CORPORATE GOVERNANCE MODELS

PROF.SHIVASHANKAR

Overview of Corporate Governance

MODELS OF CORPORATE GOVERNANCE

Corporate governance systems vary around

the world. This because in some cases, corporate governance focuses on link between a shareholder and company, some on formal board structures and board practices and yet others on social responsibilities of corporations. However, basically, corporate governance is seen as the process by which organizations are run.

Some Definitions
Corporate Governance is the system by which

companies are directed and controlled

Cadbury Report (UK), 1992

to do with Power and Accountability: who

exercises power, on behalf of whom, how the exercise of power is controlled.

Sir Adrian Cadbury, in Reflections on Corporate

Governance, Ernest Sykes Memorial Lecture, 1993

A Canadian Definition
the process and structure..to direct and

manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business.

Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994

An OECD Definition
Corporate

governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

Preamble to the OECD Principles of Corporate Governance, 2004

An Indian Definition
fundamental objective of corporate

governance is the enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.

SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

A Gandhian Definition
Trusteeship obligations inherent in company

operations, where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders interests.

Some Further Definitions

Corporate governance is essentially about leadership:
leadership for efficiency; leadership for probity; leadership with responsibility; and

leadership which is transparent and which is

accountable.
- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

What is Corporate Governance?

The Manner in which a Corporation is Run
Achieving its Objectives Transparency of its Operations Accountability & Reporting Good Corporate Citizenship

The Processes & Operating Relationships that Best Achieve

Organisational Goals

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Some Governance Models

Finance or the Principal-Agent Model
Markets for Capital, Managerial Talent and

Corporate Control, Key determinant In general, profit-maximisation goal is co-functional with social-welfare-maximisation Shareholders as Residual Claimants have superior control rights

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Exclusive Accountability to Shareholders

Risk-bearing Entrepreneurs

Residual Claimants
Winding-up Ranking: Last in Pecking Order Boards Appointed by Shareholders Non-congruence of Stakeholder Interests

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Residual Claimant Theory

shareholders residual claimants to the firms income.

Creditors have fixed claims and employees remunerations negotiated in advance of performance .. Gains and losses from abnormally good or bad performance .. The lot of shareholders, who stand last in the queue .. Shareholders make discretionary decisions and bear consequences .. As such, .. Owners of business with important control rights
The Economic Structure of Corporate Law, Frank H

Easterbrook and Daniel R Fischel (1991) OUP

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The Stakeholder Case

Firm Objective must be defined more widely

than just shareholder-value-maximisation, since risk capital is not the only, or even the major input Residual Claimant Rights Not Universally Valid, eg, Circumscribed in case of prebankruptcy (US Chapter XI) Situations Other Such: Employees with Firm-specific Specialised Skills, Customers/Vendors with Substantial Stake in the Business, etc
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Towards an Integrated Model

One-Size does not Fit All Circumstances

A Combination of Shareholder/Stakeholder

Models Necessary Some Argue, While Shareholder Claim Well Established, Stakeholder Claims Need to be Proved Tailor Model to Suit Unique Circumstances

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The Corporate Board

Central to Corporate Governance
Juxtaposed between Shareholders on the one

hand, and on the other, Managers of the Entity (Cadbury) Follows Distancing between Ownership and Control (Berle and Means) Trustee for All Shareholders Loyalty & Commitment Always to Company

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Board Role & Responsibility

Provide/ Exercise Leadership and Strategic Guidance Objective Judgement Independent of Management Control over the Company

Direct and Control the Management of the

Company Be Accountable at all times to All Shareholders

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Dimensions of Board Responsibility

Direction involves
Formulation & Review of Company Policies,

Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc Setting Objectives & Monitoring Performance Oversight of Acquisitions, Divestitures, Projects, Financial and Legal Compliance, etc

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Dimensions of Board Responsibility

Control Involves
Prescribing Codes of Conduct, Overseeing Disclosure & Communication

Processes, Ensuring Control Systems to Protect Company Assets Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives

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Dimensions of Board Responsibility

