Modelsof CG

ROCK CENTER FOR CORPORATE GOVERNANCE
CASE: CG-11
DATE: 01/15/08
MODELS OF CORPORATE GOVERNANCE:

WHO’S THE FAIREST OF THEM ALL?
In 2007, corporate governance became a well-discussed topic in the business press. Newspapers
produced detailed accounts of corporate fraud, accounting scandals, excessive compensation, and
other perceived organizational failures—many of which culminated in lawsuits, resignations, and
bankruptcy. The stories ran the gamut from the shocking and instructive (epitomized by Enron
and the elaborate use of special purpose entities and aggressive accounting to distort its financial
condition in 2001) to the shocking and outrageous (epitomized by Tyco partially funding a $2.1
million birthday party in 2002 for the wife of CEO Dennis Kozlowski, which included a vodka-
dispensing replica of the statue David). Central to these stories was the assumption that
somehow corporate governance was to blame. That is, there was a functional failure in the
system of checks and balances established to prevent abuse by executives.
The need for a 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 benefit themselves, with the cost of these actions borne by the owners.1
Economists refer to such a situation as the agency problem. To lessen agency costs, some type
of control or monitoring system is put in place in the organization. At a minimum, the
monitoring system consists of a board of directors to oversee management on behalf of
shareholders and an external auditor to express an opinion on the reliability of financial
statements. In the majority of companies, however, governance systems are influenced by a
much broader group of constituents, including creditors, labor unions, customers, suppliers,
investment analysts, the media, and regulators (see Exhibit 1). In order for governance systems
to be economically effective, they should decrease agency costs above and beyond the direct cost
of compliance and the indirect cost on managerial decision making.
1 This issue was the basis of the classic discussion in Berle and Means, The Modern Corporation and Private
Property, (New York: Harcourt, Brace and World, 1932).
Professor David F. Larcker and Brian Tayan prepared this case as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
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Models of Corporate Governance: Who’s the Fairest of Them All? CG-11 p. 2
Broad standards of governance are required by regulatory bodies, based on the recommendations
of expert panels. For example, the Cadbury Committee—commissioned by the British
government “to help raise the standards of corporate governance and the level of confidence in
financial reporting and auditing”—issued a Code of Best Practices in December 1992 that in
many ways provided a benchmark set of recommendations on governance.2 These standards set
the basis for listing requirements on the London Stock Exchange and were in large part adopted
by the New York Stock Exchange (NYSE). Compliance with these standards, however, did not
always translate into effective governance systems. For example, Enron was compliant with
New York Stock Exchange requirements for an independent audit and compensation committee
and a majority of independent directors, but it still failed spectacularly.
Over time, a series of formal regulations and informal guidelines were proposed to address
perceived shortcomings in governance systems as they were exposed. The most important
formal legislation relating to governance was the Sarbanes-Oxley Act of 2002, which mandated a
series of requirements to improve corporate controls and reduce conflicts of interest.
Importantly, CEOs and CFOs found to have made material misrepresentations in the financial
statements were made subject to criminal penalties. Despite these efforts, corporate failures
stemming from deficient governance systems still continued. In 2005, Refco, a large U.S.-based
foreign exchange and commodity broker, filed for bankruptcy after revealing that it had hidden
$430 million in loans made to its CEO. The disclosure came just two months after the firm
raised $583 million in an initial public offering.
Several third-party organizations—such as The Corporate Library, Governance Metrics

International, and Institutional Shareholder Services (ISS)—attempted to protect investors from
these failures by publishing governance ratings on individual companies. These rating agencies
used alphanumeric or numeric systems that ranked companies according to a set of criteria that
they believed (in aggregate) measured effectiveness. Companies with high ratings were
considered less risky and most likely to grow shareholder value. Companies with low ratings
were considered the least safe and had the highest potential for failure or fraud. The accuracy of
these ratings, however, had not been clearly demonstrated, and critics alleged that they
encouraged a “one size fits all” approach to governance.3 The potential shortcomings of these
ratings were exhibited in the case of HealthSouth, which was accused in 2003 of systematically
making false accounting entries and overstating earnings by a total of $1.4 billion between 1996
and 2002. At the time, the company had an ISS rating that placed it in the top 35 percent of
Standard & Poor’s 500 companies and the top 8 percent of its industry peers.4
Despite the difficulty of evaluating corporate governance structures, investors still perceived
strong governance to be important. In a widely touted research report published by McKinsey &
Company in 2002, nearly 80 percent of institutional investors said that they would pay a
premium for a well-governed company. The size of the premium varied by market, from 11
percent for Canadian companies to around 40 percent for companies in countries with weak
2
Cadbury Committee, Report of the Committee on the Financial Aspects of Corporate Governance, (London: Gee,
1992).
