Models of

CORPORATE
GOVERNAN
CE
CHAPTER 10
 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.

• There is no one model of corporate governance which is universally

acceptable as each model has its own advantages and disadvantages.

• Following are some of the models of corporate governance:

Three Models of Corporate Governance from
Developed Capital Markets

Anglo-US Model

Japanese Model

German Model

Indian model
 ANGLO-US MODEL
The Anglo-US model is characterized by share ownership
of 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.
KEY
PLAYERS
MANAGEMENT SHAREHOLDERS

BOARD OF DIRECTORS
“Corporate Governance Triangle”
• This model is also called an ‘Anglo-Saxon model’ and is used as basis of
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. Moreover, 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).
 The-Anglo American Model
Elect
fd Shareholders
Board of Directors
(Supervisor) Stakeholders

Appoints and
supervises
Officers
(Manager)

Monitors
Manage &
regulates Regulatory/Leg
Creditors
al system
Company
Composition of the Board of Directors

Insiders (executive director)

Is a person who is either employed by the corporation
who has significant business relationship with corporate
management.

Outsiders (non-executive director or

independent director)
Is a person/institution which has no direct
relationship with the corporation or management
 The same person has served as both chairman
of the BOD and CEO which led to ff. abuses:
 Concentration of power in the hands of one person
 Concentration of power in a small group of persons
 Management and/or the board of directors’
attempts to retain power over long period of time
 The board of directors’ flagrant disregard for the
interests of outside shareholders
CORPORATE ACTIONS REQUIRING
SHAREHOLDERS APPROVAL
The 2 routine corporate actions requiring shareholders approval under the
Anglo-uS model are:
1. Election of Directors
2. Appointment of Auditors

Non-routine corporate actions which also require shareholder approval include:

3. Establishment or amendment of stock option plac(because these plans affect
executive and board compensation)
4. mergers and takeovers
5. Restructuring
6. Amendments of the articles of incorporation
INTERACTION AMONG
PLAYERS
• The Anglo-US model establishes a complex, well-regulated
system for communication and interaction between
shareholders and corporations. A wide range of regulatory and
independent organizations play an important role in corporate
governance.
• Shareholders may exercise their voting right without attending
the annual general meeting in person
• All registered shareholders received the following by mail(the
agenda for the meeting including background information on all
proposals“ proxy statements", the corporation's annual report
and a voting card.
• Shareholders may vote by proxy
In the Anglo-US model, a wide range of institutional
investors and financial specialists monitor a corporation's
performance and corporate governance. These include:
1. A variety of specialized investment funds
2. Venture-capital funds, or funds that invest in new or start-up
corporation
3. Rating Agencies
4. Auditors
5. Funds that target investment in bankrupt or problem
corporation.

In contrast, One bank serves many of these functions in the Japanese and
German models. As a result, one important element of both of these
models is the strong relationship between a corporation and its main
bank.
JAPANESE MODEL
The Japanese model is characterized by a high level of stock
ownership by affiliated banks and companies
● a banking system characterized by strong, long-term links
between banks and corporation
● A legal, public policy and industrial policy framework designed
to support and promote "keiretsu"
● BOD composed of solely insiders and comparatively low level
of input of outside shareholders
● Equity Financing is important for Japanese Corporations
● Insiders and their affiliates are the major shareholders in most
Japanese corporations.
 The Japanese Model
Provides managers, monitors
and acts in emergencies
Supervisory Board
Appoint (including President) Provides
managers
Ratifies the President’s decision

President

Shareholders Consults Main bank

Executive Management
(Primarily Board of Directors)

Managers
Provides Loan
Own
Company
Owns
KEY PLAYERS
The Japanese system of Corporate Governance is many-sided, centering around a
main bank and a financial/industrial network or keiretsu