Accountability Involves
Creating, Protecting and Enhancing Company

Wealth and Resources Timely and Transparent Reporting Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

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Corporate Governance & Capital Market Drivers: A Conceptual Framework

REGULATION & LEGISLATION

Regulators (SEBI/RBI)

Government Legislation

Stock Exchanges Listing Agreements

Lenders (Banks/ Depositors)

Listed Corporations (The Board & the Executive)

Shareholders/ Stakeholders

Market Operators (Rewards)

Institutional Investors Press/Media (Pension Funds/Insce Cos) (Opinion Makers)

Market Operations, Critique & Monitoring

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An Enterprises Triple Effect on Society

Sustainable Development Waste Control

Equal Opportunities Education & Culture

Emissions Business Impact Energy Use Product Life-cycle Product Value Trading Wealth Generation Productive Employment Ethical

Community Regeneration

Economic

Human Rights Employee Volunteers

The Triple-Bottomline Impact

economics

Business Impact

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environment

society

Governance Orientation Matrix

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MODELS OF CORPORATE GOVERNANCE

There is no one model of corporate

governance which is universally acceptable as each model has its own advantages and disadvantages. The following are some of the models of corporate governance : Anglo-American model German model Japanese model Indian model

Market-Based Corporate Governance System

Corporate governance systems have developed

differently throughout the world. The marketbased corporate governance system is based on Anglo-American law. Since the markets are the primary source of capital, investors are given the most power in determining corporate policies. Therefore, the system relies on the capital markets to exert control over the corporation's

Market Model of Corporate Governance System

A system relying on the investors of a firm to exert

control over how the corporation is to be managed. A market-based corporate governance system defines the responsibilities of the different participants in the company, including shareholders, the board of directors, management, employees, suppliers and customers.

Anglo-American model
This model is also called an Anglo-Saxon model Used as corporate governance in U.S.A, U.K, Canada, Australia,

and some common wealth countries. The shareholders appoint directors who in turn appoint the managers to manage the business. Thus there is separation of ownership and control. The board usually consist of executive directors and few independent directors. The board often has limited ownership stakes in the company. A single individual holds both the position of CEO and chairman of the board. This system (model) relies on effective communication between shareholders, board and management with all important decisions taken after getting approval of shareholders (by voting).

German model
This is also called as 2 tier board model

There are 2 boards viz. The supervisory board and the anagement board. Used in countries like Germany, Holland, France, etc. Usually a large majority of shareholders are banks and financial institutions. The shareholder can appoint only 50% of members to constitute the supervisory board. The rest is appointed by employees and labor unions.

Japanese model
This is also called as the business network model, usually

shareholders are banks/financial institutions, large family shareholders, corporate with cross-shareholding. There is supervisory board which is made up of board of directors and a president, who are jointly appointed by shareholder and banks/financial institutions. This is rejection of the Japanese keiretsu- a form of cultural relationship among family controlled corporate and groups of complex interlocking business relationship, where cross shareholding is common most of the directors are heads of different divisions of the company. Outside director or independent directors are rarely found of the board.

Indian model
The model of corporate governances found in India is a

mix of the Anglo-American and German models. This is because in India, there are three types of Corporation viz. private companies, public companies and public sectors undertakings (which includes statutory companies, government companies, banks and other kinds of financial institutions). Each of these corporation have a distinct pattern of shareholding. For e.g. In case of companies, the promoter and his family have almost complete control over the company. They depend less on outside equity capital. Hence in private companies the German model of corporate governance is followed.

