THE MODELS OF CORPORATE GOVERNANCE

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

Anglo-US Model

The Anglo-US model is based on a system of individual or institutional shareholders that are
outsiders of the corporation. The other key players that make up the three sides of the corporate
governance triangle in the Anglo-US model are management and the board of directors. This model
is designed to separate the control and ownership of any corporation. Therefore the board of most
companies contains both insiders (executive directors) and outsiders (non-executive or independent
directors). Traditionally, though, one person holds the position of CEO and chairman of the board of
directors. This concentration of power has led many companies to include more outside directors
now. The Anglo-US system relies on effective communication between shareholders, management
and the board with important decisions being put to the vote of the shareholders.

Japanese Model

The Japanese model involves a high level of ownership by banks and other affiliated companies and
"keiretsu," industrial groups linked by trading relationships and cross-shareholding. The
key players in the Japanese system are the bank, the keiretsu (both major inside shareholders) ,
management and the government. Outside shareholders have little or no voice and there are few
truly independent or outside directors. The board of directors is usually made up entirely of insiders,
often the heads of the different divisions of the company. However, remaining on the board of
directors is conditional on the company's continuing profits, therefore the bank or keiretsu
may remove directors and appoint its own candidates if a company's profits continue to fall.
Government is also traditionally influential in the management of corporations through policy and
regulations.

As in Japan, banks hold long-term stakes in corporations and their representatives serve on boards.
However they serve on boards continuously, not just during times of financial difficulty as in Japan.
In the German model, there is a two-tiered board system consisting of a management board and a
supervisory board. The management board is made up of inside executives of the company and the
supervisory board is made up of outsiders such as labor representatives and shareholder
representatives. The two boards are completely separate, and the size of the supervisory board is set
by law and cannot be changed by the shareholders. Also in the German model, there are voting righ t
restrictions on the shareholders. They can only vote a certain share percentage regardless of their
share ownership.

Corporate governance is the set of company tools, rules, relations, processes and systems designed for
the fair and efficient management of the enterprise, meant as a compensation system among the
potentially divergent interests of the minority shareholders, the controlling shareholders, and the
directors of a company. Hence the corporate governance structure expresses the rules and processes
for company decision-making, the procedures for setting the company's objectives, and the means for
attaining and measuring the results achieved.

There several different governance models, depending on the degree of capitalism in which the
company operates. The liberal model, typical of the English-speaking countries, gives priority to
shareholders’ interests. The model prevalent in continental Europe and Japan also recognizes the
interests of the workers, managers, suppliers, customers, and society.

The rules of corporate governance are based on both the laws and regulations in the legal framework
of the country in which the company operates, and its own bylaws. Relations include those among the
actors involved in the company: the owners (shareholders), the managers, the directors, the regulatory
authorities, the employees, and the company in the wide sense. The processes and systems refer to
mechanisms of delegation of powers, performance measuring, security, reporting, and accounting.

Usually three different corporate governance systems are distinguished for joint-stock companies.

The ordinary system, typical of the Italian tradition, is applied in the absence of a different selection
as per the bylaws. This system calls for the presence of an administrative body (a Sole Director or a
Board of Directors whose number of members is determined by the shareholders’ meeting, unless set
in the bylaws) and a Control Body (the Board of Statutory Auditors).

The two-tier system, typical of the German tradition (and the only direction and control system for
joint-stock companies) and later adopted by other European countries such as France, the Netherlands,
and Finland (where, however, it is optional), by which the company’s administration is divided into
two different bodies, the management board and the supervisory board.

There must be at least two members of the management board, whose terms of office may not exceed
three financial years and they may be removed at any time by the supervisory board. They are subject
to the same responsibilities as directors.

There must be at least three members of the supervisory board, they are appointed by the shareholders’
meeting for three financial years (the shareholders’ meeting also appoints its chairman) and their terms
are renewable. The shareholders’ meeting may remove them at any time.