● The bank provides its corporate clients with loans as well as services related to
bond issues, equity issues, settlement accounts and related consulting services.
● The main bank is generally a major shareholder in the corporation.
● In the US, Anti-monopoly prohibits one bank from providing this multiplicity of
services
● Many Japanese corporation also have a strong financial relationships with a
network of affiliated companies. These networks, characterized by crossholding
of a debt and equity, trading of goods and services, and informal business
contacts, are known as Keiretsu
● Government-directed industrial policy plays a key role in Japanese Governance,
this includes official and unofficial representation on corporate boards, when a
corporation faces financial difficulty
 In the Japanese model, the four key players are:
1. Main Bank(a major inside shareholder)
2. Affiliated company or keiretsu(a major inside
shareholder)
3. Management
4. Government

Interaction among these players serves to link relationship rather balance

power, as in the case of Anglo-US Model
- non-affiliated shareholders have little or no voice in japanese Governance
-As a result, there are few truly independent directors(representing outside
shareholders)
Share Ownership Pattern
In Japan, Financial institutions and corporations firmly hold
ownership of the equity market.

Insurance companies
43 %
Banks

Corporations 25 %
Foreign 3%
Composition of the board of directors
Executive managers – the heads of major divisions of the
company and its central administrative body.

COMMON PRACTICE:
• If a company’s profit fall over an extended period, the
main bank and member of the keiretsu may remove
directors and appoint their own candidates to the
company’s board.
• Appointment of retiring government bureaucrats to
corporate boards
• The average japanese board contains 50 members
 GERMAN MODEL
governs
German Austrian
Corporations Corporations

Some elements also apply

Netherlands France Belgium Scandinavia
• This is also called as 2 tier board model as there are
2 boards viz. The supervisory board and the
management board. It is 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 labour
unions.
UNIQUE ELEMENTS of the GERMAN
MODEL
Two-tiered Board Structure
Which means it consist of a management board and supervisory
board. The 2 boards are completely distinct; no one may serve
simultaneously on a corporations management board.

Size of supervisory board

It is set by law cannot be change by shareholders

Voting right restrictions

Voting right restrictions are legal; these limit a shareholder
to voting a certain percentage of the corporation’s total
share capital, regardless of share ownership position
BOARD COMPOSITIONS
Two-tiered Board
Responsible for daily
Management Board management of the company

Responsible for appointing the

Supervisory Board
management board

Employees/labour Responsible for appointing

Union & members to the supervisory
Shareholders board
KEY
PLAYERS
BANKS
Corporate shareholders
Banks usually play a multi- role as shareholder, lender, issuer
of both equity and debt, depository. German and Austrian
corporations use the abbreviations AG following their names
Share Ownership Pattern
Corporations 41%
Banks 27%
Pension Funds 3%
Individual Owners 4%
Foreign investors 19%
Disclosure Requirements
❶ Corporate financial data, requires on a semi-annual basis.
❷ Data on capital structure
❸ Limited information on each supervisory board nominee,
including name, hometown and occupation/affiliation.
❹ Aggregate data for compensation of management and
supervisory board.
❺ Any substantial shareholder holding more than 5% of the
corporation’s total share capital.
❻ Information on proposed mergers and restructurings.
❼ Proposed amendments to the articles of association.
❽ Names of individuals and/or companies proposed as
auditors
Corporate Actions Requiring
Shareholder Approval
❶ Allocation of net Income (payment of dividends and

reserves.
❷ Ratification of the acts of the management board
for the previous fiscal year.
❸ Ratification of the acts of the supervisory board for
the previous fiscal year.
❹ Election of the supervisory board.
❺Appointment of auditors.
 Indian model
• In ancient time, the king was always considered
as a the representer of the people. The trust
ship principles also followed.
• •In the modern Indian corporate are governed
by the Company's Act of 1956 that followed less
or more the UK model.
• •The pattern of private companies is mostly
that of closely held or dominated by a founder,
his family and associated.
 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.
• Features for government corporation
• •Equity are owned wholly or substantial (+51%) by the
government.
• •Good deal of political and bureaucratic influence over
the management.
• •Organization often treated as Social Entity.
• •The Board of Directors are appointed by the controlling
administrative ministry.
• •Excessive emphasis on observing rules, regulation and
guidelines.