Models of Corporate Governance CORPORATE GOVERNANCE SYSTEMS Efforts made for Effective Corporate Governance Cadbury Committee Sarbanes Oxley Act, 2002 Global Corporate Governance External Auditor Trends in Governance in Major MNC’s India China Japan Other European Model

1. MODELS OF CORPORATE
GOVERNANCE:
WHO’S THE FAIREST OF THEM OF ALL?

2. CORPORATE GOVERNANCE
SYSTEMS
The need of governance system is based on the
assumption that the separation between the owners
of a company and its management provides self
interested executives the opportunity to take actions
that benefits themselves with the cost of their actions
borne by the owners. (Agency Cost)
In order for governance systems to be economically
effective, companies should try to decrease agency
cost above and beyond the direct cost compliance
and indirect cost on managerial decision making.

3. Management
Shareholder
s
Board of
Directors

4. Efforts made for Effective Corporate
Governance
Cadbury Committee
Help to raise the standards of corporate governance and the
level of financial reporting and auditing.
‘Code Of Best Practices’ were issued to provide a benchmark
set of recommendation on governance.
Sarbanes Oxley Act, 2002
Under this, CEOs and CFOs found to have made material
misrepresentation in the financial statement were made
subject to criminal penalties.
Third Party Organizations
The Corporate library
Institutional Shareholder Services and Governance Metrics
International`

5. Institutional Shareholder Services
and Governance Metrics
International
 GMI Ratings is the leading independent provider of global
corporate governance and ESG ratings for companies
worldwide.
 Ratings are built on extensive research and modeling that
incorporates a broad spectrum of Environmental, Social
and Governance (ESG) metrics as well as incorporating
accounting transparency issues, to support the goal of
identifying companies at risk.
Exhibit 2: page 177

6. Global Corporate Governance
United States and Britain
Share Holder Centric
Model of Corporate
Governance
Germans and other
European Nations
Stake Holder Centric
Model of Corporate
Governance
Japanese Model
Focuses on Business
Relationship
Korean Model
Roots from Korean War
Chinese Model
Reflects the Transition
from Communism to
Capitalistic system
Indian Model
Influenced by a History of
Powerful Family
Ownership

7. United States
The Boards of directors served as the most important
controlling mechanism.
The CEO of most US corporations were professionals.
The Board had primary four responsibilities:
1. The selection of CEO
2. The selection of candidates for BODs.
3. Evaluation and review of company’s strategy, operational
execution, capital structure and published financial
statements.
4. Ensuring that the company was in compliance with all
applicable laws and regulations.

8. The BODs typically included executive(CEO or any other
senior official) and non executive directors.
NYSE listing rules required that non- executive directors
meet outside the presence of executive directors.
NYSE rules required that company have a majority of
independent board members.
Family member and significant share holder can also
served on board.

9. External Auditor
The external auditor reviewed the internal controls of the
company to assess whether it employed sound practices in
keeping its accounts and also tested selected accounts to
determine whether they complied with GAAP.
If auditor found no reason of materially misleading, the firm
expressed an unqualified opinion.
External auditors were also required to perform an assessment
of the company’s internal controls. And if material misleading
discovered, the CEO and CFO could be subject to criminal
liability, punishable by fines and prison.
Management, too, was required to perform the same
assessment. So they employed internal auditors who were

10. Governance Regulations and
Procedures
Securities and Exchange Commission through Securities
and Exchange Act 1934 to protect interest of investors
investing in primary and secondary markets, and to keep a
check on executives who violated securities law.
Companies were given rights to amend their own law
(bylaws) for better functioning.
Companies listed on stock exchanges should have
minimum 3 independent directors who are financially literate
and of whom one should be a ‘financial expert’.
Companies cannot directly appoint directors but through
voting right of shareholders.

11. Liability
• Company law protects shareholders liability to the extent of
their investment.
• Companies directors can personally be sued for their
misconduct like insider trading, misallocation of funds etc.
• Directors often purchase Director’s and Officer’s liability
insurance (D&O).
• Example: Rajat Gupta of Goldman Sachs was accused for
insider trading and was later on sent for imprisonment and
was fined.