The one-tier system, typical of the English-speaking country tradition, where management is assigned
to a single board, the board of directors, among whose members a control committee is appointed.

Different models of corporate governance differ according to the variety of capitalism in which they
are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The
coordinated or multistakeholder model associated with Continental Europe and Japan also recognizes
the interests of workers, managers, suppliers, customers, and the community. A related distinction is
between market-oriented and network-oriented models of corporate governance.[37]

Continental Europe (Two-tier board system)[edit]

Main article: Aktiengesellschaft
Some continental European countries, including Germany, Austria, and the Netherlands, require a
two-tiered board of directors as a means of improving corporate governance.[38] In the two-tiered
board, the executive board, made up of company executives, generally runs day-to-day operations
while the supervisory board, made up entirely of non-executive directors who represent shareholders
and employees, hires and fires the members of the executive board, determines their compensation,
and reviews major business decisions.[39]

Germany, in particular, is known for its practice of co-determination, founded on the German
Codetermination Act of 1976, in which workers are granted seats on the board as stakeholders,
separate from the seats accruing to shareholder equity.

India[edit]

The Securities and Exchange Board of India Committee on Corporate Governance defines corporate
governance as the "acceptance by management of the inalienable rights of shareholders as the true
owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction between
personal & corporate funds in the management of a company."[40][41] India is a growing economy and
it is quite important to safeguard the interests of investors and also ensure that the responsibility of
management is fixed. The Satyam scandal, also known as India's Enron, wiped off billions of
shareholders' wealth and threatened foreign investment in India. This is the reason that corporate
governance in India has taken the centre stage.[42]

United States, United Kingdom[edit]

The so-called "Anglo-American model" of corporate governance emphasizes the interests of

shareholders. It relies on a single-tiered board of directors that is normally dominated by non-
executive directors elected by shareholders. Because of this, it is also known as "the unitary
system".[43][44] Within this system, many boards include some executives from the company (who
are ex officio members of the board). Non-executive directors are expected to outnumber executive
directors and hold key posts, including audit and compensation committees. In the United Kingdom,
the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual
role has been the norm, despite major misgivings regarding the effect on corporate governance.[45] The
number of US firms combining both roles is declining, however.[46]
In the United States, corporations are directly governed by state laws, while the exchange (offering
and trading) of securities in corporations (including shares) is governed by federal legislation. Many
US states have adopted the Model Business Corporation Act, but the dominant state law for publicly
traded corporations is Delaware General Corporation Law, which continues to be the place of
incorporation for the majority of publicly traded corporations.[47] Individual rules for corporations are
based upon the corporate charter and, less authoritatively, the corporate bylaws.[47] Shareholders
cannot initiate changes in the corporate charter although they can initiate changes to the corporate
bylaws.[47]

It is sometimes colloquially stated that in the US and the UK "the shareholders own the company".
This is, however, a misconception as argued by Eccles & Youmans (2015) and Kay (2015).[48]

Founder centrism[edit]

Recent scholarship from the University of Oxford outlines a new theory of corporate governance,
founder centrism, which is premised upon a narrowing in the separation between ownership and
control. Through the lens of concentrated equity ownership theory, a new theory of the firm, the
traditional checklist of best practices are inapplicable, as evidenced by the significant outperformance
of technology companies with dual-class share structures and integrated CEO/Chairman positions:

Founder-run companies, such as Facebook, Netflix and Google are at the forefront of a new wave of
organizational structure better suited to long-term value creation. Founder centrism, an inclusive
concept within CEO theory, integrates the capacity of founder and non-founder senior leadership to
adopt an owner's mindset in traditionally structured corporations, such as Thomas J. Watson Sr. and
Thomas Watson Jr. with IBM, Steve Jobs and Tim Cook with Apple, Jamie Dimon with JPMorgan
Chase, Lloyd Blankfein with Goldman Sachs, Rick George with Suncor Energy, and many others. In
substance, all fall within the ambit of founder centrism—leaders with a founder's mindset, an ethical
disposition towards the shareholder collective, and an intense focus on exponential value creation
without enslavement to a quarter-by-quarter upward growth trajectory. In traditionally structured
firms, high performing executives gain deference, become highly influential, and take on the qualities
of concentrated equity owners. To the extent these leaders embrace founder centrism, their companies
will experience efficiency advantages relative to competitors operating within traditional
parameters.[49]
An article published by the Australian Institute of Company Directors called "Do Boards Need to
become more Entrepreneurial?" also considered the need for founder centrism behaviour at board level
to appropriately manage disruption.[50