3
See “Corporate Governance Ratings: Got the Grade… What was the Test?” GSB No. CG-08.
4
Cited in Jeffrey Sonnenfeld, “Good Governance and the Misleading Mythos of Bad Metrics,” Academy of
Management Executive, February 2004, Vol. 18 Issue 1, pp. 108-113.
regulatory environments (such as Morocco, Egypt, and Russia).5 However, there is considerable
controversy among academics and executives regarding whether strong governance systems
actually resulted in higher market valuations, as the survey indicated. Nor had academics clearly
demonstrated which specific control mechanisms led to effective governance in the first place.
GLOBAL CORPORATE GOVERNANCE
Standards of corporate governance were not uniform around the world, owing in large part to
differences in legal tradition, social and cultural values, and the structure of capital markets in
individual countries. The United States and Britain had adopted a shareholder-centric model of
corporate governance (often referred to as the Anglo-Saxon model). This model emphasized the
increase in shareholder value, in compliance with national laws and regulations, as the primary
objective of the corporation. A unitary board of executive and non-executive directors had
oversight control in the Anglo-Saxon model and was subject to considerable influence by the
chief executive officer. The Germans, along with several other European nations, adopted a
stakeholder-centric model of governance. This model placed more emphasis on the importance
of non-shareholder constituents—labor unions in particular—and reflected the large influence of
controlling owners and major German national banks. The Germans implemented a two-tiered
board structure that more clearly separated oversight from management. The Japanese model
was built around business relationships, with Japanese banks, customers, and suppliers all
influencing board-level decisions. The Korean model had its roots in that country’s emergence
from the Korean War, whereas the Chinese model reflected a transition from communism to a
capitalistic system. The Indian model was influenced by a history of powerful family ownership.
Some organizations had made efforts to compare the governance systems across national
boarders. The governance rating agencies Institutional Shareholder Services and Governance
Metrics International had developed international governance scores. Companies in the U.S. and
Europe often received the highest scores while companies in Japan and those in developing
countries generally received lower scores. Nevertheless, there were many exceptions to this
trend, as companies from around the world moved at different speeds to adopt global standards
of governance (see Exhibit 2 for the ratings scores on selected international corporations).
United States
In the United States, the board of directors served as the most important controlling mechanism
to ensure that the management of publicly traded corporations acted in the interest of
shareholders. The chief executive officers of most U.S. corporations were professional
managers. That is, the chief executive officer was typically not a founder or controlling owner
but instead a professional manager hired by the board of directors to run the company. In fact,
after Bill Gates stepped down as the CEO of Microsoft in 2000 and Maurice “Hank” Greenberg
stepped down as the CEO of American International Group in 2005, none of the 30 companies in
the Dow Jones Industrial Average had a CEO who was a founder or a member of the founding
5
McKinsey & Company, McKinsey Global Investor Opinion Survey on Corporate Governance, 2002,
http://www.mckinsey.com/clientservice/organizationleadership/service/corpgovernance/pdf/GlobalInvestorOpinio
nSurvey2002.pdf (December 7, 2007).
family.6 Even Google, 10 years old and having recently completed a successful IPO, brought in
an outside professional to serve as formal chief executive officer (Eric Schmidt, previously the
CEO of Novell Inc.), although founders Sergey Brin and Larry Page continued to play active
roles serving as president of technology and president of products, respectively.
The board of directors provided oversight of the actions of professional management to protect
the financial interests of shareholders. The board had four primary responsibilities: the selection
of the chief executive officer; the selection of candidates for the board of directors; evaluation
and review of the company’s strategy, operational execution, capital structure, and published
financial statements; and ensuring that the company was in compliance with all applicable laws
and regulations. As such, U.S. boards served both an advisory role and a compliance role.
