German versus American Business Models
In Germany, under the model of “stakeholder capitalism”, employee representatives sit on company boards of directors. In the German model of business, it is assumed that both labor (employee representatives) and capital (shareholder representatives) have important stakes in the enterprise and should work in harmony with each other. In the United States, the board of directors usually represents only the owners of the business. What advantages are there to employees as stakeholders in Germany that are not provided to employees in US companies? In the United States, how do employees let management know their stakeholder concerns?
Structure
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The idea of engaging the stakeholders in the process of decision-making has become an issue of concern in the modern business world. Various studies have claimed that coordination with employees in business decisions has important effects on the development of the business. This follows the fact that the employees tend to have a deeper knowledge of the business and the challenges that face it and as a result, may have relevant ideas on how to address them, unlike in the business models were the shareholders believe in making the decisions on their own.
Studies have looked at the stakeholder capitalism model in Germany which has remained a key factor in increasing the market competition against that of the United States which excludes the stakeholders in the board of directors. In this case, the shareholders are the business owners who have a share in a public company and are only interested in the performance of the company based on the stock performance or appreciation (Terjesen & Sealy, 2016). The stakeholders lack a share in the public company and their interest lies in the performance of the entire company. The purpose of this paper is to analyze the benefits engaging by Germany corporate governance to the employees over those in the US companies. The paper further establishes how the employees in the US present the concerns of the stakeholders to the management. It establishes that the United States should embrace the business model adopted by Germany owing to its numerous benefits.
Literature Review
The business models in Germany are different from those in the United States and such differences have served significant impacts on the performance of the companies. Over the years, the United States companies have a record of highly paid executives as compared to those in Germany. Additionally, the gap between the earnings of the least paid employee and that of a CEO in the US is much larger compared to Germany. Such a difference is attached to various factors such as the fact that in Germany, the executive compensation is determined by the return on equity and firm size unlike in the US where it is based on the proceeds from the stock. In Germany, both the stakeholders and shareholders hold important positions in the performance of the company and hence are equally represented in the board of directors. On the contrary, in the United States, only the shareholders have a role to play in making the corporates’ decision and hence take the lead in the board of directors while the stakeholders are sidelined.
In Germany, “codetermination” is a common business term which simply means allowing a worker to participate in the decision making the process for a company. The term has been derived from the “Codetermination Act” which was implemented in 1976 with the intention to strengthen the labor rights by allowing them to have a role in the decision-making process of the corporates. Codetermination has recently attracted the US business partners and is deeply used in the culture of Germany corporate governance. The Germany business culture upholds the participation of both employees and shareholders in the decision-making process. In this regard, the policies of a company are majorly developed on the basis of the democratic decision-making process. On the other hand, in the United States business model, the easy classification of the employee-oriented, insider, or stakeholder-oriented corporate governance is highly embraced.
Germany’s business model upholds equality in both labor and capital which aims increasing profits based on the human capital investments and appreciating the loyalty of employees through their participation in the company’s operations unlike in the US. In the United States, the board of directors only represent the owners of the business who are the shareholders. In many cases, the shareholders have insufficient knowledge to conduct the management of the corporation. As a result, the shareholders opt to higher the highly experienced professionals to manage their corporations considering the agency theory which assumes that human behavior is opportunistic in nature (Lin, Schmid, & Xuan, 2018). In this regard, there is a tendency for the shareholders to attract the decisions that will benefit their personal interests rather than that of the companies. It also becomes possible for the interests of the hired managers to fall in conflict with those of the shareholders and as a result, act opportunistically. The result will be a prolonged process of making decisions and hence attract business failure. The Germany business model provides strong protection to the employees which allows them a direct role in corporate governance. The government implemented the Codetermination Act of 1976 which requires all the stock corporations and business entities over a certain employee base to have a two-tiered board structure which allows a certain level of employee representation on the board of directors (Kerzner, 2017).
In the United States, the shareholders hold annual meetings whereby they elect a board which appoints the executive officers. In this case, the long-term employees form the relevant candidates for election as new directors. For instance, the five directors on the board of Toyota elected in 1993 were former employees and 31 of Honda were also former employees (Larcker & Tayan, 2015). Such a custom makes the senior management consider the employees’ perspective on the corporate policy and hence providing them with the protection similar to that in Germany. However, such a custom bears some disadvantages. For instance, it is possible to forgo new talented and highly skilled employees in the efforts to retain the long-term ones. Such leads to the sacrificing of future leaders and hindering the general promotion and career development.