Corporate Governance Models Around the World

There are many different models of corporate governance around the world. These differ according to the variety of
embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or Multi
with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, an
distinction is between market-orientated and network-orientated models of corporate governance.

 Continental Europe

Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Direc
corporate governance. In the two-tiered board, the Executive Board, made up of company executives, generally runs
the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires
executive board, determines their compensation, and reviews major business decisions. See also Aktiengesellschaft.

 India

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by managemen
shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is
about ethical business conduct and about making a distinction between personal & corporate funds in the manageme
suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles o
this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.

 United States, United Kingdom

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies
Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is
system". Within this system, many boards include some executives from the company (who are ex officio members
directors are expected to outnumber executive directors and hold key posts, including audit and compensation comm
the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the
serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regar
governance.

In the United States, corporations are directly governed by state laws, while the exchange (offering and trading)
(including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation A
for publicly traded corporations is Delaware, which continues to be the place of incorporation for the m
corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the co
cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.

Two-Tier Board
A corporate structure with two boards of
directors. A management board oversees the company and provides general direction, while a su
pervisory board must approve of major business decisions. Half the supervisory board is elected
by shareholders while the other half represents employee interests. It appoints the management
board. A two-
tier board is seen in German companies with the Aktiengesellschaft corporate structure.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

two-tier board
a structure of the BOARD OF
DIRECTORS of a company used in certain European countries, such as Germany
and Norway, that comprises two tiers:

a. a supervisory board, on which representatives of workers and management board are repr
esented;
b. a management board that is concerned with the day-to-day running of the business.

The supervisory board is responsible for formulating general policy and the management board
with implementing policy. Two-
tier boards have gained in popularity in Europe over the past two decades, compared with the U
K and US style of unitary boards, and their development has been encouraged by the EUROPE
AN UNION. See also WORKER PARTICIPATION.

The Stakeholder
Model of Corporate
Governance

November 8th, 2019

Nicholas J. Price

A model of corporate governance refers to how companies define the purpose of companies in
society. The shareholder theory of corporate governance has held over time, but thoughts about
this model are beginning to evolve. In some arenas, corporate leaders favor a stakeholder theory
of corporate governance. There are differences in how men and women view the stakeholder
theory of corporate governance. Board directors and executives also have some differences in
how they view the stakeholder theory.
 Stakeholder Model of
Corporate
Governance

The stakeholder theory of corporate governance focuses on the effect of corporate activity on all
stakeholders of the corporation, as opposed to focusing on the corporate effect on the
shareholders. With the stakeholder theory, there is the expectation that corporations will make
efforts to mitigate or reduce conflicts between stakeholders. The theory also incorporates the
interests of any third parties that have some level of dependence on the corporation.

Stakeholders that fall under this theory may be internal stakeholders, such as corporate directors,
managers and employees. They may also be external stakeholders like creditors, vendors,
auditors, customers, the community and government agencies. While stakeholders are not
directly involved in the process, stakeholders have influence over how the company operates. All
stakeholders engage with the corporation on some level with an understanding that the
corporation will deliver on some level, whether that is a paycheck, dividends, a bonus, additional
orders, tax revenue or a job.

