Corporate governance

Corporate governance actually refers to the system of rules as well as the process by which a
company gets controlled and directed. Corporate governance essentially involves balancing
the interests of a company's many stakeholders, such as shareholders, management,
customers, suppliers, financiers, government and the community. Since corporate governance
also provides the framework for attaining a company's objectives, it encompasses practically
every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure.

Types of Corporate Governance

Corporate governance can be of two kinds namely good as well as bad corporate governance.
The features of good corporate governance involve principles like honesty, integrity,
openness, accountability, responsibility, commitment to the organization. On the other hand,
bad corporate governance can cast doubt on a company's reliability, integrity or obligation to
shareholders which could in turn affect the financial stability of the company. Tolerance or
support of illegal activities can create scandals like the one that rocked Volkswagen AG in
2015, when it was revealed that the firm had rigged engine emissions tests in America and
Europe. Volkswagen saw its stock shed nearly half its value in the days following the start of
the scandal.

Corporate Governance Around the world

Corporate governance is the system of rules, practices and processes by which a company is
directed and controlled. Corporate governance essentially involves balancing the interests of
a company’s many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community.

While all systems have the same objective and have origins in similar legal frameworks, the
framework, rights and make-up of governance structures can vary considerably. Let us
actually observe examples from over the world.

For example, in the US, shareholders elect a board of directors, who in turn hire and fire the
managers who actually run the company. In Germany, the board is not legally charged with
representing the interests of shareholders, but is rather charged with representing the interests
of stakeholders, including workers and creditors as well as the shareholders. It also usually
has a member of the labour union on the board.

In the UK, the majority of public companies voluntarily abide by the Code of Best Practice
on corporate governance. It recommends there should be at least three outside directors and
the board chairman and the CEO should be different individuals.

Japan’s corporate boards are dominated with insiders – loyal managers who cap off their
careers with a stint inside the boardroom – and they are primarily concerned with the welfare
of keiretsu (parent company) to which the company belongs.

China has colossal corporate structures where businesses have parent, grandparent and even
great-grandparent companies. Each level has a board and Communist Party officials usually
have a seat. In India, the founding family members usually hold sway over the board.
Korean manufacturers’ strategy is to grow as rapidly as possible and do this by borrowing
money from banks. As a result, the government holds sway over their corporate governance
structure through the banks. This relationship gives the Government influence over the
company, while the company has a say in government issues and Korean corporate
governance.

Finally, the French corporate governance structure often attracts criticism for involving a
complex network of public sector organisations, large businesses and banks. However, this
ensures the French excel at collaborative projects between business and Government. For
example, France leads the world in the production of nuclear reactors and high-speed trains.

Comparison of Corporate Governance Practices between India and

Germany on the basis of certain attributes

I. Cash Flow Rights

In India, around 40% of the equity shareholdings are owned by family controlled
large business groups comprising of closely held holding companies as well as
subsidiaries. Cross shareholdings among the companies as well as pyramidal
stock ownership is actually observed. About 20% of the equity shares are owned
by the financial institutions, government, FII’s, mutual funds as well as small
investors. The market is liquid as well.
In Germany, about 40% of the equity holdings of a large company with other
large companies followed by 11% of institutional investors, 10% of banks and
16% of private stakeholders, government. The smaller companies are usually
family controlled and cross holding has been observed. The investors are found
to have limited roles and the holdings are mostly found to be illiquid and strong
control has been observed from the commercial banks as well.

II. Control Rights

In India, the control rights are mostly concentrated in the hands of the family
controlled business groups. The management as well as the control of operations
of the companies are delegated to the managers that are under the governance of
the board which is controlled by the family.
In Germany, the management and control of operations are delegated to the
management board under the governance of the supervisory board.

III. Governance Rules

 In India, there is a single tier majority inside the board with minimum. Audit
committee is appointed comprising of majority of independent directors and the
role and function of the audit committee is enacted.
In Germany, there is a two tier board system containing a supervisory board
which discharges all supervisory functions and a management board with senior
executives discharging functions of the direction and the management. There is
considerable autonomy to the management as well as strong protection of the
rights of the creditors.

IV. Role of Governance

In India, the internal capital markets created by the controlling business groups
are more efficient than the external capital markets. There seems to diversion of
wealth and resources away from the company to the owners. Due to the lack of
expertise, there seems to be less effective monitoring by the state owned financial
institutions. There is lack of transparency due to rampant corruption.
In Germany, the high standard of performance and higher degree of effectiveness
by the combination of internal networks and a formal governance structure.
Decisions are reached by discussion. There is successful entrepreneurial drive,
highly trained workforce. The commercial banks have a large influence over the
German companies. Stakeholder protection is widely given importance.

V. Governance Reforms
In India, economic reforms were enacted in the form of liberalisation, relaxing
licensing rules, elimination of restrictions on private sector investment, reduction
of tariff. This led to increased competition in market entry of FII, FDI. Number
of initiatives were introduced by SEBI to protect shareholders.
In Germany, the banks were reconsidering their stakes in companies.
Regulatory measures on accounting standards, insider trading, takeover as well
as standards of financial disclosure were improved.

So in the end roughly tabulating we get,