ANKARA UNİVERSİTY FACULTY OF LAW

CARPORATE GOVERNANCE MAKE-UP ASSİGNMENT

CANSU ZORMAN
20060698
cansuzorman20@gmail.com
The Shareholder and Stake holder views
on the company

Corporate governance is a discipline based on ethical principles that regulates the

management and auditing mechanisms of companies. One of the key issues in this area is
what interests a company, and therefore its directors, should be committed to pursuing. A
fundamental question is whether a company should look after the interests of its shareholders
only, or also those of other stakeholders.

I. Finance Theory and the Shareholder Focus: Shareholder Sovereignty and

Financial
Corporate governance is a discipline based on ethical principles that regulates the governance
and control mechanisms of companies. One of the central issues in this field is what interests
a company, and therefore its directors, should be committed to pursuing. Financial theory
generally argues that a company's primary objective is to maximise shareholder value. This
section examines finance theory to understand the shareholder-oriented perspective and assess
its limitations.
I.1. Finance Theory and the Shareholder Focus
Finance theory asserts that the main purpose of corporations is to increase shareholders'
wealth. Shareholder value refers to the economic value that the company provides to its
shareholders, and maximizing this value is the measure of a company's success according to
finance theory1. According to this perspective, a company is expected to perform the best
service by satisfying its shareholders and adding value to their investments.
I.2. Advantages of a Shareholder Focused Perspective:
The main advantages of a shareholder-oriented perspective include the following:
Improved Corporate Performance: A shareholder-oriented company generally operates more
efficiently and profitably because financial success is directly related to increasing
shareholder value2.
Investor Confidence: A shareholder-oriented company can gain investor confidence and
attract potential investors because it demonstrates transparent governance 3.

1
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
2
Lazonick, W., & O'Sullivan, M. (2000). Maximizing shareholder value: A new ideology for corporate
governance. Economy and Society, 29(1), 13-35.
3
Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance. Journal of Finance, 52(2), 737-783.

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Market Competitiveness: A shareholder-oriented perspective can help a company gain an edge
in market competition because investors generally expect long-term success and value
growth.
I.3. Limitations of the Shareholder Focus and the Multi-Stakeholder Model:
The limitations of the shareholder-oriented perspective are as follows:
Tendency to Short-Term Thinking: A shareholder-driven company can often focus on short-
term financial gains, which can lead to a lack of focus on long-term sustainability and social
responsibility4.
Ignoring Social and Environmental Impacts: Focusing solely on shareholders can lead a
company to neglect its social and environmental impacts, which can lead to reputational
damage in the long run5.

II. Balancing Shareholders and Stakeholders: The Challenging Journey of the

Multi-Stakeholder Model
II.1. Foundations of the Multi-Stakeholder Model:
The multi-stakeholder model represents an approach in which companies should look out not
only for their shareholders, but also for other stakeholders. This model aims to overcome the
limitations of a shareholder-oriented perspective that focuses only on financial success and
places greater emphasis on the social, environmental and ethical responsibilities of
companies6.
II.2. Advantages of the Multi-Stakeholder Model:
The main advantages of the multi-stakeholder model are as follows:
Sustainable Value Creation: The multi-stakeholder model allows companies to focus on long-
term sustainable value creation efforts. This includes not only financial, but also social and
environmental impacts7.
Social Reputation and Brand Equity: By adopting a multi-stakeholder model, companies can
enhance their social reputation and strengthen customer loyalty because consumers are often
sensitive to ethical and socially responsible principles8.
Risk Management: The multi-stakeholder model offers companies the opportunity to manage
various risks more effectively and be more resilient to crisis situations, as it requires them to
be prepared for various scenarios while trying to balance the various expectations of
stakeholders9.

4
Porter, M. E., & Kramer, M. R. (2011). Creating Shared Value. Harvard Business Review, 89(1/2), 62–77.
5
Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Stakeholder theory: The state of
the art. Cambridge University Press.
6
Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston, MA: Pitman.
7
Elkington, J. (1997). Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Oxford: Capstone.
8
Sen, S., & Bhattacharya, C. B. (2001). Does Doing Good Always Lead to Doing Better? Consumer Reactions to
Corporate Social Responsibility. Journal of Marketing Research, 38(2), 225–243
9
Mackey, A., Mackey, T. B., & Barney, J. B. (2007). Corporate Social Responsibility and Firm Performance:
Investor Preferences and Corporate Strategies. Academy of Management Review, 32(3), 817–835.

