired CEO has no formal influence on the company or on the
board of directors and no one takes advantage of exploiting his experience [William
J. Wales et al. 2013].
The Anglo-Saxon model (Figure 4) is a model, which is built around the share-
holders. The shareholders work in the capital market and can govern the company
through the board of directors.
The main features of Anglo-Saxon corporate governance (Figure 4) are the fol-
lowing:
The model is known as the shareholders’ model, which means that the share-
holders are at the center of the governance system. The minority shareholders are
Figure 4. The Anglo-Saxon corporate governance system
Source: Choi [2011]
348 Yaron Shemesh
indirectly protected by a large and liquid stock market. There is a low level of family
and state ownership concentration and a dominant role is played by institutional
investors [Piesse, Strange,  Toonsi 2011; Tipurić et al. 2009].
The low level of family and state ownership is the main problematic feature in
the Anglo-Saxon model. It opens the possibility of there being a dominant position
of management in the power structure of the system. In these circumstances, the
management makes all the necessary daily business decisions. These decisions are
often taken, according to the management’s own interests, which might give rise
to over-investment and excessive risk-taking. This over-investment and excessive
risk-taking might make the corporation bigger, but more vulnerable to adverse
external shocks. As much as the corporation is bigger, the CEO’s power will also
be extended. This can lead the CEO to overinvest, even if the resulting company
profit is low or, in extreme cases, might lead to a loss for the company. Thus, in such
cases, the over-investment might lead to greater CEO power, but might also leave
the shareholders with a lower return on their capital [Tipurić et al. 2009].
According to Cernat [2004], there are fiduciary relationships between the share-
holders and the management, based on the market capitalism concept. The el-
ementary Anglo-Saxon assumption is based on the belief that the non-centralized
capitalist market can have self regulating and balancing features. According to this
elementary assumption, individual entrepreneurs and managers struggle to be as
successful as possible. This success is oriented towards being as profitable an or-
ganization as possible; of course, this means material success. In the short term, the
individualist behavior with profit as the target is accompanied by appropriate laws.
The main reason for these laws comes from the desire to keep an efficient Anglo-
Saxon model. For example: according to the continental theory, the company has its
own independent desires. These desires might be good for the company, but might
not be good for the shareholders. For these reasons, we can find in company law
many issues which originate from these desires; for example: statutory capital rules,
board responsibilities and shareholders’ rights [Cernat 2004].
As presented in Figure 4, the shareholders and the capital market are the main
actors in Anglo-Saxon corporate governance. The shareholders are active and moni-
tor the CEO and other managers in the company through the board of directors.
Since the directors were nominated by the shareholders/owners, the shareholders
have full, indirect control of the business decisions.
2.2. The German model
2.2.1. Historical background
German industrial progress speeded up in the second half of the 19th
century. It was
financed by wealthy families, but foreign investors, small shareholders and private
banks were involved as well. Large scale enterprises had a key role during German
industrialization. The new German company law published in 1870 created a legal
349Corporate Governance – Past and Present
foundation for the current dual board structure [Gelauff, den Broeder 1997; Morck,
2005].The dual board structure developed in order to protect the public and minor
shareholders. This dual board structure consists of the management board and the
supervisory board (see Figure 5). No member can participate in both boards.
The new law also envisaged consistency in accounting, reporting and governance.
In 1884, a new update to company law was passed. This update continued the same
consistency principles, but it also forced directors and supervisory board directors
to be fully informed about all developments in the company [Morck and Steiner
2005]. According to Morck and Steiner [2005. P, 13], two decades before World War
I, CEO compensation was very much connected with company performance. How-
ever, during the Weimar Republic, the ownership structure became more diffused.
This diffused ownership led to corporate takeover fears for both families and their
hired managers. In order to prevent hostile corporate takeovers, companies started
to spread themselves among the family’s board members and the family’s bank, with
multiple voting shares and voting caps [Morck  Steiner 2005].
The National Socialist government established most of the features of modern
German corporate governance. The law of 1937 freed managers and directors from
their specific commitment to the shareholders, regarding the maximizing of the share
value and changed it to a general liability to stakeholders, especially to the Reich.
Managers were defined as professionals, that are hired to help company-owning
families [Morck and Steiner 2005, p. 2]. Directors were defined as family members
on the board of directors [Morck Steiner 2005, p. 1]. The 1937 law also forbade
voting by mail. This forbade lead to the entrusting of banks with proxy-voting rights.
This solution made the large banks key voting controllers over much of the German
Figure 5. The German corporate governance system
Source: [Choi, 2011]
350 Yaron Shemesh
corporate sector. According to Morck and Steiner [2005], after this act, the Third
Reich took control of the banks.
After WWII, the banks were privatized, but their proxy voting rights remained.
In 1998, reforms of all proxy voting rights were cancelled and the affected compa-
nies’ prices in the stock exchange rose sharply. The reason for the rise in the stock
exchange prices after the 1998 reforms was the change in the shareholder structure
in companies and the fact that major shareholders had got more influence in com-
panies. This change led to authorized capital increases in companies. [Gelauff, den
Broeder 1997; Morck and Steiner 2005].
2.2.2. The model profile
The German model (Figure 5) is characterized as a long term relationship between
the stakeholders and the company. The individual interest in the firm is implemented
by a corporate culture in Germany. [Gelauff, denBroeder 1997].
As presented in section 3.2.1., Germany, while still being a capitalist and demo-
cratic country, has a different tradition from the American and British governance
models. Both the US and the UK use the Anglo-Saxon system, where there is no
supervisory board, employee power is limited, institutional investors are powerful,
capital markets are strong and takeover activities are common [Choi 2011; Wójcik
2003; Herrigel 2006]. The German practice and the legal background of corporate
governance put in the center both individual interests and shareholders’ interests.
The shareholders are only one group of many firm stakeholders, such as: employees,
suppliers, customers, etc. From this point of view, all stakeholders’ interests (not only
shareholders) should be protected and reflected in corporate decisions. According
to this point of view, all stakeholders (including shareholders) are in the center of
the governance system.
This way of thinking is at the center of considerations and is unique to the Ger-
man system. In this system, it is legally binding that the labor union representative
has a seat on the board of directors. Such a board might better reflect the interests
of all stakeholders [Choi 2011]. According to Gelauff, den Broeder [1997, p. 26], as
a result of this way of thinking, the board of directors can be less sensitive to stock
price fluctuations. In Germany, the number of listed companies in the stock exchange
is only about one third of the number of companies listed in the UK. Therefore,
the stock market in Germany is smaller. Choi [2011, p. 168] also claimed that the
German corporate system is incompatible with raising money in the capital market.
This feature, however, has faded and more capital is raised through share issuance
nowadays. The corporate governance structure in Germany is not a unique one.
Many countries, like Austria, Holland, Poland and Switzerland, have dual boards as
well. Many countries, e.g. Germany and the Scandinavian countries, have employee
representatives on the supervisory board. There are more countries, like Japan (see
351Corporate Governance – Past and Present
Section 3.3.) and Italy, where banks are highly involved in the ownership and, thus,
the corporate governance of manufacturing and service sector companies. Since
Germany is the biggest economy in Europe and has been economically successful
after WWII, it has attracted special attention [Wójcik 2003].
As is seen in Figure 5, shareholders and all other stakeholders monitor and super-
vise the two boards of directors. One of the problems in this model is the process of
raising capital. In the German model, capital is typically raised through the process of
issuing debt (that is via corporate bonds) or it is borrowed, in the form of loans and
credits from banks. It is worth noting that an important feature of German culture
is keeping individual interests in the middle of the model. This may lead to a real
win-win situation between companies’ interests and stakeholders’ interests; both
sides’ desire is to increase the company’s profit and general performance. The dual
board system allows both the monitoring of boards and the verification of whether
companies’ decisions are compatible with shareholders’ and other stakeholders’
interests and are not biased towards private executive managers’ interests.
2.3. The Japanese model
2.3.1. Historical background
Japan was an isolated conservative country between 1639 to 1853 [Izumi and Isozumi
2001, p. 91 and Morck and Steiner 2005, p. 19]. Commercial families were at the
bottom of the social hierarchy. According to Morck and Steiner [2005, p. 19], at the
top of the social hierarchy were warriors, priests, farmers and workers. Unsurpris-
ingly, this Japanese societal hierarchical structure led to economic stagnation. Yet
the need to manage a densely populated country forced the feudal Japanese rulers to
allow for the growing influence of two commercial families, namely the Mitsui and
the Sumitomo [Morck and Steiner 2005, p. 19]. In1853, Admiral Perry threatened
to shell Tokyo in order to force opening Japan to American trade. The Japanese
leaders had no choice, but to open the economy to foreign traders. Following this
move, the feudal government let young samurai warriors seize power, intending to
restore the Meiji emperor [Morck  Steiner 2005]. This emperor remained on his
throne as merely a figurehead, nonetheless.
The Meiji emperor’s leaders decided to face and finally defeat the foreigners, but
in order to do so, they had first to learn their ways. Japan sent the best students to
universities all over the world to study and master foreign technologies, business
and government know-how and to report back. The outcome of this process was
the gradual emergence of a new Japanese cultural, economic and political revival.
According to Randall Morck and Nakamura [2007], the influence was almost on
all life aspects: Japan started to use the German parliament model, in addition to
compulsory public schools, modeled along the French and German style. Japan
352 Yaron Shemesh
modernized its army, and implemented a Royal English navy structure. Japan in-
troduced the religious freedom. In 1871, the Japanese rulers canceled all feudal
ranks and privileges. In fact, the rulers built a new Japanese society, relying on the
German code. Japan also modernized its legal system. By 1888, the Japanese civil
code was very much the same as the original German code.
The Meiji restoration took place in 1868 and was completed in 1877. By the end
of World War I, Japan was as developed an industrial economy as the European
countries [Randall Morck  Nakamura 2007].