The board of directors typically included executive and non-executive directors. Executive
directors included the chief executive officer or any other senior official at the company who
also served on the board. For example, at Johnson & Johnson, CEO William Weldon and
Executive Committee Member Christine Poon were both executive directors on the board in
2007. Executive directors were limited in the committees they served on because of their roles
as insiders. For instance, they generally did not serve on the audit or compensation committees.
As a result, the majority of directors at U.S. corporations were non-executive directors, often the
heads of unaffiliated corporations, nonprofit organizations, or universities. Non-executive
members were typically selected based on their expertise in issues that were of strategic
importance for the company or for specialized financial knowledge. For example, Johnson &
Johnson’s board of directors had six non-executive directors who were current or retired CEOs
of major corporations (including Citigroup, Kellogg, and PepsiCo). These individuals were
presumably selected because of their strategic, operational or financial knowledge. Johnson &
Johnson’s board also had four non-executive directors who were university or health
organization officials (including a former U.S. surgeon general and a professor at Massachusetts
Institute of Technology). These individuals were presumably selected because of their expertise
in science, research and public policy (see Exhibit 3 for the composition of Johnson & Johnson’s
board).
In order to ensure that the board of directors acted without excessive influence from senior
management, NYSE listing rules required that non-executive directors meet outside the presence
of executive directors on a scheduled basis. Furthermore, NYSE rules required that the company
have a majority of independent board members. Independence was a subjective criterion, and
companies were given discretion in defining their own particular standards. In general,
independent directors were those whose objectivity would not be compromised by material
business, charitable or other relationships with the company or company officials. Most
companies believed that all of their non-executive directors were also independent, although
circumstances could arise in which a director’s independence might be weakened. For example,
all non-executive directors at Johnson & Johnson met the company’s independence standards.
However, one could imagine a situation in which the independence of Charles Prince, former
chairman and CEO of Citigroup, might be compromised if Citigroup was involved in one of the
6
Although Cornelius Vander Starr was the founder of the original underwriting companies that became AIG,
Greenberg had been hired as CEO in 1967 when the holding company American International Group was formed.
company’s financing or acquisition deals. Alternatively, the involvement of the Massachusetts

Institute of Technology in major clinical research might be seen as compromising the
independence of non-executive director Susan Lindquist, who was a professor at that university.
As a result, activist investors dissatisfied with a company’s performance sometimes challenged
the independence of certain directors and sought to have them removed.
In some U.S. corporations, the founder or family member who retained a significant ownership
position in the company also served on the board. For example, Edsel B. Ford II and William
Clay Ford Jr. were both on the board of directors of Ford Motor Company, holding a 5.9 percent
and 4.8 percent stake in the company’s shares, respectively.7 Edsel and William were cousins to
each other and the great-grandchildren of company founder Henry Ford. Approximately one-
third of companies in the Standard & Poor’s 500 Index had a founder or descendent of the
founder in senior management or on the board of directors.8
Sometimes founding shareholders also exerted significant influence over the company by
holding a separate class of stock which had increased voting rights. For example, six
descendents of Katherine Graham, including Chairman and Chief Executive Officer Donald
Graham, owned 100 percent of the Class A shares of The Washington Post Company. Katherine
Graham’s father had purchased the Washington Post newspaper out of bankruptcy in 1933, and
later Katherine assumed the position of publisher and chief executive officer, taking the company
public in 1971. In doing so, she became the first female CEO of a Fortune 500 company.9 Even
as a public company, the Washington Post was considered a controlled company by the SEC,
because of its dual share class structure. Seven of the company’s 10 directors were exclusively
nominated and voted on by holders of the company’s 1.7 million Class A shares; the remaining
three directors were voted on by holders of the company’s 7.8 million Class B shares.10 As a
result, even though a public shareholder could accumulate a majority of the company’s
outstanding shares, s/he could not wrest substantive control from the Graham family and its
chosen directors.