2
However, the multi-stakeholder model also has its challenges and presents companies with
various challenges to achieve balance.
II.3. Challenges and Achieving Balance:
Challenges of the multi-stakeholder model include the following:
Conflicting Expectations: Conflicting expectations and interests among different stakeholder
groups can make it difficult for companies to achieve balance. For example, shareholders
often seek short-term financial returns, while environmental groups may demand long-term
sustainability efforts10.
Measurement and Reporting: Successful implementation of the multi-stakeholder model
requires effective measurement and reporting mechanisms. However, the complexity and
diversity of these processes can challenge companies11.
Cultural and Governance Changes: Transitioning to a multi-stakeholder model may require
significant changes in corporate culture and governance structures. Successfully managing
these changes can take time and face resistance12.
As a result, striking a balance between shareholders and stakeholders is a critical factor for the
future success of companies. While the multi-stakeholder model offers several advantages to
companies seeking to strike this balance, it can be a challenging journey to implement.
However, strengthening the understanding of sustainable value creation and social
responsibility can be seen as a step towards overcoming these challenges.
III. Legal Aspects and Regulations: Legal Framework for Shareholder and
Stakeholder Rights of Companies

The legal dimension includes regulations governing shareholder and stakeholder rights of
companies in corporate governance. In this section, we discuss the legal responsibilities of
companies and the regulations that govern the relationships between shareholders and other
stakeholders. The legal framework determines what responsibilities companies have legally
and maintains the balance between stakeholders.
III.1. Shareholder Rights and Legal Protection:
Shareholder rights refer to the ownership stake in a company and are usually protected by
local legal systems. Shareholders have rights such as voting in general meetings, requesting
information, and receiving dividends13. The legal framework protects shareholders against
company management and allows them to expect fair treatment.

10
Friedman, M. (1970). The Social Responsibility of Business is to Increase its Profits. The New York Times
Magazine, 13.
11
Eccles, R. G., & Serafeim, G. (2013). The Performance Frontier: Innovating for a Sustainable Strategy. Harvard
Business Review, 91(5), 50–60.
12
Jones, T. M., & Wicks, A. C. (1999). Convergent Stakeholder Theory. Academy of Management Review, 24(2),
206–221.
13
Coffee Jr., J. C. (2006). The Future as History: The Prospects for Global Convergence in Corporate Governance
and its Implications. Northwestern University Law Review, 100(2), 603-687.

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III.2. Other Stakeholder Rights and Responsibilities:
The legal framework protects not only shareholders but also other stakeholders. For example,
there are various regulations on issues such as job security for employees, product safety for
consumers and environmental protection. These regulations ensure that companies fulfil not
only their financial but also their social and environmental responsibilities14.
III.3. International and Local Regulations:
At the international level, many countries have become parties to various regulations and
conventions in order to comply with international law and standards. For example, the United
Nations Global Compact (UNGC) enables companies to make commitments on issues such as
human rights, environmental sustainability and anti-corruption 15. In addition, at the local
level, the legal systems of the countries in which companies operate determine the principles
of corporate governance and ensure that companies conduct business in accordance with local
laws.
III.4. Evolution of Legal Regulations:
Regulatory frameworks have evolved over time and are increasingly focused on more
stakeholders. For example, issues such as sustainability reporting and corporate social
responsibility are supported by regulations in many countries that require companies to
legally disclose16. This allows companies to assess their performance beyond financial
achievements and provide greater transparency to their stakeholders.
As a result, the legal framework is constantly evolving to protect shareholders and other
stakeholders, ensure a fair balance and enable companies to fulfill their social responsibilities.
Conclusion:
The corporate governance debate continues on what interests corporations should be
committed to pursuing. While shareholder-oriented finance theory argues that the main
objective of corporations is to maximize shareholder value, today there is a need to shift to a
broader perspective. It is critical for long-term sustainability that companies not only pursue
financial success, but also social, environmental and ethical responsibilities. Legislation and
regulation also play an important role in achieving this balance, but the most effective
outcome depends on the ability of companies to strike this balance in their internal culture and
governance structures.

14
chwartz, M. S., & Carroll, A. B. (2003). Corporate Social Responsibility: A Three-Domain Approach. Business
Ethics Quarterly, 13(4), 503-530.
15
United Nations Global Compact. (2000). The Ten Principles of the UN Global Compact. Retrieved from
https://www.unglobalcompact.org/what-is-gc/mission/principles
16
Eccles, R. G., Serafeim, G., & Krzus, M. P. (2011). Market Interest in Nonfinancial Information. Journal of
Applied Corporate Finance, 23(4), 113-127.