Board Directors’ View

of the Stakeholder
Theory of Corporate
Governance

Many board directors aren’t completely sold on the notion of the stakeholder theory. In August
2019, over 200 chief executives discussed the issue at the Business Roundtable. The discussions
produced a shift in how they define the purpose of corporations in society. Executives made a
statement that companies shouldn’t only advance the interests of the shareholders, but they
should consider a broader stakeholder model that includes the interests of the employees,
customers, suppliers and the communities in which they work.

Many business leaders from some of the largest corporations in the United States said at the
Roundtable that they agreed with the stakeholder model of governance, but board directors were
more mixed. Only 58% of board directors felt that companies should consider stakeholders rather
than shareholders. Related to the issue of corporations having a social purpose, most board
 directors agreed with it. They also believe that having a social purpose and company profitability
aren’t necessarily mutually exclusive. While board directors and executives have somewhat
opposing views, males and females aren’t so much on the same page either.

Gender Differences in
the Stakeholder
Theory of Corporate
Governance

Women board directors tend to favor the stakeholder model of governance, with 71% on board
as compared with only 54% of male directors favoring the stakeholder model.

Men and women in the boardroom differ in their perspectives on how much attention the board
should be giving to social issues like environmental and sustainability concerns and corporate
social responsibility. About 52% of men think that investors give too much weight to social
issues and only 26% of women directors believe that social issues are getting enough attention. If
the pressure continues to keep adding women to boards, the impact of this could be that women
will encourage boards to dedicate more time on their agendas to social issues.

Other notable statistics showed:

 56% of men said that shareholders paid too much attention to environmental and sustainability
issues, whereas only 29% of women felt the same.

 94% of women wish that companies would do more to promote gender and racial diversity in the
workplace, compared to 81% of males.

 71% of women said they wanted companies to prioritize a greater group of stakeholders and only
54% of men agreed with that view.

 62% of women were more likely to value having environmental and sustainability expertise on
their boards and only 47% of men concurred with their opinions.

Women are also more likely to see the financial impact of ESG issues on the company. Females
are also more likely to say that ESG-related disclosures should be a priority for management.
The results of these polls indicate that these issues are more likely to be taken seriously by
 management and boards because of the heightened attention given to them by women. The
varying perspectives between men and women could mean that boards that have a better balance
between men and women may be changing their approach to ESG issues in the boardroom.

Here’s a snippet of the gender divide on ESG issues:

 62% of women said that ESG issues are important to the company’s shareholders, compared
with only 48% of men.

 62% of women also said that they felt ESG issues have a financial impact on the company’s
performance, compared with only 45% of men.

 46% of women believe that management should disclose a company’s efforts on ESG-related
issues and only 24% of men felt the same way.

Most companies factor in the role of social issues in developing their corporate strategies, to
some extent. Female board directors were more inclined to say that social issues should be
considered when developing the corporate strategy. Boards with strong female participation
could influence the degree that social movements play into corporate strategies. For example,
the 2019 PwC Annual Directors’ Survey indicated differences in female and male board
directors in the following areas:

 82% of women directors wanted to prioritize the scarcity of resources, compared with 61% of
men.

 70% of women encouraged their companies to prioritize human rights, compared with 58% of
men.

 68% of women desire to see climate change as part of their corporate strategy, compared with
50% of men.

 66% of women thought social movements should be incorporated into their overall strategy, and
only 38% of men felt the same.

 57% of women expressed the need for income inequality to be included in the corporate strategy,
compared with 38% of men.
It will be interesting to see how the model of corporate governance evolves in the coming years
and how it shapes companies and their boards as women begin to become more of a staple in
boardrooms and as stakeholders become a more important component in the business world.

COMPOSITION OF THE BOARD OF DIRECTORS

CORPORATE ACTIONS REQUIRING SHAREHOLDERS APPROVAL

Concentration of power in a small group of persons

DISCLOSURE REQUIREMENTS

Management and/or the board of directors' attempts to retain power over a long period of time,
without regard for interests of other players entrenchment

 Prefer that a majority of its shareholders be long-term, preferably affiliated, parties.