Dual share classes could be structured in several alternative ways to ensure that one class of
shareholders maintained control. For example, before the sale of the Dow Jones Company in
2007, the Bancroft family owned all Class B shares, which were afforded 10 times as many votes
as publicly traded Class B shares. Approximately 9 percent of publicly traded corporations in
the U.S. had some form of dual class structure.11 Shareholder activists and governance rating
agencies opposed dual class shares, which they believed led to an unnecessary entrenchment of
management.
7
Ford Motor Company, 2006 form DEF14-A, filed with the Securities and Exchange Commission, April 5, 2007.
8
Cited in: Ashiq Ali et al, “Corporate Disclosures by Family Firms,” Journal of Accounting and Economics, Vol.
44, Issues 1-2, September 2007, pp. 238-286.
9
See Katharine Graham, Personal History, (New York: Knopf, 1997).
10
The Washington Post Company, 2006 form DEF14-A, filed with the Securities and Exchange Commission,
March 23, 2007.
11
Scott Smart et al, “Why Dual-Class Shares Don’t Add Up,” Directorship, Vol. 33, Issue 4, September 2007, pp.
14-15.
In many instances, significant shareholders who were not founding members of the company
also served on the company’s board. For instance, a hedge fund or institutional investor might
purchase a material percentage of the company’s outstanding shares and, either through hostile
or cooperative means, be nominated to the board.12 In theory, the investor should seek board
representation in proportion to his or her ownership position in the company; in practice, many
activist investors sought board representation beyond their ownership percentage. In 2006,
hedge fund Trian Fund Management, run by activist investor Nelson Peltz, successfully won 2 of
12 board seats through hostile efforts after taking a 5.5 percent position in Heinz Co.
With rare exceptions, major mutual fund companies like Fidelity, the Capital Group, and
Vanguard, and large pension funds like California Public Employees’ Retirement System
(Calpers) did not sit on the board of directors even though such companies often held 3-10
percent positions in many publicly traded companies. With limited exceptions, labor union
representatives also did not sit on the boards of American corporations. Both of these
shareholder groups sought to maintain influence through the proxy voting process rather than
through direct board representation.
External Auditor
Although the board of directors was the most prominent controlling force in corporate
governance, the external auditor also served a critical role by ensuring the integrity of published
financial statements. As of 2007, there were four major auditing firms (known as “the Big
Four”): PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG. The
previous fifth major accounting firm, Arthur Andersen, closed in 2002 after the bankruptcies of
Enron and WorldCom, both of which were Arthur Andersen clients.13
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 Generally Accepted Accounting Principles (GAAP). If the auditor found no
reason for concern that the statements were materially misleading (fraud or error), the firm
expressed an unqualified opinion that accompanied the financial statements in the annual report.
The unqualified opinion generally stated that “the financial statements presented fairly the
financial condition, the results of operations, and the cash flows of the company [for specific
years], in accordance with accounting principles generally accepted in the United States of
America.” The auditor was also required to specify in the opinion if it did not believe that the
company could continue to operate profitably as a going concern. Qualified opinions and going
concern warnings were very infrequent.
After the passage of Sarbanes-Oxley, external auditors were also required to perform an
assessment of the company’s internal controls, in accordance with Section 404 of the law.
Management, too, was required to perform this same assessment and certify that the financial
report “did not contain any untrue statement of a material fact or omit to state a material fact”;
12
See “Sovereign Bancorp and Relational Investors: The Role of the Activist Hedge Fund,” GSB No. CG-06.
13
In 2002, Arthur Anderson was found guilty of obstruction of justice for the destruction of documents relating to
its audit of Enron. As a result of the verdict, the firm lost its SEC license to serve as external auditor. In 2005,
however, the U.S. Supreme Court overturned the verdict on procedural grounds. Nevertheless, the reversal was
too late to salvage the company’s business.
that it “fairly presented in all material respects the financial condition, results of operations and
cash flows of the company”; and that the company “established procedures that maintained
effective internal control over financial reporting.” If a material misstatement or deficiency was
subsequently discovered, the chief executive officer and chief financial officer could be subject
to criminal liability, punishable by fines and prison.
As such, the external auditor was not responsible for the presentation or accuracy of financial
statements but instead served to reduce the risk that statements were misleading by performing a
check on management and its financial reporting procedures. Auditors were required to report
directly to the audit committee of the board of directors to further maintain independence from
the influence of management.