The OECD Guidelines on Corporate Governance of State Owned Enterprises

Louis Bouchez Corporate Affairs Division, OECD Delhi, India 16 - 17 February 2006
The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries

Outline
1. Rationale for developing the Guidelines 2. Process and main characteristics 3. Priorities in the Guidelines 4. A new pillar to the OECD corporate governance

work 5. The Asian Network on corporate governance of SOEs

1. Rationale for developing the Guidelines

Scale and scope of the state sector Impact of SOEs on economic performance Pressure for reform deriving from globalization and

liberalization Specific governance challenges Expected benefits from improvements of SOE governance Strong demand from non-OECD economies

2. Process and main characteristics

Extensive and inclusive consultations with relevant

players from OECD members and non-member countries (Paris 2004) The Guidelines: are non-binding and non-prescriptive are complementary to the OECD Principles of Corporate Governance do not preclude/alter privatization policies are based on a Comparative Report

3. Priorities in the Guidelines

3.1 Ensure a level-playing field with the private sector 3.2 Reinforce the ownership function within the state administration 3.3 Improve transparency of SOEs objectives and performance 3.4 Strengthen and empower SOE boards 3.5 Provide equitable treatment of non-controlling / minority shareholders

3.1 Ensure a level-playing field with the private sector

Separate regulation and the shareholding

function Transparency of special obligations Harmonization in legal forms More flexibility in capital structures Competitive conditions in access to finance

3.2 Reinforce ownership function within the state administration

Centralization / coordination of the ownership

function Clear and disclosed ownership policy No direct interference in day-to-day activities Let boards carry out their responsibilities Accountability secured Effective exercise of ownership rights

3.3 Improve transparency of SOEs objectives and performance

Consistent and aggregate disclosure

Reinforced internal audit

Independent external audit High quality standards for accounting and audit

Disclosure as listed companies

Disclosure of material information, including

financial assistance from the state, transactions with related entities and risk factors

3.4 Strengthen and empower SOE boards

Structured and skill-based nomination process Clear mandate and full responsibility Able to appoint CEO Able to exercise independent judgment

limit number of state representatives on the

board separation between Chair and CEO Systematic evaluation of board

3.5 Provide equitable treatment of non-controlling minority shareholders

Important for States capacity to attract outside

funding Impact on valuation of SOEs Relevant for the general perception of the State as an owner Prevents the State pursuing objectives outside the SOEs interests

4. A new pillar to the OECD CG work

Dissemination and discussion in non-OECD countries Priority topic in both the Asian and Russian Roundtable Dedicated country meeting and policy dialogue in China, Ukraine and Egypt Presentation of the Guidelines in other Roundtables (MENA, Latin America, SEE and Eurasia)

Follow-up on OECD country work Co-operation on Korean reforms Thematic issues such as aggregate reporting on nomination and evaluation for SOE boards

5. The Asian Network on CG of SOEs

Initiated in May 2005 as new activity of the Asian

Roundtable on CG, in order to:

Raise awareness on CG of SOEs Evaluate existing CG policy framework of SOEs Influence policymaking in Asia by providing a forum for peer

policymakers Support CG reforms in SOE

The Asian Network will meet in 2006 and 2007 to discuss

each of the 6 chapters of the Guidelines Intention to draft (i) a Policy Brief providing concrete policy recommendations and (ii) a comparative report

OECD MEMBERS

Country
AUSTRALIA7 June 1971 AUSTRIA29 September 1961 BELGIUM13 September 1961 CANADA10 April 1961 CHILE7 May 2010 CZECH REPUBLIC21 December 1995

OECD MEMBERS
DENMARK30 May 1961

ESTONIA9 December 2010

FINLAND28 January 1969 FRANCE7 August 1961 GERMANY27 September 1961 GREECE27 September 1961 HUNGARY7 May 1996 ICELAND5 June 1961 IRELAND17 August 1961

OECD MEMBERS
ISRAEL7 September 2010

ITALY29 March 1962

JAPAN28 April 1964 KOREA12 December 1996 LUXEMBOURG7 December 1961 MEXICO18 May 1994 NETHERLANDS13 November 1961 NEW ZEALAND29 May 1973 NORWAY4 July 1961

OECD MEMBERS
POLAND22 November 1996

PORTUGAL4 August 1961

SLOVAK REPUBLIC14 December 2000 SLOVENIA21 July 2010 SPAIN3 August 1961 SWEDEN28 September 1961 SWITZERLAND28 September 1961 TURKEY2 August 1961 UNITED KINGDOM2 May 1961 UNITED STATES12 April 1961