 Annual reports and materials related to the AGM are available to all shareholders
 Shareholders may attend the annual general meeting, vote by proxy or vote by mail
 Shareholders activism is restricted by informal yet important aspect of the Japanese
system

GERMAN MODEL
MODELS OF
CORPORATE
GOVERNANCE
Government
End of Discussion.

Thank You!

3. The growth of Japanese capital markets led to their partial liberalization and an opening,
though small, to global standards.

UK Corporations (1990)

Institutional shareholders held approximately 61%

Individual shareholders held approximately 21%

US Corporations
(1981)

Individual shareholders held 38%

(1990)

Institutional shareholders held

INTERACTION AMONG PLAYERS

NEED FOR A MODEL

1. Corporate financial data, required on a semi-annual basis.

2. Data on the capital structure.

3. Limited information on each supervisory board nominee.

4. Aggregate data for compensation of the management board and supervisory board.

5. Any substantial shareholder holding more than 5% of the corporation's total share capital.

6. Information on proposed mergers and restructurings.

7. Proposed amendments to the articles of association.

8. Names of individuals and/or companies proposed as auditors.

DISCLOSURE REQUIREMENTS

Rating agencies

Another practice common in Japan is the appointment of retiring government bureaucrats to

corporate boards

COMPOSITION OF THE BOARD OF DIRECTORS

1. Main bank

2. Affiliated company or keiretsu

3. Management

4. Government

Auditors

Board of Directors
Venture-capital funds, or funds that invest in new or "start-up" corporation
"Outsiders"

Japanese corporations is composed almost completely of insiders

Concentration of power in the hands of one person

1. Due to the growing role of Japanese corporations at home and abroad, policy formation
became fragmented due to the involvement of numerous ministries.

 Shareholders may exercise their voting rights without attending the annual general
meeting in person.
 All registered shareholders receive the following by mail:
 the agenda for the meeting
 corporation's annual report
 voting card
 Shareholders may vote by proxy, that is, they complete the voting card and return it by
mail to the corporation.

Independent Directors
"Good corporate governance is about 'intellectual honesty' and not just sticking to rules and
regulations, capital flowed towards companies that practiced this type of good governance."

US has the most comprehensive disclosure requirements and a complex, well-regulated system
for shareholder communication.

The board of directors' flagrant disregard for interests of outside shareholders

CORPORATE ACTIONS REQUIRING SHAREHOLDERS APPROVAL

1. Corporate financial data

2. Breakdown of the corporation's capital structure

3. Substantial background information on each nominee to the board of directors

4. The aggregate compensation paid to all executive officers as well as individual compensation
data for each of the five highest paid executive officers

5.all shareholders holding more than 5% of corporation's total share capital

6. Information on proposed mergers and restructurings

7. Proposed amendments to the articles of association

8. Names of individuals and/or companies proposed as auditors

1990

 financial institutions held approximately 43% of the Japanese equity market

 corporations held 25%
 foreigners currently own approximately 3%

A variety of specialized investment funds

Bank
Management
INTERACTION AMONG PLAYERS

REGULATORY FRAMEWORK

KEY PLAYERS IN THE ANGLO-US MODEL

Routine corporate actions

 Payment of dividends and allocation of reserves

 Election of directors; and appointment of auditors

Other common corporate actions

 Capital authorizations
 Amendments to the articles of association and/or charter
 Payment of retirement bonuses to directors and auditors
 Increase of the aggregate compensation ceilings for directors and auditors

Non-routine corporate actions

 Mergers, takeovers and restructuring

Routine corporate actions

 Elections of directors
  Appointment of auditors

Non-routine corporate actions

 Establishment or amendment of stock option plans

 Mergers and takeovers
 Restructurings
 Amendment of the articles of incorporation

SHARE OWNERSHIP PATTERN

KEY PLAYERS IN THE ANGLO-US MODEL

DIAGRAM

REGULATORY FRAMEWORK

Outside Shareholders
ANGLO-US MODEL

 It is characterized by a high level of stock ownership by affiliated banks and companies