With the new western knowledge and technology, the government built large,
state-owned factories. This process created a huge public debt. To solve this problem,
the Japanese government launched a massive privatization process in the late 19th
Century. Many of the factories were sold to the Mitsui and Sumitomo families and
to some other families such as the Mitsubishi. By 1952, most of the biggest corpo-
rations were owned by rich and powerful Japanese families. These new, industrial,
family-controlled factories were called zaibatsu. Further to the Japanese privatization
process, Japan started its industrialization with a mix of private and state-owned
factories. Thus, Japan started the 20th
century with a state-owned and privately owned
factory mixture [Izumi and Isozumi 2001; Morck and Steiner 2005].
After the Second World War, producers in Japan saw a high growth between
1960 and 1970 and achieved international success during the 1980s [Tetsuhiro 2013,
p. 421]. In this period, producers established a Japanese style of management and
a unique Japanese, insider-oriented corporate governance system [Tetsuhiro 2013].
In this system, the banks monitored the experienced executives in companies. The
cross-ownership, insider-type corporate governance system stopped working well
in the 1990s. This failing form of corporate governance and the worsening financial
standing of many were reflected in an assets collapse in the inflated domestic market
economy. The lower stock market valuation of Japanese companies attracted a large
number of foreign investors. The presences of foreign investors lead to higher com-
petition and, in many cases, to transformation and internationalization of major
flagship Japanese corporations. According to this new worldwide competition, the
authorities changed their strategy from that of the 1990s and tried to change the
corporate governance model and practice to accommodate expectations of the new
business environment. However, despite these efforts to modernize the corporate
governance system, the traditional system still prevailed [Tetsuhiro 2013]. The
problem of traditional corporate governance weakness was demonstrated in the
2011 Olympus scandal [Tetsuhiro 2013].
2.3.2. The model profile
The issue of corporate governance was not in the main stream of awareness in Ja-
pan until the middle of the 1990s Mizuno [2010]. At that time, the major feature of
the model was the monitoring role of the main banks over the companies in their
353Corporate Governance – Past and Present
horizontal keiretsu business group (see section 3.3.1). Tetsuhiro [2013] confirms
that another important keiretsu trait cross shareholdings. This prominent role of
core megabanks stemmed also from the fact that from the end of World War II up
to the 1980s, the Japanese stock exchange did not grow sufficiently, due to a low
equity capital ratio [Tetsuhiro 2013]. Thus, Japanese corporations had to borrow
money from banks in order to invest and develop their capacity.
According to Mizuno [2010],these main keiretsu banks were hit when the 1990s
dotcom bubble burst. They had to dispose of bad loans of their keiretsu companies.
This process triggered an unwinding of cross holdings in the keiretsu groups and
led to a major decline of share prices in the Japanese stock market. As a result of
this, not only did the main banks lose their influence in their keiretsu groups, but
it attracted foreign investors, who could reasonably cheaply acquire shares in com-
panies. As a result, according to Mizuno [2010], foreign investor ownership share
in Japanese firms rose from 7.7% in 1993 to 28% in 2006.
Naturally, foreign investors started to demand more transparency and attention
to corporate governance in their co-owned companies in Japan. Japanese firms
reacted to the foreign investors’ demands by adapting their corporate governance
system. Many firms with American shareholders adopted the US board structure,
nominating non-statutory executive officers and independent statutory auditors
[Mizuno, 2010, p. 653].
In 2001, following foreign shareholders’ criticism of the practices of boards
of directors and audit committees, the government started to work on a systemic
reform of the corporate governance system [Gilson and Milhaupt 2005; Chizema
and Shinozawa 2012]. In the same year, the government of Prime Minister Junichiro
Koizumi published a new amendment to the Japanese commercial code. One of
the main issues this amendment dealt with was the strengthening of the statutory
auditors’ quality and the expansion of their authority. According to Chizema and
Shinozawa [2012],the conventional statutory auditor system was a weak version of
the German corporate governance model. The old Japanese statutory auditor system:
could not appoint or remove directors, did not represent the shareholders’ and the
employees’ interests, since the auditors were nominated by the board of directors.
The main role of the auditor was to monitor the Board’s compliance with the law
and the financial statement [Chizema and Shinozawa 2012s].
The Japanese corporate governance reforms continued in 2002. These further
reforms replaced the conventional statutory auditor’s board with three committees
[Chizema and Shinozawa 2012]. As Figure 6 shows, these were: audit, nomination
and compensation committees. The 2002 reform included the implementation of
a set of rules, regarding the composition of each committee. It created an entirely
new mechanism which gave companies an option to adopt the reform or keep the
conventional statutory auditor system [Chizema and Shinozawa 2012; Gilson and
Milhaupt 2005].
354 Yaron Shemesh
Figure 6. The old, conventional, statutory auditor system and the new Anglo-Saxon
corporate governance system.
Source: [Chizema and Shinozawa, 2012]
In 2005, a new corporation law was introduced. Its main aim was to renew and
modernize Japanese corporate laws, including the rules of corporate governance
[Chizema and Shinozawa 2012]. The new law requires that at least half of the audi-
tors must be external auditors. In the conventional statutory auditor system, there
is no demand for external directors [Chizema and Shinozawa 2012].
In Japan, executive success is not measured and appreciated in the same way as
it is in the U.S. A successful president usually steps down and takes on the position
of akaicho (the chairman of the board of directors).The roles and duties are different
from those expected in U.S companies. The kaicho participates in board meetings,
but he is also important as part of the management. In Japan, the kaicho is an active
and respectful part of the top management team. The retired president’s influence
is so significant, because as a kaicho, he still has a top supervisory position in the
firm. The kaicho is expected to and has a position to suggest advice to the current
president and to supervise his activities. The current president is formally responsible
for developing and executing the company’s strategy and managing the company.
In such a situation, the kaicho can be a powerful player and can have even more
power than the current president. This prominent position and role is totally dif-
ferent to the situation in the U.S., as presented in section 3.1. Also in Japan, when
a president does not become a kaicho, it means that he was not successful in his
position as president [William J. Wales, Vinit Parida,  Patel, 2013, p. 300].
The actions that were taken by the Japanese government: in the 2001-2002
reforms and then in the implementation of 2005 Companies Law were aimed at
355Corporate Governance – Past and Present
bettering corporate governance in Japan. The government’s decision to allow the use
of both the old Japanese statutory system and the new committee system mecha-
nism is problematic. It requires every company to declare, in advance, what kind
of mechanism is being used. The Japanese option to use the retired company presi-
dent’s experience and knowledge gives the companies an option to learn from past
mistakes. While being a full member of the board of directors, the retired company
president can lead the company to a better position from the economic and also
from the business points of view.
2.4. The Israeli practice
2.4.1. Historical background
The Israeli corporate governance system was created after the establishment of
the new Israeli state in 1948. In the pre-establishing years of the state of Israel, the
whole area was governed by the British Mandate. Due to this British governance,
there was a strong influence on the company ordinance of the new Israeli nation.
According to Lurie and Frenkel [2003], after establishing Israel, the authorities in
Israel adopted the British companies’ ordinance, which was published originally
in 1929. Israeli corporate governance was influenced by many of the new na-
tion’s needs such as: resource shortages, ideological and strategic considerations.
Company ownership was made up of state-owned companies and collectively
held business groups owned companies. At the beginning, the privately owned
companies were in the hands of families or individuals. These groups were largely
in the Histadrut trade union movement’s hands [Corporate Governance (CG) in
Israel 2011, p. 14].
After the Yom-Kippur war of 1973, the Israeli economy suffered from over
a 15year period of stagflation, which ended in 1985. One of the major outcomes of
the economic problems of that time was the banking crisis that took place in the
early 1980s [CG in Israel 2011, p. 14]. This collapse was triggered by the banks, which
used to have sizable portfolios of shares in their assets. With the collapse of share
prices, the value of bank assets shrank; they had to be protected by nationalization
[CG in Israel 2011, p. 14].
In 1985, the Israeli coalition government announced a new Economic Stabiliza-
tion Plan (ESP). The major elements of the ESP were: reduction of public subsidies,
currency devaluation, liberalization of the state’s control over the capital market
and privatization of selected state-owned assets. However, the main ESP goal was
a reduction in the Israeli budget deficit and public debt. The execution of the pri-
vatization program, envisaged in the ESP, changed the map of companies in Israel.
Before the ESP, there were 160 state-owned companies and about 90% of employees
were concentrated in 10 large firms [CG in Israel 2011, p. 14]. The privatization
of the banks had a special role, since they had major shareholdings in the Israeli
356 Yaron Shemesh
industrial enterprises. The banks’ privatization programme envisaged a reduction
in the banks’ holdings in any non-financial company to a maximum of 15% of their
capital. Furthermore, the banks were required to report on any new investment in
a non-financial domestic company, where its value exceeded 5% of the Israeli Central
Bank’s equity [CG in Israel 2011, p. 14]. The result of these moves was that, by the
end of 1990, all of the state-owned and collectively held business groups changed
their ownership structure. Most of these groups dissolved and the rest changed their
owners. The new companies’ owners did not belong to the old elite of Histadrutthat,
used to control business in Israel [CG in Israel 2011, p. 14].
The main Israeli legislation regarding Corporate Governance in 1990 was the
company ordinance (that was adopted from the British Mandate) and the Securi-
ties law (1968) [CG in Israel 2011, p. 18].The Israeli company law of 1999 became
valid in February, 2000 [Lurie and Frenkel 2003].This new company law replaced
the company ordinance that had been valid from 1929. The Israeli company ord-
nance had been amended a lot over the years. The new law brought a new corporate
governance concept. The new concept was based on a clear power separation on
the one hand and a more precise and better system of checks and balances on the
other [Lurie and Frenkel 2003].