Best practices for corporate governance often called for limits on consulting and non-audit
related services performed by the external auditor. Proponents of this standard asserted that the
fraudulent accounting practices of Enron, WorldCom and others were encouraged in part by
conflicts of interest that prevented auditors from challenging the aggressive accounting policies
of these companies. They argued that, because the fees generated by these consulting contracts
substantially exceeded fees earned for audits and corporate tax preparation, auditors did not have
incentive to stand up to management for fear of losing lucrative relationships. Section 202 of the
Sarbanes-Oxley Act addressed some of these conflicts by prohibiting auditors from performing
certain non-audit-related services for their audit clients, such as bookkeeping, financial
information system design, fairness opinions, and other appraisal and actuarial work.
Shareholder activists and governance ratings firms believed that, as rule of thumb, the fees that
audit firms received from a client for consulting work should not exceed audit and tax-related
fees. As an example, in 2000, IBM paid its auditor PricewaterhouseCoopers $12.2 million in
audit and audit-related fees, $7.9 million in tax consulting fees, and $41.3 million in other fees.14
However, in 2006, it paid PricewaterhouseCoopers $53.7 million in audit and audit-related fees,
$6.9 million in tax consulting fees, and only $1.4 million in other fees.15 IBM’s substantial audit
cost in 2006 was due largely to the increased cost of compliance with Sarbanes-Oxley.
Many organizations separately employed internal auditors, who were company employees
responsible for identifying weaknesses in internal controls and making recommendations for
improvement. Senior executives relied in part on the internal auditor’s assessment when
certifying the financial statements. Internal auditors often had dual reporting to the chief
financial officer and the audit committee of the board.
Governance Regulations and Procedures

The board of directors and company management were responsible for compliance with
applicable state and federal law as well as regulations imposed by the Securities and Exchange
Commission. Congress created the SEC through the Securities and Exchange Act of 1934 to
oversee the proper functioning of primary and secondary financial markets, with an emphasis on
the protection of security holder rights and the prevention of corporate fraud. Among its various
14
International Business Machine, 2000 form DEF 14-A, filed with the Securities and Exchange Commission,
March 12, 2001.
15
International Business Machine, 2006 form DEF 14-A, filed with the Securities and Exchange Commission,
March 12, 2007.
powers, the SEC was granted the power to regulate securities exchanges (such as the New York
Stock Exchange, NASDAQ, and the Chicago Mercantile Exchange), to bring civil enforcement
actions against companies or executives who violated securities laws (through false disclosures,
insider trading, and fraud), and to oversee the proxy solicitation and annual voting process.
While rules relating to the proper functioning of securities markets were regulated by the SEC,
the majority of corporate governing rights were granted by state law. State law granted the board
of directors the power to create and amend company bylaws. Through the bylaws, the board
defined the rights and obligations of corporate officers and directors and determined certain
governance procedures. These procedures included the process for nominating and electing
candidates to the board, the method by which the board conducted business and voted on
matters, and the creation of the rules by which the shareholder meeting would be conducted. The
board of directors was also granted the right to create special subcommittees to focus on key
functional areas.
Approximately half of all publicly traded U.S. companies were incorporated in their state of
origin. For example, in 2007, Whole Foods Market was incorporated in the state of Texas,
where its first stores were located. Likewise, medical device company Stryker was incorporated
in the state of Wisconsin where it was founded. The other half, however, were incorporated in
the state of Delaware. Delaware had the most developed body of case law, which gave
companies greater clarity on how corporate governance and liability matters might be decided.
Furthermore, trials over corporate matters were heard by a judge rather than a jury, which
companies felt reduced liability risk. Also, Delaware had fairly lenient interest laws, making it
attractive for lenders, in particular credit card companies such as Discover and Capital One.
The board of directors was also responsible for ensuring that companies complied with the listing
requirements of the exchanges on which its securities traded as well as the Sarbanes-Oxley Act
of 2002. Among the listing requirements of the New York Stock Exchange, the company had to
have at least 400 shareholders, maintain a minimum market value and trading volume in its
securities, as well as demonstrate compliance with certain governance standards. The listed
company’s board was required to have a majority of independent directors; the compensation
committee of the board had to be composed entirely of independent directors; the audit
committee had to have a minimum of three members all of whom were “financially literate” and
at least one of which was a “financial expert”; and the chief executive officer had to certify
annually that his or her company was in compliance with NYSE requirements.
