The Analysis on the Assimilation of the Model of Corporate Governance

Criticism Of Previous Theories

Many people now advocate the concept which the company relates to the economic costs, namely, it treats the company as an instrumental object, and recognizes that the purpose of the company to exist is to reduce costs. Now this view, which is put forward by Ronald H. Coase, becomes the mainstream view. According to this view, if the activities carried out in the market, its Production Cost or Transaction Cost is zero, then the trades among individuals or production activities in the market can be successfully completed, so the company does not need to exist, only individuals are necessary. However, there is no zero cost existing in reality. There always exist the elements, which increase the costs in the market (Curtis, 2009), such as Bounded Rationality, Opportunism, Asset-Specific Investment and other factors. We form a company in order to reduce these costs. According to the level of Transaction Costs in a particular society, company forms the type of inside system (an internal institution governance model), the type of outside system (a market-based corporate governance), and the type of the intermediation.

In general, in the modern companies which management and possession are separated, corporate governance is treated as a method by the shareholders to supervise and control the behavior of their selected managers, namely, the corporate governance is a “Who supervises who” system. This is because under the circumstances that the separation of management and possession, owners should take supervisory measures to managers in order to prevent the managers served as an agent to violate the owner’s rights. These measures need costs that are called Agency Cost. Therefore, in order to reduce the cost, building a supervisory system on the company structure is needed, and this supervisory system is the corporate governance system. This corporate governance which is focused on “who supervises who” can be divided into two types: one is that the owners pay more attention to the supervision of the managers, the other is the minority shareholders more focus on the supervision of the major shareholders or the supervision of substantial owners such as managers have a great influence within the company. Like the United States whose shareholders is dispersed in society needs the previous way, while Japan, Korea, China need to apply the latter method. For example, in Japan, especially before 90s, cross-shareholdings among companies are a common phenomenon. Therefore, the manager becomes a real company controller who dominates the company, and the company shareholders are actually the managers of the other companies. The company managers protect each other's interest. In this case, there isn’t an opposite relationship between management and possession; in South Korea, some financial combination groups dominate large companies. Owners have greater power to control the company; therefore there isn’t an opposite relationship between management and possession. In China, country becomes the major shareholder, which is very common. Therefore, there isn’t an opposite relationship between management and possession. In these countries, management and possession are not separated. Compared to the problems about how the owner supervises managers, the more important problem is how to control the company controllers to protect the rights of minority shareholders and the weak, that is, in such countries, the important function of corporate governance is the supervision of the controllers.