In 2004, the Israeli Securities Authority (ISA) founded a new corporate govern-
ance committee, that later on was named after its president as the Goshen Committee
[Lifschutz  Jacobi 2010]. This committee worked out and proposed a draft of the
new Israeli corporate governance code that followed OECD and the U.S. Sarbanes
Oxley rules (see section 3.4.2)[Lifschutz and Jacobi 2010].
The Israeli corporate governance’s main features are: a one layer system, a mini-
mum number of four directors on a board of directors, a ban on the CEO taking
the position of the chairman of the board of directors, no obligation to have an
employee representation on the board of directors, and an audit committee, which is
responsible for board and executive remuneration. The Israeli corporate governance
mechanism follows the Anglo-Saxon one. Figure 4 describes the Anglo-Saxon system
and can also be used for the Israeli corporate governance system [OECD 2014].
The Israeli company law requires that the company is governed by three organs:
the general shareholders’ assembly, the board of directors and the CEO, with his
active management of the company [Meir A. Fuchs and Koren 2010]. These three
organs are presented in Figure 4.The company law allows for checks and balances
processes between these three company organs. In this way, each organ has its own
sphere to act autonomously[Meir A. Fuchs and Gideon K. 2010].
2.4.2. The Goshen Committee
The (Israel Securities Authority) ISA is responsible for the enforcement of the
securities law and, in particular, its main duties, concerning market observation
and the prevention of and battle against legal violations[CG in Israel 2011, p. 9]. As
357Corporate Governance – Past and Present
Moshe Terry President of ISA, he nominated Z. Goshen to preside over a special
ISA committee to study and report on the current Israeli corporate governance
code. [Devash et al. 2006; Goshen 2006]. In December 2006, Z. Goshen presented
the committee’s report to the ISA with a number of recommendations. The com-
mittee identified Israel as an emerging market. It found that it was very important
to set proper corporate governance standards and rules that would be aligned with
standards, adopted in leading Western economies. In July 2007, the ISA approved
the Goshen Committee’s recommendations and issued a binding regulation, requir-
ing all companies listed on the Israeli stock exchange to use the recommendations
and implement them in their directors’ reports [Devash et al. 2006; Lauterbach 
Shahmoon 2010].
The main recommendations that the Goshen Committee provided were focused
on improving Israeli corporate governance. In particular, the recommendations con-
cerned the problems of boards of directors’ structure and independence, audit rules
and procedures, transactions with related parties and, finally, the need to establish
a specialized corporate and securities law court. The committee maintained that the
board of directors’ independence was one of the most important corporate govern-
ance issues in Israel. Thus, its final recommendation was that every public company
should have external directors, who would constitute one third of all directors and
their number should not fall below two [Goshen 2006; Lauterbach and Shahmoon
2010; Lifschutz and Jacobi 2010; CG in Israel 2011, p. 33]. The committee also recom-
mended strengthening the internal audit committee in public companies. The com-
mittee emphasized in the report that „in light of the auditing committee’s importance,
and as a complimentary step ensuring directors’ independence, great significance is
attached to the independence of the auditing committee’s members and their financial
qualifications”. That is why the committee suggested that most of the audit committee
members should be independent directors (including external directors).The com-
mittee chairman should also be an external director. The Goshen Committee stated
that in order to have an efficient approval process for the public company’s financial
statement, the audit committee must have a pre-discussions stage, preceding the
board of directors’ acceptance considerations and vote[Goshen 2006; Lauterbach
and Shahmoon 2010; Lifschutz and Jacobi 2010; CG in Israel 2011, p. 33].
The Goshen Committee also addressed the difficult issue of transactions with
related parties. This stems from the fact that most public companies in Israel are
controlled by main, dominant shareholders. The concentration of ownership and,
in fact, power might lead to biased deals and conflicts of interest. The committee
found that in order to overcome the possible bias, transactions with related parties
should be studied and approved by a majority of the non-related parties. The Gos-
hen Committee recommended that this solution be valid up to the moment that
a professional court is established. After establishing the professional court (the pro-
fessional „economic court“, established in December 2010), a normal shareholders‘
358 Yaron Shemesh
majority would be enough to approve such transactions. According to the Goshen
Committee recommendation, the new court should prevent the exploitation of
minority shareholders and discrimination by major shareholders. This new institu-
tion should lead to the improvement of quality in public companies’ management,
further development of the Israeli capital market and a better performance of the
national economy[Goshen 2006; Lauterbach and Shahmoon 2010; Lifschutz and
Jacobi 2010; CG in Israel 2011, p. 33].
Further to the ISA‘s decision to adopt the Goshen Committee recommenda-
tions and to implement the new rules regarding the corporate governance of public
companies, the OECD corporate governance council decided to open membership
negotiations with Israel. The negotiation target was to establish a roadmap by setting
the terms, conditions and processes to be met before Israel joined the OECD. In the
roadmap, the council asked some OECD committees to provide formal opinions.
According to the formal opinions of these committees and the relevant information,
the OECD invited Israel to be a member of the OECD. After Israel finished imple-
menting all the internal procedures, Israel became an OECD member in September
2010 [CG in Israel 2011, p. 3].
2.4.3. The 16th
and 20th
amendments to Israeli company law
On March 6th
, 2011, the Israeli Knesset approved the 16th
amendment to the Israeli
company law of 1999. This amendment is the most important and meaningful change
to the original law, which was accepted in 1999. This amendment also implemented
most of the Goshen Committee’s recommendations [Shmueli 2011; Shemtov and
Ganzer 2011]. Five years before the 16th
amendment was approved, almost no one in
Israel knew of the term ‘corporate governance’. Today, everyone in public company
management knows this term and understands what it means. The consolidation
process and implementation of appropriate corporate governance in public com-
pany is a long process that can take many years and can cover a variety of laws,
regulations and directives like Sarbanes Oxley, amendment 16 and administrative
enforcement [Kibovich 2011]. The amendment target was to change the corporate
triangle power balance, that includes the controlling shareholders, the minority
shareholders and the board of directors. The main target of this amendment is to
balance all the factors by transferring some of the controlling shareholders’ power
to the minority shareholders. By moving this power, the minority shareholders
will have more influence on the decision making process in the public companies
[Shemtov and Ganzer 2011].
On December 12, 2012, the Israeli Knesset approved the 20th
amendment to the
Israeli company law of 1999. The 20th
amendment is about the executive remunera-
tion in public and bonds companies. This amendment is based on the recommen-
dations of the Justice Minister Yaakov Neeman. The amendment has three main
issues that will make the public and bonds companies obligated to. The issues in the
359Corporate Governance – Past and Present
amendment are: establishing a remuneration committee that will be independent
and able to discuss all the remunerations issues, deciding for a remuneration policy
for each company with a link between the executive performance to his remunera-
tion, outlining the remuneration approving policy and the procedure for approving
individual transactions with executives [http://index.justice.gov.il/Publications/
News/Pages/ScharBchirim.aspx, 19/07/15].
By changing the balance power in the 16th
amendment and setting the high level
executives’ remuneration process in the 20th
amendment, the law is trying to force
the company high level leaders to work properly from the one hand and from the
other to have a fair remuneration from the company. This remuneration must be
based on a clear and known process that can be traced by all stakeholders.
3. Convergence of corporate governance practice
The convergence of corporate governance models and, in particular, practice is
visible in both its internal and external dimensions [Letza, S., Kirkbride, J.,  Sun,
X. 2004; La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., 2000]. Its pace
has been strengthened by the recent wave of globalization, which can be traced back
to the mid 1980s. It speeded up, due to the technological progress and the revival
of a free market ideology and economic policies [Kowalski 2013, pp. 12-14]. What
emerged was a prevailing liberal paradigm, based on the reduced role of the state
in the economy, deregulation and the assumed autonomous ability of markets to
maintain the equilibrium. What followed was both privatization, where the UK
played an inspirational role, and the liberalization of capital flows [Kowalski 2013].
These deregulation, liberalization of capital flows and privatization policies in the
UK, other European countries and in Israel were reflected by an increased intercon-
nectedness of national economies, higher completion and a growing presence of
multinational corporations (MNC).
The MNCs step by step built their global supply chains by developing intra-
industry trade and off shoring or outsourcing more and more tasks. Institutionally
these technology driven processes were accompanied by a growing number of
mergers and acquisitions (MA). The MA were the most powerful factor behind
the convergence trend in corporate governance. Typically, mother companies, ac-
cepting local regulations, maintained their original corporate governance culture.
Developing the local network of stakeholders, MNCs spread its internal corporate
governance to their customers.
The internal corporate governance convergence trend was also triggered by the
dot.com crisis and major collapses of such big companies as Pet.com, the Webvan
Group, Enron or Parmalat. These corporate governance failures and scandals made
both business and financial sectors’ people and regulators improve the mechanisms
360 Yaron Shemesh
for controlling the agency problem and protecting investors by setting stringent
rules of accounting and reporting [Tucker, P., Haliassos, M., Kockelkoren, T., Ureta,
J. C., González-Páramo, J. M., Schock, L. J., ...  Wymeersch, E., 2015]. The major
contributors to convergent practices were also global auditing companies.
In the external corporate governance, major convergence was seen in a num-
ber of countries such as Japan and Israel (see section 2.3). It was visible in the
European context, where many companies began to raise capital through public
offerings, instead of borrowing from banks or issuing Corporate Bonds. This trend
was strengthened by globalization and financialization, where capital began to be
easily available [Kowalski 2013, p. 27-32; Horn, L., 2004]. Thus, gradually, also in
Europe, without changes of formal corporate governance framework, capital mar-
kets indirectly began to have a stronger impact on management and supervisory
boards’ decisions. These convergence trends are strongly influenced by the needs
of globalization, but it does not mean that national variations of corporate govern-
ance ceased to play a role. Corporate governance changes and amendments are still
nationally controlled.