As a result, companies were subject to a complicated intersection of corporate law, securities

law, and listing requirements. For activist investors, the web of regulations provided both
challenges and opportunities as they sought to further their causes and impose change on the
companies they targeted. For example, the activist fund Relational Investors—in an attempt to
stop a three-way deal between Sovereign Bancorp, Banco Santander, and Independence
Community Bank—filed a petition with the SEC, sought to overturn a NYSE rule, and also filed
a lawsuit in the state of Pennsylvania.16 Likewise, the American Federation of State, County,
and Municipal Employees (AFSCME) pension plan, seeking to gain the right to directly
nominate directors to the board of AIG, petitioned the SEC for the right to include a shareholder
16
See “Sovereign Bancorp and Relational Investors: The Role of the Activist Hedge Fund,” GSB No. CG-06.
proposal on the matter on AIG’s annual proxy. When the SEC sided with the company in
rejecting the proposal, the AFSCME filed a lawsuit in federal court in New York to force the
issue, which it lost in the trial but subsequently won on appeal.
Liability
State law treated a corporation as a “person” that had legal standing to sue and be sued,
independent from the shareholders in the company. This legal distinction between the company
and its shareholders protected shareholders from personal liability for company obligations and
for company misconduct. For example, if a company could not meet its required debt payments
or failed to fulfill the terms of a signed contract, the offended party could not sue the
shareholders for recovery.
Management and directors too were protected from personal liability for company misbehavior.
They could, however, be sued for their own personal actions, even when carried out in a
professional capacity. For example, a company director could be personally sued for committing
wrongful acts, such as breach of company trade secrets, misallocation of corporate funds, and the
issuance of incorrect statements. Also, company officials could be sued for employment-related
claims, including wrongful dismissal, failure to promote, sexual harassment, and other violations
of anti-discrimination laws. Companies often purchased directors and officers liability insurance
(D&O insurance) to reimburse officials for such liabilities.17
The most serious lawsuits filed directly against executives and directors, however, were claims
of fraud, which were explicitly excluded from coverage under D&O insurance. Fraud was
significantly more serious than a wrongful act in that it involved an intent to mislead or defraud.
For example, the SEC prosecuted illegal insider trading lawsuits on the basis of fraud, claiming
that company executives made misleading statements to the public about their company’s
prospects with the intent to profit from an artificially high stock price. Illegal insider trading was
punishable with jail time and financial penalties up to three times the profit gained or loss
avoided from such activity. For example, in 2007, Joseph Nacchio, former chairman and chief
executive officer of Qwest, was found guilty of insider trading for selling over $100 million of
Qwest shares in early 2001 at around $35 per share, just months before the stock fell under $10
and then much lower. Nacchio was sentenced to six years in prison and ordered to pay $19
million in fines and $52 million in forfeitures.
United Kingdom
Of all the European models of corporate governance, the British model shared the most
similarities with the U.S. model. The British model, like the U.S. model, was born out of
common law. That is, precedent was more influential in determining governance structure than
detailed statutes passed by legislative bodies. For example, the Companies Act 1985, which
consolidated seven Companies Acts passed by Parliament between 1948 and 1983, imposed very
few governance requirements on companies. Among them, companies were required to have a
board (with a minimum of two directors for publicly traded companies) and the board was
responsible for certain administrative functions, including the production of annual financial
17
A study by Black, Cheffins, and Klausner (“Outside Director Liability,” Stanford Law Review, Vol. 58, pp. 1055-
1159, 2006) demonstrated that directors almost never lose personal money from shareholder lawsuits.
reports. The Act did not specify a required structure for boards, nor did it mandate procedures
for conducting business. Such rules were to be decided by the company’s shareholders through
the company’s articles of association. The tradition of common law in both the U.K. and the
U.S. led to a great deal of flexibility in the development of corporate governance standards in
these two countries, which together were referred to as the Anglo-Saxon model.