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The characteristics of One-Tier and Two-
Tier Board Systems
Comparison of Board Structures: One-tier and Two-tier Models

Corporate governance is recognized as a fundamental element for the successful management

of companies and the protection of stakeholders' interests. The board structure plays a key role
in this process and is practiced in various models across different countries and cultures. In
this section, we will specifically focus on the Anglo-American (one-tier) and German (two-
tier) board models. The characteristics, advantages and disadvantages of both models will be
examined, thus providing an understanding of how to choose the one that best suits the needs
of companies.
Corporate governance is vital for the effective management of companies and the protection
of stakeholders' interests. In this context, the board structure plays a critical role in
determining the company's decision-making processes, strategic planning and operational
effectiveness. Two important models of corporate governance are the Anglo-American (One-
tier) and German (Two-tier) models.

I. Single-tier Board System (Anglo-American Model):

The single-tier board system is a corporate governance model that is widely applied in
countries such as the United Kingdom and the United States. This model offers a structure in
which the board structure focuses on integrated and fast decision-making processes.
In this model, board members usually serve as senior executives of the company. This can
speed up decision-making processes and enable effective management of the company's
operational activities. The fact that board members are also members of the company's
executive management facilitates communication and allows decisions to be implemented
quickly17.
The single-tier model offers advantages, particularly in terms of flexibility. As decision-
making processes are less layered, the company can quickly adapt to changing circumstances.
This can help the company to be more agile in a competitive business environment 18.
However, despite the advantages of the single-tier model, it is also subject to some criticisms.
One of the main criticisms is the lack of control mechanisms and uncertainty in long-term
17
D. C. Hambrick ve R. A. D'Aveni, "Top Management Team Disintegration, the TMT Reputation for Conflict, and
TMT Conflict," Administrative Science Quarterly 1992.
18
J. A. C. Baum, T. J. Rowley ve A. V. Shipilov, "Dancing with Strangers: Aspiration Performance and the Search
for Underwriting Syndicate Partners," Management Science 2003

5
strategic planning. The fact that directors also assume supervisory duties may lead to conflicts
of interest and lack of transparency19.
In this context, it is important for companies to carefully consider the advantages of the
single-tier board system in terms of speed and flexibility, as well as its potential risks and
weaknesses.

II. Two-tier Board of Directors System (German Model):

The Two-tier Board System is a corporate governance model adopted particularly in

Germany. This model aims to provide more control and diversity of interests by separating the
board structure into two tiers as separate executive and supervisory boards.
In the German model, the board of directors consists of two separate tiers: the executive board
(Vorstand) and the supervisory board (Aufsichtsrat). The executive board manages the day-to-
day operations of the company, while the supervisory board oversees the executive board and
assesses its compliance with the company's strategic goals. This separation allows the
company to pursue a more balanced decision-making process and ensures representation of
various stakeholders20.
The supervisory board usually includes representatives from the company's stakeholders. This
ensures diversity of interests and can create a fair balance in decision-making processes. It
also allows stakeholders to contribute more effectively to the strategic direction of the
company21.
The two-tier system offers more oversight and control mechanisms. The supervisory board
regularly reviews the company's activities and closely monitors the board's responsibilities.
This can benefit the company in terms of long-term planning and sustainability22.
However, the complexity of the two-tier model and the length of the decision-making
processes may lead to criticism. This can be disadvantageous when companies need to make
quick decisions in a competitive environment. Moreover, the lack of industry knowledge that
representatives on the supervisory board sometimes lack may make effective supervision
difficult23.
In this context, despite the advantages of the two-tier board system in terms of oversight and
diversity of interests, it is important for companies to carefully assess their choice of this
model, taking into account the challenges such as potential complexity and cumbersome
decision-making processes.
19
J. Lorsch ve E. MacIver, "Pawns or Potentates: The Reality of America's Corporate Boards," Harvard Business
Review 1989.
20
H. Willke, "Divergent Models of Corporate Governance: Anglo-American, European and the Differences,"
MPIfG Discussion Paper 99/2, 1999.
21
R. Oxelheim ve P. Ghauri, "Sustainable Corporate Governance: A Study of Pre- and Post-acquisition Behavior
of Swedish Multinationals," Journal of Business Ethics 2005.
22
A. Keasey ve M. Wright, "Corporate Governance: Responsibilities, Risks and Remuneration," John Wiley &
Sons, 2013.
23
G. Hund, "Corporate Governance in Germany: The Role of Banks and Ownership Concentration," European
Journal of Law and Economics 2000.

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Conclusion:

Both board structures offer unique advantages and challenges. The model a company chooses
will vary depending on factors such as culture, geography, industry, and size. A one-tier model
provides speed and flexibility, while a two-tier model offers the advantage of greater oversight
and long-term strategic planning. Companies should take these factors into account when
choosing the model that best suits their needs and establish an effective corporate governance
approach. It is important to note that both models can form a crucial basis for a company's
sustainable success. However, the success can only be achieved if the appropriate model is
selected and implemented effectively.