Conclusions
The models and practice were developed in the 19th
and at the beginning of the 20th
Century. They reflected the then economic, technological and legal context. That
is why the formal solutions and the practical modus operandi have had strong
historical and institutional underpinnings. The uniform board model, in terms of
its international range, has dominated. However, in Germany and in some other
continental European countries there functions the dual board model. It formally
separates strategic, supervisory and monitoring responsibilities from current man-
agement. Both major models with national variations exist, but have gradually
begun to converge. In practical terms, that has been particularly seen in the area of
internal corporate governance. The gradual convergence stemmed from globaliza-
tion, the liberalization of capital flows and international competition for foreign
investors. These objective processes and national policies were echoed in various
national legislations, focused on providing more transparency, disclosure and the
protection of investors.
The Israeli case is a unique one from the corporate governance point of view.
While establishing the young Israeli nation, the Israeli leaders, at that time, had to
take the laws that they had in their hands. The Israeli leaders took Mandate laws
and validated them for the new, young Israeli nation. Through the years, the com-
pany ordinance, which was adopted from Mandate time, has been amended many
times, due to the Israeli developing nation needs. The new company law and the
amendments after publishing the new law prove that the new nation’s needs are
361Corporate Governance – Past and Present
still changing, according to the domestic economical progress and to the economy
changing around the world.
The recent global financial crisis unveiled corporate governance weaknesses and,
thus, the need to rethink its both practical and formal aspects. In the globalized
world, with its current financialization, there is a need to discuss and implement
more universal solutions in the internal and external dimensions of corporate gov-
ernance. They will not replace national models entirely, but could make the global
economic and financial system safer and more robust.
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CORPORATE GOVERNANCE - PAST AND PRESENT

  • 2. NEW TRENDS IN ECONOMICS, MANAGEMENT AND FINANCE The peer-reviewed proceedings of an international academic conference The First International Conference for PhD Students and Young Researchers in Economics, Management and Finance March 6, 2015 Poznań University of Economics Editors Piotr Michoń Agnieszka Poczta-Wajda Magdalena Osak Paweł Marszałek Roderic Gray Sylwester Białowąs
  • 3. ISBN 978-83-944645-0-9 Printed and bound in Poland by: Poznań University of Economics and Business Print Shop ul. Towarowa 53, 61-896 Poznań, Poland phone: +48 61 854 38 06, +48 61 854 38 03 Published by Doctoral Seminars in English, Poznań University of Economics and Business, Poznań [email protected] First Published 2015 Scientific review Agata Filipowska, Aleksander Grzelak, Anna Wach-Kąkolewicz, Gary Evans, Grzegorz Mikołajewicz, Izabela Bludnik, Jarosław Kubiak, Joanna Ratajczak-Tuchołka, Justyna Rój, Maciej Brzozowski, Maciej Ławrynowicz, Maciej Szymczak, Maciej Żukowski, Magdalena Andrałojć, Magdalena Stefańska, Remigiusz Napiecek, Tomasz Wanat, Witold Jurek For information Piotr Michoń, PhD Coordinator of Doctoral Seminars in English Poznań University of Economics and Business [email protected]
  • 4. CONTENTS Economics and society Michał Litwiński, Rationality According to Traditional Institutionalism and Neoclas- sical Economics...............................................................................................................7 Swajan Das, Determinants of Tertiary Level Students’ Overseas Study Decision.............22 Wiktoria Domagała, Self-Discrimination among Women in Poland.................................40 Tadeusz Lewandowski, Personalized Medicine and Finding the Predictive Biomarker: A Case Study on Avastin...................................................................................................58 Hila Yariv, Pharmacist Prescribing in Israel: International Background and Stakehold- er Analysis...........................................................................................................................73 Moshe Manor, Reforms to the Israeli Pension System..........................................................89 Human resources Moshe Margalit, The Relationship between Founders’ Military Background and Or- ganisational Culture: An Israeli Air-Force Retirees’ Case Study Using Narrative Research...............................................................................................................................109 Ewelina Pomian, A Construct of Proximity as Evidenced in the Studies on Organiza- tions in the Aerospace Industry........................................................................................129 Przemysław Piasecki, Workforce Segmentation and its Determinants in Small Com- panies: The Case of British SMES.....................................................................................143 Moshe Katan, Similarities and Differences between Leadership Development and Leader Development – Review Of Concepts..................................................................157 Markets and companies Benjamin Gozlan, Measuring Leanness: A Model for Estimating Leanness at Country Level.....................................................................................................................................175 Keren Ogintz, Creditors’ Arrangements in a Changing World............................................194 Michał Borychowski, Can the Production of Liquid Biofuels Support the Sustainable Development of Agriculture? Reflections on the Background of the Development of the Bioeconomy..............................................................................................................210
  • 5. 4 Contents Dawid Szutowski, The Impact of Innovation on the Market Value of Tourism Enter- prises: A Statistical Analysis..............................................................................................223 Tomaszewski Artur, A Game Theory Approach to an Analysis of the Decisions of Two Competitors on the Polish TV Market............................................................................237 Marcin Flotyński, Target Price Accuracy in the Recommendations of Stocks on the Example of Companies from the WIG20 Index.............................................................248 Marketing and Consumers’ Behaviour Marta Grbyś, Neuromarketing Application in Consumer Behaviour Research................271 Agnieszka Marie, Enhancing the Quality of Pathologies in Consumer Behaviour Re- search by Means of a Systematic Review.........................................................................284 Michaela Otravski, Impact of Social Media on Fashion Conscious Consumers...............300 Filip Nowacki, Marketing 4.0 as a Solution for International Entrepreneurship..............309 Management Izabela Rekowska, New Marketing Communication Models for Digital Marketplace – How Brands Can Take Advantage of Digital Media in Their Merketing Strategy.....325 Yaron Shemesh, Corporate Governance – Past and Present................................................341 Lior Ogintz, The Introduction and Implementation of the Failing Company Doctrine into the Legal and Economic Systems of Israel..............................................................364
  • 6. Yaron Shemesh CORPORATE GOVERNANCE – PAST AND PRESENT Summary: The awareness of the need for Corporate Governance started between the end of the 19th century and the beginning of the 20th century. Corporate Governance is different from country to country, because of the state’s historical, cultural and institutional underpin- nings. The aim of the paper is to describe and assess the evolution and current major models and the practice of Corporate Governance. In the paper, the description and assessment of the main corporate governance models is supplemented by analyses of the Israeli practice and development in this area. Keywords: Corporate Governance, board of directors, external auditing, audit committee, internal corporate governance, external corporate governance. JEL codes: G34, M12, M14, M42, O16. Introduction There exist simultaneously various forms of capitalism in the 21st century. In the US, there are many independent companies (sole proprietors and corporations), that compete with each other on the one hand, and with foreign competitors on the other, for orders and ultimately for market share. Each corporation has its own chief executive officer (CEO) and every CEO pursues his corporate and strategic policy [Morck 2005]. The pressure of competition and the desire to have as many customers and sales as possible can lead to policies that might be excessively risky, because of bad strategic decisions. Economic crises are events that happen periodically and might occur, because of many supply and demand factors. Some of these factors may be due to hyper – competition pressure and because of the CEO having an excessive desire to increase the company’s turnover, profitability, number of customers or other performance measures. In the last two decades, the most profound economic collapses took place between 1995 and 2001 (the dotcom bubble crisis), and in 2007-2009 (the subprime mortgage crisis). The last episode was not limited to the stock exchange, but also contaminated the whole US economy and spread to most developed countries. This episode was the most serious recession in the post-World War II period.
  • 7. 342 Yaron Shemesh The dotcom and subprime crises led shareholders and stakeholders to search for a mechanism that would help them to monitor managers in enterprises, regarding their decisions and ways of investing both company capital and capital that has been raised from investors/shareholders. The aim of the paper is to describe and assess the evolution and current major models and the practice of corporate governance. Special attention has been devoted to the Israeli Corporate Governance. The rest of the paper is divided as following: Section 2 is devoted to defining corporate governance; Section 3 deals with major corporate models and practice; Section 4 addresses the issue of corporate govern- ance convergence. The paper is closed by conclusions. 1. Corporate governance defined Corporate governance can be defined as a framework for maximizing the sharehold- ers’ value in a corporation, while taking the right steps to ensure fairness to all stake- holders. Corporate governance is about transparency and raising the stakeholders’ confidence in the way that the company is run [Sharvani, 2011, p. 52]. Other authors see corporate governance as a set of mechanisms, designed to guarantee the provid- ers of finance a return on their investments [Alcantara and Merino 2012, p. 223; Tipurić, Tušek, Filipović 2009, p. 58]. It consists of a set of rules and regulations that should guarantee that small investors reduce their risk, due to the misbehavior of company managers and the controlling shareholders [Lauterbach Shahmoon 2010, p. 35]. It is also a set of organizational and operational processes that makes the governance system work [Choi 2011, p. 167]. The above corporate governance definitions indicate a set of rules that executives as the main decision makers in companies and the controlling shareholders have to work within. These rules are to create an atmosphere of confidence for all of the stakeholders and shareholders, and a belief that proper corporate governance func- tions in the company. In literature, corporate governance mechanisms usually have been divided into one of the following groups: internal and external mechanism. Does it come from the board of directors, which is internal, or from external capi- tal providers? The board of directors, which is located in the center of the internal control system in the company, looks for a mechanism that will verify efficient company working processes. External capital providers look for a mechanism that will ensure a good return on their money. In figure 3, there is a visual description of the relationship between the internal and external factors in a company [Gillan 2006 p. 382]. Figure 3 demonstrates the link between the shareholders and the board of direc- tors. The shareholders elect the board of directors’ members. The board of directors’ members have fiduciary obligations to the shareholders [Gillan 2006 p. 383].
