PROF.SHIVASHANKAR

CORPORATE GOVERNANCE MODELS

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Overview of Corporate Governance

MODELS OF CORPORATE GOVERNANCECorporate 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.

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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

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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

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An OECD Definition“Corporate governance involves a set of

relationships between a company’s 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

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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

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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.

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Some Further DefinitionsCorporate governance is essentially about

leadership:leadership for efficiency;leadership for probity;leadership with responsibility; andleadership which is transparent and which is

accountable.- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

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What is Corporate Governance?The Manner in which a Corporation is Run

Achieving its ObjectivesTransparency of its OperationsAccountability & ReportingGood Corporate Citizenship

The Processes & Operating Relationships that Best Achieve Organisational Goals

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Some Governance ModelsFinance 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 toShareholdersRisk-bearing EntrepreneursResidual ClaimantsWinding-up Ranking: Last in Pecking OrderBoards Appointed by ShareholdersNon-congruence of Stakeholder Interests

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Residual Claimant Theory

“…shareholders … residual claimants to the firm’s 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 CaseFirm 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 pre-bankruptcy (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 ModelOne-Size does not Fit All CircumstancesA Combination of Shareholder/Stakeholder

Models NecessarySome Argue, While Shareholder Claim Well

Established, Stakeholder Claims Need to be Proved

Tailor Model to Suit Unique Circumstances

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The Corporate BoardCentral 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 ShareholdersLoyalty & Commitment – Always to Company

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Board Role & ResponsibilityProvide/ Exercise

Leadership and Strategic GuidanceObjective Judgement Independent of

ManagementControl 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 ResponsibilityDirection involves

Formulation & Review of Company Policies, Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc

Setting Objectives & Monitoring PerformanceOversight of Acquisitions, Divestitures,

Projects, Financial and Legal Compliance, etc

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Dimensions of Board ResponsibilityControl Involves

Prescribing Codes of Conduct, Overseeing Disclosure & Communication

Processes,Ensuring Control Systems to Protect

Company AssetsReviewing Performance & Realigning Action

Initiatives to Achieve Company Objectives

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Dimensions of Board ResponsibilityAccountability Involves

Creating, Protecting and Enhancing Company Wealth and Resources

Timely and Transparent ReportingGood 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

Listed Corporations(The Board & the Executive)

Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements

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

Lenders(Banks/

Depositors)

Shareholders/Stakeholders

REGULATION & LEGISLATION

Market Operations, Critique & Monitoring

Environment Social

Economic

An Enterprise’s Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education & Culture

Emissions Community Regeneration

Energy Use Human Rights

Product EmployeeLife-cycle Volunteers

Product Wealth Productive Ethical Value Generation Employment Trading

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The Triple-Bottomline Impact

Business Impact

environment society

economics

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Governance Orientation Matrix

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 SystemCorporate governance systems have

developed differently throughout the world. The market-based 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 modelThis 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 modelThe 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

   

 

Outline1. Rationale for developing the Guidelines2. Process and main characteristics3. Priorities in the Guidelines4. A new pillar to the OECD corporate

governance work5. The Asian Network on corporate governance

of SOEs

1. Rationale for developing the GuidelinesScale and scope of the state sectorImpact of SOEs on economic performancePressure for reform deriving from globalization

and liberalizationSpecific governance challengesExpected benefits from improvements of SOE

governanceStrong demand from non-OECD economies

2. Process and main characteristicsExtensive and inclusive consultations with

relevant players from OECD members and non-member countries (Paris 2004)

The Guidelines: are non-binding and non-prescriptiveare complementary to the OECD Principles

of Corporate Governancedo not preclude/alter privatization policiesare 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 boards3.5 Provide equitable treatment of non-

controlling / minority shareholders

3.1 Ensure a level-playing field with the private sectorSeparate regulation and the shareholding

functionTransparency of special obligationsHarmonization in legal formsMore flexibility in capital structuresCompetitive conditions in access to finance

3.2 Reinforce ownership functionwithin the state administration

Centralization / coordination of the ownership function

Clear and disclosed ownership policyNo direct interference in day-to-day

activitiesLet boards carry out their responsibilitiesAccountability securedEffective exercise of ownership rights

3.3 Improve transparency of SOEs’ objectives and performanceConsistent and aggregate disclosureReinforced internal auditIndependent external auditHigh quality standards for accounting and

auditDisclosure as listed companiesDisclosure of material information, including

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

3.4 Strengthen and empower SOE boardsStructured and skill-based nomination

processClear mandate and full responsibilityAble to appoint CEOAble to exercise independent judgment

limit number of state representatives on the board

separation between Chair and CEOSystematic evaluation of board

3.5 Provide equitable treatment of non-controlling minority shareholdersImportant for State’s capacity to attract

outside fundingImpact on valuation of SOEsRelevant for the general perception of the

State as an ownerPrevents the State pursuing objectives outside

the SOE’s interests

4. A new pillar to the OECD CG workDissemination 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 EgyptPresentation of the Guidelines in other Roundtables (MENA,

Latin America, SEE and Eurasia)Follow-up on OECD country work

Co-operation on Korean reformsThematic 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 SOEsEvaluate existing CG policy framework of SOEsInfluence policymaking in Asia by providing a forum for peer

policymakersSupport 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 MEMBERSISRAEL7 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 MEMBERSPOLAND22 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