 A banking system characterized by strong, long-term links between bank and corporation
 A legal, public policy and industrial policy framework designed to support and promote
"keiretsu"
 Board of directors compose almost solely of insiders
 A comparatively low level of input of outside shareholders

Shareholders
SHARE OWNERSHIP PATTERN

 Management
 Directors
 Shareholders
 Government agencies
 Stock exchanges
 Self-regulatory organizations
  Consulting firms

Keiretsu
If a company's profits fall over an extended period, the main bank and members of the keiretsu
may remove directors and appoint their own candidates to the company's board

 German banks
 Corporate shareholders

CORPORATE ACTIONS REQUIRING SHAREHOLDERS APPROVAL

Routine corporate actions

 Allocation of net income

 Ratification of the acts of the management board for the previous fiscal year
 Ratification of the acts of the supervisory board for the previous fiscal year
 Election of the supervisory board
 Appointment of auditors

Other common corporate actions

 Capital authorizations
 Amendments to the articles of association and/or charter
 Affiliation agreements with subsidiaries
 Increase of the aggregate compensation ceilings for the supervisory board

Non-routine corporate actions

 Mergers, takeovers and restructuring

JAPANESE MODEL
KEY PLAYERS IN THE JAPANESE MODEL

KEY PLAYERS IN THE GERMAN MODEL

  It is characterized by share ownership pf individual, and increasingly institutional,
investors not affiliated with the corporation known as outside shareholders or "outsiders";
 A well-developed legal framework defining the rights and responsibilities of three key
players, namely: management, directors and shareholders; and
 A comparatively uncomplicated procedure for interaction between shareholder and
corporation as well as among shareholders.

1990

 institutional owners (primary banks) held 27% of the German equity market
 corporations held 41%
 foreign investors held 19%
 institutional agents
 pension funds (3%) or individual owners (4%)

Management
Traditionally, the same person has served as both chairman of the board of directors and chief
executive officer of the corporation. In many instances, this practice led to abuses, including:

- Mervyn King

A wide range of institutional investors and financial specialists monitor a corporation's

performance and corporate governance, these includes:

 The German legal and public-policy framework is designed to include the interests of
labor, corporations, banks and shareholders in corporate governance system.
 Several obstacles exist to shareholder participation, especially in terms of banks' power as
depositories and voting agents.
 The majority of German shares are issued in bearer (not registered) form.
 Most shareholders purchase shares through a bank, and banks are permitted to vote the
shares of German they hold on deposit.
 Shareholders must either attend the meeting in person or to be represented in person.

DISCLOSURE REQUIREMENTS
INTERACTION AMONG PLAYERS

2. The increasing internationalization of Japanese corporations made them less dependent on

their domesic market and therefore somewhat less dependent on industrial policy.

COMPOSITION OF THE BOARD OF DIRECTORS

INTERACTION AMONG PLAYERS

 Banks hold long-term stakes in German corporations and bank representatives are elected
to German boards.
 German model prescibes two boards with separate members, German corporations have a
two-tiered board structure consisting of a management board which is composed entirely
of insiders.
 The size of the supervisory board is set by law and cannot be changed by shareholders.
 Voting right restrictions are legal

1. Financial data on the corporation, required on a semi-annual basis.

2. Data on the corporation's capital structure.

3. Background information on each nominee to the board of directors

4. Aggregate data on compensation, namely the maximum amount of compensation payable to

all executive officers and the board of directors.

