With ‘internal governance’, we refer to the organization of stakeholder engagement, voice and supervision at the firm level. Currently, this ‘internal governance’ consists of rules and (best) practices regarding shareholder rights, the AGM, the behavior of non-executive directors, etc. 

An open question is if and how other stakeholders could or should be incorporate in the internal governance of the firm and through what mechanisms this should influence compensation.

Currently, shareholders address their differences through several mechanisms. They can directly influence decision-making through engagement or ‘voice’ (e.g. electing non-executive directors, voting during the AGM), but they can also send signals to management through divestments/‘exits’. Both options are not available to broader stakeholders. They have no voting rights, nor can they divest as they have no ownership.

Engagement, voting and/or representation can be an efficient way to resolve issues of common agency. This suggests that one way forward could be to increase the representation of broader stakeholders in the internal governance of firms. Several options are available at various levels of control within the organisation. By including a broader group of stakeholders on the board, decision-making on compensation (but also: in general) could be more reflective of environmental and societal considerations 1. At the level of the annual general meeting, corporate behaviour may be more strongly influenced if voting rights are extended more broadly to stakeholder interest groups or differentiated between investors seeking a short-term gain versus a long-term commitment. 



Corporate governance in a jurisdiction is very much determined by its history and political development. For ease of reference, two distinctly different systems with their characteristics are shown in the two tables here below. It concerns on the one hand, the outsider system, also labelled as the Anglo-Saxon governance system, which builds on the concept of liberal market economies like the USA and the UK. On the other hand, the insider system, also labelled the Rhineland governance system, which builds on coordinated market economies like Germany or Japan.

OwnershipDispersedConcentrated blockholders
Key conflict of interestPrincipal - AgentPrincipal - Agent + Principal - Principal
Voting powerOne share - One voteMulticlass shares/voting rights
Information asymmetryHigh (mandated) transparency, quitable distribution of informationDistribution of information focussed on major shareholders
Coporate law protectionStong minority stake provisions in corporate lawWeak protection for minority shareholders
Capital baseSkewed towards public capital/debtSkewed towards private capital/debt
Controlling principalsBoard of Directors, Institutional investorsIndividual blockholders
EngagementMainly through exitsMainly through voice

The second table outlines the strengths and weaknesses of these two governance systems.

Insider systems

(maximize blockholder value)
Relationship based

Long-term orientation

Better control over manager

Engagement by voice
Conflict dominant – weak shareholders

Weak investor protection

Less-developed public capital markets

Hostile takeovers rare due to shareholder control

Value extraction by dominant shareholders
Outsider systems

(maximize shareholder value)
Market based

No conflict between shareholders

Strong investor protection

Well developed public capital markets

Hostile takeovers as a disciplining mechanism on firm management
Short-term orientation

Principle – Agent dilemma

Engagement by exit

Rent extraction by manager


The third table here below describes two different models in corporate law, which are frequently debated nowadays. The shareholder model gained traction in the second half of the 20th century, following the so-called Friedman Doctrine. The stakeholder model is gaining traction in the last decade in the belief that a company is a social institution. All those that are affected by a company, are qualified as stakeholders and their voices are to be heard / taken into account in the corporate decision-making process. Due to globalisation, the rise of institutional investor dominance and the inclusion of ESG factors (stimulated by the UN SDGs) in seeking a sustainable economy, a convergence of these models occurs and will influence the development of corporate governance in many jurisdictions over the coming period

 Shareholder modelStakeholder model
ObjectiveMaximize shareholder wealth
Be socially responsible, acting in the public interests
Performance measureMarket valueSocial- environmental impact
Orientation(often) Short-term(mostly) Long-term
Governance dilemmaPrinciple - AgentMultiple Principles

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1. See e.g. Jager et al. (2020). Labor in the Boardroom.