12. United Kingdom
1) The British model shared the most similarities with the us
laws.
2) The companies act 1985 which consolidated seven
companies act passed by parliament between 1985 and
1983, which has very few governance requirements on
companies.
3) Among those companies they have to required to have a
board with minimum two director for publicly traded
companies have responsibility for certain administrative
function, including the production of annual financial report,
4) The tradition of common law of both U.K & U.S led to great
deal of flexibility in the development of corporate governance

13. Along with the Higgs report were combined with those of
the Cadbury committee in 2003 and that became the
combined code.
This committee include at least half of the board of
directors should be non-executive should appoint a lead
independent directors who serves as a liaison with
shareholders, the nomination committee should be
headed by non executive directors, and executive director
Together, the Cadbury and Higgs report had the effect of
shaping the board of directors into a monitoring and
control body as much as a strategy setting body.
Two-thirds of the U.K’S 350 largest companies did not

14. This committee recommended a set of self regulated
standards of governance known as the code of bet
practices.
The critics of the Cadbury committee report claimed that
the voluntary adoption of governances practices did not
go for enough to raise oversight standards.
Another critic of the Cadbury report believed the
enforcement mechanism of relying on shareholders to
protest lack of compliance was weak and did not go far
enough.

15. Germany
German Law mandated that corporations under a two tired
board structure which separated the oversight and the
management functions
The management board(Vorstand) was responsible for day to
day decision making on such matters as product
development, manufacturing, supply chain etc.
Supervisory board(Aufischtrat) responsible for appointing
members to the management board, approval of financial
statement, mergers, payment of dividend etc.
The supervisory board was requited by law to the one-third of
its members as labor representative if the company had at

16. Other European Model
European nation employed a stakeholder model, with a
large emphasis on labor, environmental and other societal
factors.
The Dutch two-board system operated similarly to the
Anglo-Saxon model.
The British and the Dutch had a fierce competitive rivalry
that reached back to the 1600s, the two countries shared a
particular similarity in their method of conducting business.
A unique breed of organization called the British-Dutch
company evolved in which a corporation operated under a
joint charter that divided its governance between the

17. Japan
The Japanese model of corporate governance had its root in
post world war II reconstruction at the end of the war, the
powerful industrial and financial conglomerates that in large
part accounted for the country's economic strength.
In 2007, Toyota Motor Corp had a 30-member board of
directors, all of these board members had extensive
experience working at the company.
Toyota developed a system of adjunct committees that
provided additional advisory or monitoring services for the
board.
The influence of major banks in the governance system was
waning, with individual shareholders taking their place

18. South Korea
Corporate Model named “ CHAEBOL” - A large conglomerate.
Working under group head quaters or founding family.
In 2007, largest Chaebol was “Samsung Group” which is
diversified into more than 30 businesses from electronics to ship
building, textiles, insaurance etc.
Other Major Companies: Hyundai, LG Group, S.K Group
Post Korean War:
1) Chaebol = Help in Economic Development.
2) Government = Encouraging expansion, diversification, Rapid
succession, incentive for efficiency in business.

19. Asian Financial Crises – 1997
Step to bring Economic stability and investors
confidence:
1) Chaebol subsidiaries working independently.
2) Companies to become self sufficient.
3) Reduction in barriers to foreign ownership.
4) Elimination of Transfer of funds.
Not all companies followed Chaebol.
Example : - Posco:
1) Privatized and sold to public in 2000.
2) Increase in outside directors from 9 to 15
3) 2006: Different CEO and Chairman

20. China
Communist Economy  Capitalist Economy.
Company Law of the People’s Republic of China:
1) Board Of Directors: 5 to 19 members.
2) Board of Supervisors: more than 3 members of which
1/3rd or more be employee representatives.
3) No BOD member as BOS.
4) Audit and Compensation committee only if they are listed
on stock exchanges like NYSE Etc.

21. 14% Shares
( NYS, SSE, HKSE )
86% Shares
(China National Petroleum
Corporation)
PetroChina
• 12 Member of which 7 current rest
affiliated with CNPC of which 3
were independent, Non-Executive
directors.
Board of
Directors
• 7 members of which two are
directors of CNPC, two
independent directors and one
employee representative.
Board of
Supervisors

22. India
India with its 20 million shareholders, is one of the largest emerging markets
in terms of the market capitalization.
Corporate
Governance
SEBI
K. Birla
Clause 49
(1999)
N.R Narayan
Murthy
(2004)
CII
Corporate
Governance
Code 1998

23. Clause49
Independent
Directors
Non-Executive
Directors
Board of
Directors
Audit
Committee
Whistler Blower
Policy
Subsidiary
Companies
Disclosures
Certifications

24. Trends in Governance in Major
MNC’s
Hewlett Packard 2006 Global Citizenship Report.
Lawsuits and Financial Liability decreasing effectiveness
of the board.
Professional Management at Publically Traded
Companies.
Eg Porsche AG
“The bar has been significantly raised by governance
reforms and the idea that there’s a stewardship for public
capital”