5. Information on proposed mergers and restructurings

6. Proposed amendments to the articles of association

7. Names of individuals and/or companies proposed as auditors

KEY PLAYERS IN THE JAPANESE MODEL

DIAGRAM

SHARE OWNERSHIP PATTERN

"Insiders"

Funds that target investment in bankrupt or problem corporations

The regulatory framework of corporate governance in the UK is established in parliamentary acts

and rules established by self-regulatory organizations.
  Corporate governance model that tries to remedy shortcomings.
 To evaluate how the "crafted" principles are applied to the "LOGIC" of governance.
 The basic model aims to incorporate not only structural aspects of governance but also
behavioral aspects.
 It also seeks to check

Anglo-Saxon model of corporate governance is a system of supervision and control over the
corporation, functioning in the United States, Canada, Australia and the United Kingdom. The
main feature of this model is to rely on the capital market, as the place of control over the
corporation. Supervision is exercised mostly by investors who expressed theirs favour or
disapproval for the actions of management by the buying/selling shares of the company and
voting during the general meetings of shareholders. In this model, the management shall not be
subject to the strict control within the organization due to the high liquidity of the market. The
relationship between managers and shareholders are short-lived and official.

Resources for current investments are collected on the capital markets and over-the-counter
(OTC) markets. Due to development of large and liquid capital markets, using this model,
companies can be independent from investment banks. Investment banks are rarely used, for
example, in a situation where there is planned takeover (MBO and LBO transactions).

Anglo-Saxon model implies a strong emphasis on the results achieved by the company and
security of their shareholders. Less importance is put on long-term business development.

Key features of the Anglo-Saxon model of corporate governanceedit

 ownership of shares is distributed,

 banks only slightly engage in the operations of the company,
 stringent requirements for accounting and transparency,
 numerous incentive forms for executives, manifested through high salaries, based on
company's results,
 capital is raised on large and liquid capital markets,
 market is an active mechanism of control over the corporation,
 internal supervisory authority is the Board of directors,
 measure of success is the share price and dividend,
 capital markets are characterized by high transparency,
 takes into account the perspective of the increase value for the shareholder,
 growing strength of concentrated share ownership particularly pension funds and
institutional investors,
 biggest role is assigned to the implementation of the goals and objectives of shareholders.

Corporate Governance Models

The Corporate governance models are broadly classified into following categories:

1. Anglo-American Model
2. The German Model
3. The Japanese Model
4. Social Control Model

Advertisement

Anglo-American Model
Under the Anglo-American Model of corporate governance, the shareholder rights are
recognised and given importance. They have the right to elect all the members of the Board and
the Board directs the management of the company. Some of the features of this model are:

 This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate

governance being the basis of corporate governance in Britain, Canada, America,
Australia and Common Wealth Countries including India
 Directors are rarely independent of management
 Companies are run by professional managers who have negligible ownership stake.
There is clear separation of ownership and management.
 Institution investors like banks and mutual funds are portfolio investors. When they are
not satisfied with the company’s performance they simple sell their shares in market and
quit.
 The disclosure norms are comprehensive and rules against the insider trading are tight
 The small investors are protected and large investors are discouraged to take active role
in corporate governance.

German Model
This is also called European Model. It is believed that workers are one of the key stakeholders
in the company and they should have the right to participate in the management of the
company. The corporate governance is carried out through two boards, therefore it is also
known as two-tier board model. These two boards are:

1. Supervisory Board: The shareholders elect the members of Supervisory Board.

Employees also elect their representative for Supervisory Board which are generally
one-third or half of the Board.
2. Board of Management or Management Board: The Supervisory Board appoints and
monitors the Management Board. The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.

Japanese Model
Japanese companies raise significant part of capital through banking and other financial
institutions. Since the banks and other institutions stakes are very high in businesses, they also
work closely with the management of the company. The shareholders and main banks together
appoint the Board of Directors and the President. In this model, along with the shareholders, the
interest of lenders is recognised.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder representation
in the board. According to this model, creation of Stakeholders Board over and above the
shareholders determined Board of Directors would improve the internal control systems of the
corporate governance. The Stakeholders Board consists of representation from shareholders,
employees, major consumers, major suppliers, lenders etc.

Indian Model
In India there are mainly three types of companies’ viz. private companies, public companies
and public sector undertakings. Each of these companies has distinct kind of shareholding
pattern. Thus the corporate governance model in India is a mix of Anglo-American and German
Models.
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