  • 8. 343Corporate Governance – Past and Present 1.1. The origins of the corporate governance concept There is probably no historical recognition of when corporate governance became an issue and this author is not sure if there ever will be. Corporate governance has existed since the moment that there were managers in a company on the one hand and investors who have invested their money in the company on the other. Thus, the first countries that practically developed and experienced corporate governance were the pioneers of modern capitalism, namely, Great Britain and the Netherlands where the first joint stock companies were created in the 17th Century. An investment process in a company that is not controlled by the investors creates a conflict of interests. After World War II, the US economy experienced a very quick and extensive expansion, as is described in Figure 1. At that time, internal govern- ance in companies was not a high priority and the phrase corporate governance was not common. By the middle of the1970s, the federal Securities and Exchange Com- mission (S.E.C.) brought corporate governance into the spotlight [Cheffins 2012].In 1974, the S.E.C. started proceedings against three directors from the Penn Central Company, claiming that they had not properly presented the company’s financial situation, according to the federal securities law. In 1976, the S.E.C. began to treat managerial responsibilities as one of the issues that should be monitored [Cheffins 2012, p. 2]. The history of corporate governance development differs from country to country. This can be seen by studying cases of the development of corporate gov- ernance in each of the seven leading industrialized countries (G7), namely: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States as well as in the Netherlands – the oldest capitalist economy [Morck 2005]. Figure 3. Corporate governance and the balance sheet model of the firm Source: Gillan [2006]
  • 9. 344 Yaron Shemesh 1.2. Internal corporate governance One of the outcomes of the governance failures that took place during the end of the 1990’s and the beginning of the 2000’s was the Sarbanes-Oxley (SOX) Act, binding in the US from 2002. The new SOX rules formalized the idea that the CEO and CFO have responsibility for publishing accurate financial reporting. The responsibility of both the CEO and CFO is also to oversee the whole process of establishing, maintaining and evaluating internal control and reporting, regarding the evalua- tion process. The reporting must take place in both quarterly and annual financial statements [Hoitash, Hoitash, Johnstone 2012, p. 768].This might be seen as an indispensable element of internal corporate governance. According to Misangyi and Acharya [2014, p. 1682], internal governance consists of: executive incentives and the board of directors. It can also consist of: the board of directors, managerial incentives and anti-takeover measures [Gillan 2006, p. 383-385]. CEOs play a leading role in internal financial control compliance. However, even if the CFO and CEO were to obey all SOX regulations, it would not eliminate the possibility of a CEO making accounting errors [Hoitash, Hoitash, Johnstone, 2012; Mitra, Jaggi, Hossain, 2013]. In the past, researchers tried to categorize the internal mechanisms in different ways, but now there is consensus in the literature [Hoitash et al. 2012, p. 768] that internal governance is an indispensable mechanism for controlling the agency problem. The agency problem can be defined as follows: The main issue in the agency problem is the separation of management and finance or, in other words, ownership and control. After raising money from a fi- nancer, the question is: how can the financer be sure that he will get a good return on his money? Thus, they will usually sign a contract. This contract is supposed to settle what the manager will do with the raised money. Will the contract be able to forecast all the decision-making situations that the manager might find himself in? [Shleifer W. Vishny 1997, p. 740-741]. The agency relationship will consist of a contract between the two or more people, who will be engaged in a venture. First, there is the owner and second, there is the agent. The owner engages the agent to perform some activities in the company, on behalf of the owner. The owner can prevent the agent from taking dangerous ac- tions by paying for monitoring, which will limit the agent. In addition, sometimes the owner will prefer to pay the agent just to prevent him from taking dangerous actions [Company, Jensen, Meckling 1976, p. 308]. The internal monitors, who are the main players in the internal corporate gov- ernance mechanism, are the directors on the board, working together with the company’s top management [Misangyi Acharya 2014].In this monitoring way, the internal mechanism will be more efficient and accurate. The board, as the internal monitor in the corporate governance mechanism, is the link between the company owners and the management, and is presumed to be monitoring and controlling the management[Tipurić et al. 2009].
  • 10. 345Corporate Governance – Past and Present 1.3. External corporate governance The firm does not work in a vacuum; it is connected to the market and must react to the market. The right hand side of Figure 3 introduces the external governance elements. These elements rise in importance, according to the firm’s needs to raise capital. The separation between capital providers and capital management creates the demand for a monitoring mechanism. This structure is defined as external corporate governance [Gillan 2006, p. 382]. Albuquerque Miao [2013] proved that proper external corporate governance leads to good internal governance. It can also be found that the board’s independ- ence is low in companies where external corporate governance is more effective [Adams Ferreira 2009]. Following modern literature, it is possible to distinguish the major factors and the good practices in external corporate governance: –– External auditing is seen as an indispensable and reliable source for the proper validation of a company’s financial information. It is emphasized that external auditors should cooperate with the internal audit committee [Mitra et al. 2013; OECD 2014; Tipurić et al. 2009]. –– Based on the agency theory, it is expected that major external shareholders (shareholders that hold above 10%) are needed to affect decisions regarding the managers’ compensation. With these decisions, they can insure that the managers will act according to their interests [Voulgaris, Stathopoulosand Walker, 2010, p. 516]. –– Only specialist external shareholders should be involved in managerial decision monitoring. These external shareholders should allow the managers to create value for the shareholders and not be disturbed by the stakeholders’ interests. [Gnan, Hinna, Monteduro andScarozza 2011, p. 911]. Following the above factors and conditions, the decision making process in the company will be monitored properly and be more efficient. The efficiency will develop from: the external auditing process, specialized shareholders and big block holders. The external mechanism will not allow any of the forces involved in the decision making process (the management, the shareholders or the stakeholders) prioritize their own interests as a target. The decisive target will remain what is “ best for the company”. 2. Corporate Governance models 2.1. The Anglo-Saxon model Contrary to modern custom – one share, one voting right – in the 19th century, the rights of the major shareholders were limited. These limits came from a desire to
  • 11. 346 Yaron Shemesh protect the minor shareholders. The ways of doing so in that century were based on one or both of the following options (Pargendler Hansmann 2013, p. 582]: first, capping how many shares any shareholder could own; second, the number of votes that any shareholder could cast was less proportionally than the quantity of shares that he/she actually owned. For example: the Leeds and Liverpool canal charter limited any shareholder from owning more than 100 shares. Another ex- ample is the Stroud Water Navigation company, that limited ownership not only to 15 shares for one shareholder, but also imposed regressive voting rights [Pargendler and Hansmann 2013]. After the UK’s Labour Party lost in the 1979 and 1983 General Elections to Mrs. Thatcher’s Conservative Party, the Labour Party adopted market governance as a policy. At that time, there were debates about the differences between econo- mies such as Japan and those in continental Europe [Siepel and Nightingale 2014]. Moreover, in the mid 1990s, economic globalization and Europeanization renewed the debate. The debate shifted towards a new approach in which more attention was devoted to national specificities, regarding corporate governance and its movement towards a harmonized model. According to Cernat [2004], two corporate govern- ance types were identified in Europe: a company based system and an enterprise based system. This variation is equivalent to the difference between shareholders and stakeholders. The difference across Europe in corporate governance systems is reflected in the regulations and social aspects in each country. For example, in the UK, hostile takeovers through the stock market are an important issue. In the European Union, the UK economy is seen as similar to the US. The reforms that were introduced by Thatcher and Blair brought the UK even closer to the American model. By contrast, in Germany, there is almost no threat from hostile takeovers. In other continental countries, as in Germany, there is also a similar way of thinking, regarding hostile takeovers[Cernat 2004]. Over the years, many reports have been written and published around the world, describing the corporate governance situation in specific countries. Each report analyzes and assesses the situation in a particular country and advises on the main activities, which are necessary to improve corporate governance. The reports started in 1992 in the UK and more were subsequently published in South Africa, Aus- tralia, the US and other countries. In the Australian Institute of Company Directors, there is a list of all the published reports, regarding corporate governance [http:// www.companydirectors.com.au/director-resource-centre/useful-links/corporate- governance-major-reports, 29/9/15]. In May 1991, the Financial Reporting Council, the London Stock Exchange and representatives of the accountancy profession set up the Cadbury committee in the UK. This was the first of many such committees, with others later being set up all over the world. The main reasons for setting up the Cadbury committee were: the low level of financial reporting and auditors’ inability to act as safeguards from the
  • 12. 347Corporate Governance – Past and Present accounting perspective. According to the Cadbury report, these concerns arose, due to the unexpected failures of major companies. The Cadbury draft report was published in May 1992 for public comment [Cadbury 1992, p. 13]. According to Jones Pollitt [2004, p. 163], the Cadbury report has a high level of analysis and gives practical suggestions on how to solve the problems that the committee was set up to solve. This report is recognized worldwide and is considered a part of the development of corporate governance in the UK and elsewhere. Some of the Cadbury report’s suggestions have been incorporated in the OECD’s Corporate Governance principals [Jones Pollitt 2004]. According to William J. Wales, Vinit Parida, Patel [2013, p.300], one more interesting issue in the U.S. is the retired CEO. Usually, in the U.S., the serving CEO has the position of chairman of the board of directors. No matter how successful the CEO may have been and how good the company’s performance is, after his retire- ment, the CEO leaves his positions as CEO and chairman of the board of directors. Then, these positions are held by the newly nominated CEO. In this situation, all of the experience that the successful, retired CEO has acquired over the years goes down the drain. The retired CEO has no formal influence on the company or on the board of directors and no one takes advantage of exploiting his experience [William J. Wales et al. 2013]. The Anglo-Saxon model (Figure 4) is a model, which is built around the share- holders. The shareholders work in the capital market and can govern the company through the board of directors. The main features of Anglo-Saxon corporate governance (Figure 4) are the fol- lowing: The model is known as the shareholders’ model, which means that the share- holders are at the center of the governance system. The minority shareholders are Figure 4. The Anglo-Saxon corporate governance system Source: Choi [2011]
