Corporate governance in european transition economies: emerging models

TLDR: In this paper, the authors contribute to the debate of corporate governance models in European transition economies, with the main types of companies' ownership structures, relationships between governance and management functions and deficiencies in existing governance systems.

Abstract: The purpose of the paper is to contribute to the debate of corporate governance models in European transition economies. The paper consists of four parts. In the introduction, after giving a historic overview of the corporate governance evolution, different understandings of the corporate governance function are presented and the contemporary corporate governance issues are described. The second part deals with governance systems in the (mainly domestically) privatised former state-owned companies in Central European transitional countries, with the main types of companies' ownership structures, relationships between governance and management functions and deficiencies in existing governance systems. The third part is dedicated to the analysis of factors that determine the efficient relationship between the corporate governance and management functions in Central European transitional economies. It deals with the issue of why the German (Continental European) governance model is usually the preferred choice and why the chosen models underperform. In the conclusion, the author offers his suggestions of how the Central European transition countries should improve their corporate governance in the future. 1. INTRODUCTION The corporate governance issue has been gaining importance in the developed market economies as well as in the transition economies. Basic reasons for such a trend are the same, but socio-economic environments are different and therefore, the analytical issues seem to have quite different weights in different groups of countries. Enterprises appeared in the history of mankind as small economic units governed by individual owners. Their effectiveness and efficiency depended on rational behaviour, i.e. rational decision-making and decision implementation. Economic efficiency forced enterprises to grow and to become of such sizes that an individual owner was not able to govern an individual enterprise by himself anymore. The decision-making process became too complex for him. Owners were forced to employ professional executives called managers to assist in managing their enterprises (Rozman, 100). The previous unified governance function has been divided into two organisational functions: governance, making mostly decisions for protecting owners' interests; and management, coordinating business activities and managing relationships in a most efficient way with the purpose to attain objectives and goals set by governance. Professionals who took over the management function became agents of the enterprise's owner. This development opened the possibility that managers would not act in the best interest of the owner - a well-known agent problem as we interpret it nowadays. The issue of how much autonomy managers should have has appeared. Further development required that an enterprise engaged more capital than an individual owner was able to invest, which produced joining of the capital owned by more owners. The governance function was no longer carried out by a sole individual but rather by more owners. Enterprises became partnerships in this way and then later corporations with a dispersed ownership. This development contributed to an evolution of a corporate governance function that ceased to be a simple relationship between an enterprise's owner and his managers. It became a complex set of relationships between owners on the one hand and a set of relationships of owners towards corporate managers on the other. The stated relationships can be established in many ways; therefore, many corporate governing models are, at least theoretically, possible. Historically, two main types of relationships within the corporate governance function and between the governance function and the management function have been developed. They are known as Anglo-American and German (Continental European) models. Each of these two (conceptual) models solves somehow differently the problem of socio-economic power allocation, the problem of the efficiency of decision-making, and finally the problem of governance and management function conceptualisation. …