Market Outsider system

Corporate governance is defined as the customs, policies, laws and institutions affecting the way in which companies are controlled or operated. The two archetypal governance systems are Market Outsider system usually associated with US and the UK, and Relational Insider system associated with Japan and Germany. The types of systems will impact the way the company is controlled and will hence automatically impact the way the factors of production are handled, one of the most important being labour.

These two differing types have different priorities, and so emphasis put on the employers will differ according to their characteristics- this consist of the balance of interests, time frames, business strategies and commitment. Market Outsider system sources its finance from external capital from debt and equity markets. Due to the dispersed nature of the ownership, shareholders can exercise voice through the threat of exit leading to equity markets having to be forever placated for fear of takeover or exit.

This implies that the relationship between investors and management will be prioritized over the relationship between management and labour, and capital being of the utmost importance for this type of system. Management’s effort would be channeled more into pleasing the shareholders through increased dividend payments to avoid the financiers from ‘exiting’ rather than distributing the firm’s profits to the workers. In times of low profits, workers would once more be ‘sacrificed’ by having lower wages in order to maintain the same amount of profit.

Workers who work under this type of system would have experience less security and stability because of the threat of redundancy of unstable wages compared to the Relational Insider system. The relational insider system, however, puts emphasis on labour. Due to their culture norms and institutions, they have limited market for corporate control and puts stakeholder instead of shareholder first. This includes labour whom they invest on through training and developments to achieve long-term returns for all stakeholders involved- management, labour and capital providers.

The time frames and business strategies of the two types of governance also impact the way employees are managed. The short-term nature of the market outsider system leads to more subcontracting, outsourcing, and less training for the workers, and emphasis on financial objectives translate into efforts in keeping labour costs low in order to achieve their profitability goals. Fast profits are important in this system due to the volatility of the equity markets.

Again, workers will have less job security since companies under this governance system applies ‘casino capitalism’, uncommitted to increase their agility in order to be able to quickly adjust to the demand and supply market. The relational insider system, on the other hand, favours long term objectives due to the ‘closer integration of financiers into the firm via long term debt or ownership’(Gospel and Pendleton). They would invest more in skills of workers and training to increase growth while on the other hand maintain steady returns for the investors.

Their longer payback periods for investments is much longer and this reduces the need for short-termism. This benefits workers as they are likely to have more stability and receive gains through the increased skill development that the firms under this system provide. For example, Germany’s strategy to maintain competitiveness is through incremental process innovation in production. Measures to secure commitment in the market outsider system are based on pay incentives. The management might be given stock options in order to align their objectives with the shareholders’.

In turn, labour is given pay incentives as a way to secure short-term commitment. This culture of opportunism leads to low trust in the employment relationship and is further compounded by the individuality promoted through individual pay incentives. The other system, on the other hand, relies on employee voice and including them in the company’s decision making process, for example Japan. Through Total Quality Circles, workers are given the opportunity to voice out their opinions and contribute to the growth of the company.

This way, the employees are enriched by this learning process and also develop a sense of loyalty to the entity that they contribute towards. Their seniority and merit pay systems also work well in securing employee commitment by preventing favoritism and rewarding loyalty. In conclusion, the two types of governance systems have very distinct employment relations. One giving more importance to shareholders and the other to stakeholders. The effectiveness of both system may vary based on the perspective that one is adapting. For example, capital, labour and shareholders as well as the economy’s perspective as a whole.