  • 13. 348 Yaron Shemesh indirectly protected by a large and liquid stock market. There is a low level of family and state ownership concentration and a dominant role is played by institutional investors [Piesse, Strange, Toonsi 2011; Tipurić et al. 2009]. The low level of family and state ownership is the main problematic feature in the Anglo-Saxon model. It opens the possibility of there being a dominant position of management in the power structure of the system. In these circumstances, the management makes all the necessary daily business decisions. These decisions are often taken, according to the management’s own interests, which might give rise to over-investment and excessive risk-taking. This over-investment and excessive risk-taking might make the corporation bigger, but more vulnerable to adverse external shocks. As much as the corporation is bigger, the CEO’s power will also be extended. This can lead the CEO to overinvest, even if the resulting company profit is low or, in extreme cases, might lead to a loss for the company. Thus, in such cases, the over-investment might lead to greater CEO power, but might also leave the shareholders with a lower return on their capital [Tipurić et al. 2009]. According to Cernat [2004], there are fiduciary relationships between the share- holders and the management, based on the market capitalism concept. The el- ementary Anglo-Saxon assumption is based on the belief that the non-centralized capitalist market can have self regulating and balancing features. According to this elementary assumption, individual entrepreneurs and managers struggle to be as successful as possible. This success is oriented towards being as profitable an or- ganization as possible; of course, this means material success. In the short term, the individualist behavior with profit as the target is accompanied by appropriate laws. The main reason for these laws comes from the desire to keep an efficient Anglo- Saxon model. For example: according to the continental theory, the company has its own independent desires. These desires might be good for the company, but might not be good for the shareholders. For these reasons, we can find in company law many issues which originate from these desires; for example: statutory capital rules, board responsibilities and shareholders’ rights [Cernat 2004]. As presented in Figure 4, the shareholders and the capital market are the main actors in Anglo-Saxon corporate governance. The shareholders are active and moni- tor the CEO and other managers in the company through the board of directors. Since the directors were nominated by the shareholders/owners, the shareholders have full, indirect control of the business decisions. 2.2. The German model 2.2.1. Historical background German industrial progress speeded up in the second half of the 19th century. It was financed by wealthy families, but foreign investors, small shareholders and private banks were involved as well. Large scale enterprises had a key role during German industrialization. The new German company law published in 1870 created a legal
  • 14. 349Corporate Governance – Past and Present foundation for the current dual board structure [Gelauff, den Broeder 1997; Morck, 2005].The dual board structure developed in order to protect the public and minor shareholders. This dual board structure consists of the management board and the supervisory board (see Figure 5). No member can participate in both boards. The new law also envisaged consistency in accounting, reporting and governance. In 1884, a new update to company law was passed. This update continued the same consistency principles, but it also forced directors and supervisory board directors to be fully informed about all developments in the company [Morck and Steiner 2005]. According to Morck and Steiner [2005. P, 13], two decades before World War I, CEO compensation was very much connected with company performance. How- ever, during the Weimar Republic, the ownership structure became more diffused. This diffused ownership led to corporate takeover fears for both families and their hired managers. In order to prevent hostile corporate takeovers, companies started to spread themselves among the family’s board members and the family’s bank, with multiple voting shares and voting caps [Morck Steiner 2005]. The National Socialist government established most of the features of modern German corporate governance. The law of 1937 freed managers and directors from their specific commitment to the shareholders, regarding the maximizing of the share value and changed it to a general liability to stakeholders, especially to the Reich. Managers were defined as professionals, that are hired to help company-owning families [Morck and Steiner 2005, p. 2]. Directors were defined as family members on the board of directors [Morck Steiner 2005, p. 1]. The 1937 law also forbade voting by mail. This forbade lead to the entrusting of banks with proxy-voting rights. This solution made the large banks key voting controllers over much of the German Figure 5. The German corporate governance system Source: [Choi, 2011]
  • 15. 350 Yaron Shemesh corporate sector. According to Morck and Steiner [2005], after this act, the Third Reich took control of the banks. After WWII, the banks were privatized, but their proxy voting rights remained. In 1998, reforms of all proxy voting rights were cancelled and the affected compa- nies’ prices in the stock exchange rose sharply. The reason for the rise in the stock exchange prices after the 1998 reforms was the change in the shareholder structure in companies and the fact that major shareholders had got more influence in com- panies. This change led to authorized capital increases in companies. [Gelauff, den Broeder 1997; Morck and Steiner 2005]. 2.2.2. The model profile The German model (Figure 5) is characterized as a long term relationship between the stakeholders and the company. The individual interest in the firm is implemented by a corporate culture in Germany. [Gelauff, denBroeder 1997]. As presented in section 3.2.1., Germany, while still being a capitalist and demo- cratic country, has a different tradition from the American and British governance models. Both the US and the UK use the Anglo-Saxon system, where there is no supervisory board, employee power is limited, institutional investors are powerful, capital markets are strong and takeover activities are common [Choi 2011; Wójcik 2003; Herrigel 2006]. The German practice and the legal background of corporate governance put in the center both individual interests and shareholders’ interests. The shareholders are only one group of many firm stakeholders, such as: employees, suppliers, customers, etc. From this point of view, all stakeholders’ interests (not only shareholders) should be protected and reflected in corporate decisions. According to this point of view, all stakeholders (including shareholders) are in the center of the governance system. This way of thinking is at the center of considerations and is unique to the Ger- man system. In this system, it is legally binding that the labor union representative has a seat on the board of directors. Such a board might better reflect the interests of all stakeholders [Choi 2011]. According to Gelauff, den Broeder [1997, p. 26], as a result of this way of thinking, the board of directors can be less sensitive to stock price fluctuations. In Germany, the number of listed companies in the stock exchange is only about one third of the number of companies listed in the UK. Therefore, the stock market in Germany is smaller. Choi [2011, p. 168] also claimed that the German corporate system is incompatible with raising money in the capital market. This feature, however, has faded and more capital is raised through share issuance nowadays. The corporate governance structure in Germany is not a unique one. Many countries, like Austria, Holland, Poland and Switzerland, have dual boards as well. Many countries, e.g. Germany and the Scandinavian countries, have employee representatives on the supervisory board. There are more countries, like Japan (see
  • 16. 351Corporate Governance – Past and Present Section 3.3.) and Italy, where banks are highly involved in the ownership and, thus, the corporate governance of manufacturing and service sector companies. Since Germany is the biggest economy in Europe and has been economically successful after WWII, it has attracted special attention [Wójcik 2003]. As is seen in Figure 5, shareholders and all other stakeholders monitor and super- vise the two boards of directors. One of the problems in this model is the process of raising capital. In the German model, capital is typically raised through the process of issuing debt (that is via corporate bonds) or it is borrowed, in the form of loans and credits from banks. It is worth noting that an important feature of German culture is keeping individual interests in the middle of the model. This may lead to a real win-win situation between companies’ interests and stakeholders’ interests; both sides’ desire is to increase the company’s profit and general performance. The dual board system allows both the monitoring of boards and the verification of whether companies’ decisions are compatible with shareholders’ and other stakeholders’ interests and are not biased towards private executive managers’ interests. 2.3. The Japanese model 2.3.1. Historical background Japan was an isolated conservative country between 1639 to 1853 [Izumi and Isozumi 2001, p. 91 and Morck and Steiner 2005, p. 19]. Commercial families were at the bottom of the social hierarchy. According to Morck and Steiner [2005, p. 19], at the top of the social hierarchy were warriors, priests, farmers and workers. Unsurpris- ingly, this Japanese societal hierarchical structure led to economic stagnation. Yet the need to manage a densely populated country forced the feudal Japanese rulers to allow for the growing influence of two commercial families, namely the Mitsui and the Sumitomo [Morck and Steiner 2005, p. 19]. In1853, Admiral Perry threatened to shell Tokyo in order to force opening Japan to American trade. The Japanese leaders had no choice, but to open the economy to foreign traders. Following this move, the feudal government let young samurai warriors seize power, intending to restore the Meiji emperor [Morck Steiner 2005]. This emperor remained on his throne as merely a figurehead, nonetheless. The Meiji emperor’s leaders decided to face and finally defeat the foreigners, but in order to do so, they had first to learn their ways. Japan sent the best students to universities all over the world to study and master foreign technologies, business and government know-how and to report back. The outcome of this process was the gradual emergence of a new Japanese cultural, economic and political revival. According to Randall Morck and Nakamura [2007], the influence was almost on all life aspects: Japan started to use the German parliament model, in addition to compulsory public schools, modeled along the French and German style. Japan
