Advantages and Disadvantages of Three Main Approaches to Corporate Governance – Term Paper Example
The paper "Advantages and Disadvantages of Three Main Approaches to Corporate Governance" is an excellent example of a term paper on management. The three main approaches of corporate governance are shareholder capitalism, stakeholder capitalism, and state ownership. These approaches influence on how the firms should operate, and therefore influence the decisions taken by the firm. Each approach has its own advantages and disadvantages and different scholars and researchers have preferred different approaches for different firms. These three approaches of corporate governance have been discussed in detail below.
Three main approaches to corporate governance:
The first approach that has been discussed in this report is shareholder capitalism and in this approach, firms operate to maximize the profitability of the investment made by the shareholders and in decision making, the shareholders of the firm are prioritized the most. The main concept behind the shareholder capitalism approach is that the risk is taken by the shareholders of the firm; this approach says that shareholders should be rewarded for taking the risk and firms should maximize the profits of the shareholders (Kelly, Kelly, and Andrew 172). While making decisions of the firm; the highest priority is given to the shareholders of the firms so the main objective behind such an approach is to achieve maximum profitability.
Stakeholder capitalism is the second approach that has been discussed in the report, and this approach says that all the parties that have their stakes in the firm should be given priority. So while making decisions, all the stakeholders that are influenced by the decision of the company are considered. Stakeholder capitalism approach would allow the firm to think about different parties that could be affected by their decisions and therefore such an approach should be encouraged because everyone in the society including the suppliers, government agencies and institutions, distributors, shareholders, investors, customers, and other stakeholders play important part in helping the firm to grow and generate profit.
When the decision making of the firm is made by the government, then it is referred to as state ownership. The main theme of state ownership is that the government knows what should be done for the benefit of the society; hence, it would make decisions that are beneficial for everyone in the society and priority might not be given to employees, suppliers, distributors, shareholders, investors, and other parties that are involved.
The best corporate governance approach.
All three approaches that have been discussed above have their advantages as well as disadvantages, but among all these three approaches, the benefits to maximize the long-run economic performance of the firm are more with the stakeholder capitalism approach. One of the benefits of this approach is that it considers everyone who can be influenced by the decisions taken by the firm. This approach shows that decisions taken by the firm would be beneficial for everyone rather than only one party, so such an approach would be a win-win solution for every party that is involved with the firm.
Whether employees should represent on the firm's board of directors.
Employees have an important role to play with any firm because they are a part of everyday operations of the firm and it is the employees that help the firm to generate profit. Considering the importance of employees and their involvement with the firm, it would be helpful if employees are involved in the board of directors as they would be able to recognize and present some problems that have not yet been identified by the top management; therefore, employees should represent on the firm’s board of directors in each system as their involvement could further enhance the productivity of the firm. Also if employees are part of the board of directors, then their motivation level would increase which could be helpful in improving the productivity level of the firm.
Role of state ownership.
State ownership would not be favorable for the firm in the long run and different economists and analysts have discouraged the concept of state ownership. It has been said that the government has a lot more to do than to manage different firms in the country. Also, analysts have recognized that private firms are able to make better use of resources of the firm and encouraging private firms, intensify the competition which is helpful for the society.
Businesses that are important for the country should be state-owned, but if the government starts managing every firm in the country, then managing all these businesses would be hard for the government. So for this reason, it is better to use state ownership for only firms that would be important for the country.