  • 17. 352 Yaron Shemesh modernized its army, and implemented a Royal English navy structure. Japan in- troduced the religious freedom. In 1871, the Japanese rulers canceled all feudal ranks and privileges. In fact, the rulers built a new Japanese society, relying on the German code. Japan also modernized its legal system. By 1888, the Japanese civil code was very much the same as the original German code. The Meiji restoration took place in 1868 and was completed in 1877. By the end of World War I, Japan was as developed an industrial economy as the European countries [Randall Morck Nakamura 2007]. With the new western knowledge and technology, the government built large, state-owned factories. This process created a huge public debt. To solve this problem, the Japanese government launched a massive privatization process in the late 19th Century. Many of the factories were sold to the Mitsui and Sumitomo families and to some other families such as the Mitsubishi. By 1952, most of the biggest corpo- rations were owned by rich and powerful Japanese families. These new, industrial, family-controlled factories were called zaibatsu. Further to the Japanese privatization process, Japan started its industrialization with a mix of private and state-owned factories. Thus, Japan started the 20th century with a state-owned and privately owned factory mixture [Izumi and Isozumi 2001; Morck and Steiner 2005]. After the Second World War, producers in Japan saw a high growth between 1960 and 1970 and achieved international success during the 1980s [Tetsuhiro 2013, p. 421]. In this period, producers established a Japanese style of management and a unique Japanese, insider-oriented corporate governance system [Tetsuhiro 2013]. In this system, the banks monitored the experienced executives in companies. The cross-ownership, insider-type corporate governance system stopped working well in the 1990s. This failing form of corporate governance and the worsening financial standing of many were reflected in an assets collapse in the inflated domestic market economy. The lower stock market valuation of Japanese companies attracted a large number of foreign investors. The presences of foreign investors lead to higher com- petition and, in many cases, to transformation and internationalization of major flagship Japanese corporations. According to this new worldwide competition, the authorities changed their strategy from that of the 1990s and tried to change the corporate governance model and practice to accommodate expectations of the new business environment. However, despite these efforts to modernize the corporate governance system, the traditional system still prevailed [Tetsuhiro 2013]. The problem of traditional corporate governance weakness was demonstrated in the 2011 Olympus scandal [Tetsuhiro 2013]. 2.3.2. The model profile The issue of corporate governance was not in the main stream of awareness in Ja- pan until the middle of the 1990s Mizuno [2010]. At that time, the major feature of the model was the monitoring role of the main banks over the companies in their
  • 18. 353Corporate Governance – Past and Present horizontal keiretsu business group (see section 3.3.1). Tetsuhiro [2013] confirms that another important keiretsu trait cross shareholdings. This prominent role of core megabanks stemmed also from the fact that from the end of World War II up to the 1980s, the Japanese stock exchange did not grow sufficiently, due to a low equity capital ratio [Tetsuhiro 2013]. Thus, Japanese corporations had to borrow money from banks in order to invest and develop their capacity. According to Mizuno [2010],these main keiretsu banks were hit when the 1990s dotcom bubble burst. They had to dispose of bad loans of their keiretsu companies. This process triggered an unwinding of cross holdings in the keiretsu groups and led to a major decline of share prices in the Japanese stock market. As a result of this, not only did the main banks lose their influence in their keiretsu groups, but it attracted foreign investors, who could reasonably cheaply acquire shares in com- panies. As a result, according to Mizuno [2010], foreign investor ownership share in Japanese firms rose from 7.7% in 1993 to 28% in 2006. Naturally, foreign investors started to demand more transparency and attention to corporate governance in their co-owned companies in Japan. Japanese firms reacted to the foreign investors’ demands by adapting their corporate governance system. Many firms with American shareholders adopted the US board structure, nominating non-statutory executive officers and independent statutory auditors [Mizuno, 2010, p. 653]. In 2001, following foreign shareholders’ criticism of the practices of boards of directors and audit committees, the government started to work on a systemic reform of the corporate governance system [Gilson and Milhaupt 2005; Chizema and Shinozawa 2012]. In the same year, the government of Prime Minister Junichiro Koizumi published a new amendment to the Japanese commercial code. One of the main issues this amendment dealt with was the strengthening of the statutory auditors’ quality and the expansion of their authority. According to Chizema and Shinozawa [2012],the conventional statutory auditor system was a weak version of the German corporate governance model. The old Japanese statutory auditor system: could not appoint or remove directors, did not represent the shareholders’ and the employees’ interests, since the auditors were nominated by the board of directors. The main role of the auditor was to monitor the Board’s compliance with the law and the financial statement [Chizema and Shinozawa 2012s]. The Japanese corporate governance reforms continued in 2002. These further reforms replaced the conventional statutory auditor’s board with three committees [Chizema and Shinozawa 2012]. As Figure 6 shows, these were: audit, nomination and compensation committees. The 2002 reform included the implementation of a set of rules, regarding the composition of each committee. It created an entirely new mechanism which gave companies an option to adopt the reform or keep the conventional statutory auditor system [Chizema and Shinozawa 2012; Gilson and Milhaupt 2005].
  • 19. 354 Yaron Shemesh Figure 6. The old, conventional, statutory auditor system and the new Anglo-Saxon corporate governance system. Source: [Chizema and Shinozawa, 2012] In 2005, a new corporation law was introduced. Its main aim was to renew and modernize Japanese corporate laws, including the rules of corporate governance [Chizema and Shinozawa 2012]. The new law requires that at least half of the audi- tors must be external auditors. In the conventional statutory auditor system, there is no demand for external directors [Chizema and Shinozawa 2012]. In Japan, executive success is not measured and appreciated in the same way as it is in the U.S. A successful president usually steps down and takes on the position of akaicho (the chairman of the board of directors).The roles and duties are different from those expected in U.S companies. The kaicho participates in board meetings, but he is also important as part of the management. In Japan, the kaicho is an active and respectful part of the top management team. The retired president’s influence is so significant, because as a kaicho, he still has a top supervisory position in the firm. The kaicho is expected to and has a position to suggest advice to the current president and to supervise his activities. The current president is formally responsible for developing and executing the company’s strategy and managing the company. In such a situation, the kaicho can be a powerful player and can have even more power than the current president. This prominent position and role is totally dif- ferent to the situation in the U.S., as presented in section 3.1. Also in Japan, when a president does not become a kaicho, it means that he was not successful in his position as president [William J. Wales, Vinit Parida, Patel, 2013, p. 300]. The actions that were taken by the Japanese government: in the 2001-2002 reforms and then in the implementation of 2005 Companies Law were aimed at
  • 20. 355Corporate Governance – Past and Present bettering corporate governance in Japan. The government’s decision to allow the use of both the old Japanese statutory system and the new committee system mecha- nism is problematic. It requires every company to declare, in advance, what kind of mechanism is being used. The Japanese option to use the retired company presi- dent’s experience and knowledge gives the companies an option to learn from past mistakes. While being a full member of the board of directors, the retired company president can lead the company to a better position from the economic and also from the business points of view. 2.4. The Israeli practice 2.4.1. Historical background The Israeli corporate governance system was created after the establishment of the new Israeli state in 1948. In the pre-establishing years of the state of Israel, the whole area was governed by the British Mandate. Due to this British governance, there was a strong influence on the company ordinance of the new Israeli nation. According to Lurie and Frenkel [2003], after establishing Israel, the authorities in Israel adopted the British companies’ ordinance, which was published originally in 1929. Israeli corporate governance was influenced by many of the new na- tion’s needs such as: resource shortages, ideological and strategic considerations. Company ownership was made up of state-owned companies and collectively held business groups owned companies. At the beginning, the privately owned companies were in the hands of families or individuals. These groups were largely in the Histadrut trade union movement’s hands [Corporate Governance (CG) in Israel 2011, p. 14]. After the Yom-Kippur war of 1973, the Israeli economy suffered from over a 15year period of stagflation, which ended in 1985. One of the major outcomes of the economic problems of that time was the banking crisis that took place in the early 1980s [CG in Israel 2011, p. 14]. This collapse was triggered by the banks, which used to have sizable portfolios of shares in their assets. With the collapse of share prices, the value of bank assets shrank; they had to be protected by nationalization [CG in Israel 2011, p. 14]. In 1985, the Israeli coalition government announced a new Economic Stabiliza- tion Plan (ESP). The major elements of the ESP were: reduction of public subsidies, currency devaluation, liberalization of the state’s control over the capital market and privatization of selected state-owned assets. However, the main ESP goal was a reduction in the Israeli budget deficit and public debt. The execution of the pri- vatization program, envisaged in the ESP, changed the map of companies in Israel. Before the ESP, there were 160 state-owned companies and about 90% of employees were concentrated in 10 large firms [CG in Israel 2011, p. 14]. The privatization of the banks had a special role, since they had major shareholdings in the Israeli
  • 21. 356 Yaron Shemesh industrial enterprises. The banks’ privatization programme envisaged a reduction in the banks’ holdings in any non-financial company to a maximum of 15% of their capital. Furthermore, the banks were required to report on any new investment in a non-financial domestic company, where its value exceeded 5% of the Israeli Central Bank’s equity [CG in Israel 2011, p. 14]. The result of these moves was that, by the end of 1990, all of the state-owned and collectively held business groups changed their ownership structure. Most of these groups dissolved and the rest changed their owners. The new companies’ owners did not belong to the old elite of Histadrutthat, used to control business in Israel [CG in Israel 2011, p. 14]. The main Israeli legislation regarding Corporate Governance in 1990 was the company ordinance (that was adopted from the British Mandate) and the Securi- ties law (1968) [CG in Israel 2011, p. 18].The Israeli company law of 1999 became valid in February, 2000 [Lurie and Frenkel 2003].This new company law replaced the company ordinance that had been valid from 1929. The Israeli company ord- nance had been amended a lot over the years. The new law brought a new corporate governance concept. The new concept was based on a clear power separation on the one hand and a more precise and better system of checks and balances on the other [Lurie and Frenkel 2003]. In 2004, the Israeli Securities Authority (ISA) founded a new corporate govern- ance committee, that later on was named after its president as the Goshen Committee [Lifschutz Jacobi 2010]. This committee worked out and proposed a draft of the new Israeli corporate governance code that followed OECD and the U.S. Sarbanes Oxley rules (see section 3.4.2)[Lifschutz and Jacobi 2010]. The Israeli corporate governance’s main features are: a one layer system, a mini- mum number of four directors on a board of directors, a ban on the CEO taking the position of the chairman of the board of directors, no obligation to have an employee representation on the board of directors, and an audit committee, which is responsible for board and executive remuneration. The Israeli corporate governance mechanism follows the Anglo-Saxon one. Figure 4 describes the Anglo-Saxon system and can also be used for the Israeli corporate governance system [OECD 2014]. The Israeli company law requires that the company is governed by three organs: the general shareholders’ assembly, the board of directors and the CEO, with his active management of the company [Meir A. Fuchs and Koren 2010]. These three organs are presented in Figure 4.The company law allows for checks and balances processes between these three company organs. In this way, each organ has its own sphere to act autonomously[Meir A. Fuchs and Gideon K. 2010]. 2.4.2. The Goshen Committee The (Israel Securities Authority) ISA is responsible for the enforcement of the securities law and, in particular, its main duties, concerning market observation and the prevention of and battle against legal violations[CG in Israel 2011, p. 9]. As
  • 22. 357Corporate Governance – Past and Present Moshe Terry President of ISA, he nominated Z. Goshen to preside over a special ISA committee to study and report on the current Israeli corporate governance code. [Devash et al. 2006; Goshen 2006]. In December 2006, Z. Goshen presented the committee’s report to the ISA with a number of recommendations. The com- mittee identified Israel as an emerging market. It found that it was very important to set proper corporate governance standards and rules that would be aligned with standards, adopted in leading Western economies. In July 2007, the ISA approved the Goshen Committee’s recommendations and issued a binding regulation, requir- ing all companies listed on the Israeli stock exchange to use the recommendations and implement them in their directors’ reports [Devash et al. 2006; Lauterbach Shahmoon 2010]. The main recommendations that the Goshen Committee provided were focused on improving Israeli corporate governance. In particular, the recommendations con- cerned the problems of boards of directors’ structure and independence, audit rules and procedures, transactions with related parties and, finally, the need to establish a specialized corporate and securities law court. The committee maintained that the board of directors’ independence was one of the most important corporate govern- ance issues in Israel. Thus, its final recommendation was that every public company should have external directors, who would constitute one third of all directors and their number should not fall below two [Goshen 2006; Lauterbach and Shahmoon 2010; Lifschutz and Jacobi 2010; CG in Israel 2011, p. 33]. The committee also recom- mended strengthening the internal audit committee in public companies. The com- mittee emphasized in the report that „in light of the auditing committee’s importance, and as a complimentary step ensuring directors’ independence, great significance is attached to the independence of the auditing committee’s members and their financial qualifications”. That is why the committee suggested that most of the audit committee members should be independent directors (including external directors).The com- mittee chairman should also be an external director. The Goshen Committee stated that in order to have an efficient approval process for the public company’s financial statement, the audit committee must have a pre-discussions stage, preceding the board of directors’ acceptance considerations and vote[Goshen 2006; Lauterbach and Shahmoon 2010; Lifschutz and Jacobi 2010; CG in Israel 2011, p. 33]. The Goshen Committee also addressed the difficult issue of transactions with related parties. This stems from the fact that most public companies in Israel are controlled by main, dominant shareholders. The concentration of ownership and, in fact, power might lead to biased deals and conflicts of interest. The committee found that in order to overcome the possible bias, transactions with related parties should be studied and approved by a majority of the non-related parties. The Gos- hen Committee recommended that this solution be valid up to the moment that a professional court is established. After establishing the professional court (the pro- fessional „economic court“, established in December 2010), a normal shareholders‘
  • 23. 358 Yaron Shemesh majority would be enough to approve such transactions. According to the Goshen Committee recommendation, the new court should prevent the exploitation of minority shareholders and discrimination by major shareholders. This new institu- tion should lead to the improvement of quality in public companies’ management, further development of the Israeli capital market and a better performance of the national economy[Goshen 2006; Lauterbach and Shahmoon 2010; Lifschutz and Jacobi 2010; CG in Israel 2011, p. 33]. Further to the ISA‘s decision to adopt the Goshen Committee recommenda- tions and to implement the new rules regarding the corporate governance of public companies, the OECD corporate governance council decided to open membership negotiations with Israel. The negotiation target was to establish a roadmap by setting the terms, conditions and processes to be met before Israel joined the OECD. In the roadmap, the council asked some OECD committees to provide formal opinions. According to the formal opinions of these committees and the relevant information, the OECD invited Israel to be a member of the OECD. After Israel finished imple- menting all the internal procedures, Israel became an OECD member in September 2010 [CG in Israel 2011, p. 3]. 2.4.3. The 16th and 20th amendments to Israeli company law On March 6th , 2011, the Israeli Knesset approved the 16th amendment to the Israeli company law of 1999. This amendment is the most important and meaningful change to the original law, which was accepted in 1999. This amendment also implemented most of the Goshen Committee’s recommendations [Shmueli 2011; Shemtov and Ganzer 2011]. Five years before the 16th amendment was approved, almost no one in Israel knew of the term ‘corporate governance’. Today, everyone in public company management knows this term and understands what it means. The consolidation process and implementation of appropriate corporate governance in public com- pany is a long process that can take many years and can cover a variety of laws, regulations and directives like Sarbanes Oxley, amendment 16 and administrative enforcement [Kibovich 2011]. The amendment target was to change the corporate triangle power balance, that includes the controlling shareholders, the minority shareholders and the board of directors. The main target of this amendment is to balance all the factors by transferring some of the controlling shareholders’ power to the minority shareholders. By moving this power, the minority shareholders will have more influence on the decision making process in the public companies [Shemtov and Ganzer 2011]. On December 12, 2012, the Israeli Knesset approved the 20th amendment to the Israeli company law of 1999. The 20th amendment is about the executive remunera- tion in public and bonds companies. This amendment is based on the recommen- dations of the Justice Minister Yaakov Neeman. The amendment has three main issues that will make the public and bonds companies obligated to. The issues in the
  • 24. 359Corporate Governance – Past and Present amendment are: establishing a remuneration committee that will be independent and able to discuss all the remunerations issues, deciding for a remuneration policy for each company with a link between the executive performance to his remunera- tion, outlining the remuneration approving policy and the procedure for approving individual transactions with executives [http://index.justice.gov.il/Publications/ News/Pages/ScharBchirim.aspx, 19/07/15]. By changing the balance power in the 16th amendment and setting the high level executives’ remuneration process in the 20th amendment, the law is trying to force the company high level leaders to work properly from the one hand and from the other to have a fair remuneration from the company. This remuneration must be based on a clear and known process that can be traced by all stakeholders. 3. Convergence of corporate governance practice The convergence of corporate governance models and, in particular, practice is visible in both its internal and external dimensions [Letza, S., Kirkbride, J., Sun, X. 2004; La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R., 2000]. Its pace has been strengthened by the recent wave of globalization, which can be traced back to the mid 1980s. It speeded up, due to the technological progress and the revival of a free market ideology and economic policies [Kowalski 2013, pp. 12-14]. What emerged was a prevailing liberal paradigm, based on the reduced role of the state in the economy, deregulation and the assumed autonomous ability of markets to maintain the equilibrium. What followed was both privatization, where the UK played an inspirational role, and the liberalization of capital flows [Kowalski 2013]. These deregulation, liberalization of capital flows and privatization policies in the UK, other European countries and in Israel were reflected by an increased intercon- nectedness of national economies, higher completion and a growing presence of multinational corporations (MNC). The MNCs step by step built their global supply chains by developing intra- industry trade and off shoring or outsourcing more and more tasks. Institutionally these technology driven processes were accompanied by a growing number of mergers and acquisitions (MA). The MA were the most powerful factor behind the convergence trend in corporate governance. Typically, mother companies, ac- cepting local regulations, maintained their original corporate governance culture. Developing the local network of stakeholders, MNCs spread its internal corporate governance to their customers. The internal corporate governance convergence trend was also triggered by the dot.com crisis and major collapses of such big companies as Pet.com, the Webvan Group, Enron or Parmalat. These corporate governance failures and scandals made both business and financial sectors’ people and regulators improve the mechanisms
  • 25. 360 Yaron Shemesh for controlling the agency problem and protecting investors by setting stringent rules of accounting and reporting [Tucker, P., Haliassos, M., Kockelkoren, T., Ureta, J. C., González-Páramo, J. M., Schock, L. J., ... Wymeersch, E., 2015]. The major contributors to convergent practices were also global auditing companies. In the external corporate governance, major convergence was seen in a num- ber of countries such as Japan and Israel (see section 2.3). It was visible in the European context, where many companies began to raise capital through public offerings, instead of borrowing from banks or issuing Corporate Bonds. This trend was strengthened by globalization and financialization, where capital began to be easily available [Kowalski 2013, p. 27-32; Horn, L., 2004]. Thus, gradually, also in Europe, without changes of formal corporate governance framework, capital mar- kets indirectly began to have a stronger impact on management and supervisory boards’ decisions. These convergence trends are strongly influenced by the needs of globalization, but it does not mean that national variations of corporate govern- ance ceased to play a role. Corporate governance changes and amendments are still nationally controlled. Conclusions The models and practice were developed in the 19th and at the beginning of the 20th Century. They reflected the then economic, technological and legal context. That is why the formal solutions and the practical modus operandi have had strong historical and institutional underpinnings. The uniform board model, in terms of its international range, has dominated. However, in Germany and in some other continental European countries there functions the dual board model. It formally separates strategic, supervisory and monitoring responsibilities from current man- agement. Both major models with national variations exist, but have gradually begun to converge. In practical terms, that has been particularly seen in the area of internal corporate governance. The gradual convergence stemmed from globaliza- tion, the liberalization of capital flows and international competition for foreign investors. These objective processes and national policies were echoed in various national legislations, focused on providing more transparency, disclosure and the protection of investors. The Israeli case is a unique one from the corporate governance point of view. While establishing the young Israeli nation, the Israeli leaders, at that time, had to take the laws that they had in their hands. The Israeli leaders took Mandate laws and validated them for the new, young Israeli nation. Through the years, the com- pany ordinance, which was adopted from Mandate time, has been amended many times, due to the Israeli developing nation needs. The new company law and the amendments after publishing the new law prove that the new nation’s needs are
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