In response to broad shareholder assertions that governance standards afforded too much control
to company executives, the British government commissioned the Cadbury Committee in the
early 1990s to provide a benchmark set of recommendations on governance. The committee was
headed by Sir Adrian Cadbury, great-grandson of John Cadbury, founder of the British
confectionary company. The final report of the committee recommended a set of self-regulated
standards of governance known as the Code of Best Practices. The best practices included the
separation of the chairman and chief executive officer titles, the inclusion of independent
directors on the board, the reduction of conflicts of interest at the board level due to business or
other relationships, an independent audit committee, and a review of the effectiveness of the
company’s internal controls (see Exhibit 4 for the 19 recommendations of the Code of Best
Practices). The standards of the Cadbury Committee set the basis for the standards for the
London Stock Exchange.
Publicly traded companies, however, were not legally required to adopt these standards. Instead,
they were required to issue an annual statement to shareholders stating whether they were in
compliance with the Code or, if not, their reasons for noncompliance. The practice of comply or
explain put the burden on public shareholders to lobby for change if they deemed the company’s
explanation for noncompliance unacceptable. Supporters of the comply-or-explain approach
thought that it provided an appropriate mechanism for encouraging the adoption of sound
governance standards without legally mandating them. The vice chairman of the Institute of
Chartered Accountants of Scotland offered his praise: “It will be quite easy to see which
companies are cocking a snook…. It’s the reverse of Gresham’s Law: good practices should
drive out bad.”18
Critics of the Cadbury Committee report claimed that the voluntary adoption of governance
practices did not go far enough to raise oversight standards. A representative of the British
Labour party called the Code “rather vague” and a “recipe for inactivity.” She went on to say
that “practical guidelines should have been laid down.”19 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: “If it becomes clear there isn’t compliance, then there
should be legislation.”20
At the request of the British government, former investment banker Sir Derek Higgs published a
report in 2003 that evaluated the role, quality and effectiveness of non-executive directors. The
recommendations in the so-called Higgs Report were combined with those of the Cadbury
Committee in 2003 in what became the Combined Code. Notable recommendations of the Higgs
Report were that at least half of the board of directors should be non-executive directors, that the
18
Richard Waters, “The Cadbury Report: Self-regulation seen as the way forward,” Financial Times, May 28, 1992.
19
Alison Smith, “The Cadbury Report: Labour attacks voluntary approach,” Financial Times, May 28, 1992.
20
Norma Cohen, “Criticisms of Cadbury Report Emerge,” Financial Times, June 11, 1992.
board should appoint a lead independent director who serves as a liaison with shareholders, the
nomination committee should be headed by a non-executive director, and executive directors
should serve not more than a six-year term.21 The Higgs Report also advised boards to
“undertake a formal and rigorous annual evaluation of its own performance and that of its
committees and individual directors.”22 These standards were to be included in the annual
comply-or-explain report.
Higgs believed that the elevated status of non-executive directors on the board would be “pivotal
in creating conditions for board effectiveness.”23 Together, the Cadbury and Higgs reports had
the effect of shaping the board of directors into a monitoring and control body as much as a
strategy-setting body.24
According to a survey by accounting firm Grant Thornton, two-thirds of the U.K.’s 350 largest
companies did not fully comply with the provisions of the Combined Code. The most frequent
areas of noncompliance were: failure to disclose the terms and conditions by which non-
executive directors were appointed (45 percent); audit committee did not have at least one
member with relevant financial experience (21 percent); and the audit committee did not review
the effectiveness of internal auditors (21 percent).25 For example, EasyJet PLC, in its 2006
annual report, stated that it was in compliance with the Combined Code, with the exception of
four areas: specific option grants prior to 2000 did not have performance features attached to
them; the company did not have a senior independent director during the entire year; non-
executive directors no longer serving on the board of directors were not required to hold shares
from exercised options for one year; and the chairman of the board served on the audit,
remuneration, and nominating committees for part of the year (see Exhibit 5 for the EasyJet PLC
2006 comply or explain report).26
Germany
German law mandated that corporations operate under a two-tiered board structure which
separated the oversight and management functions. The management board (Vorstand) was
responsible for day-to-day decision making on such matters as product development,
manufacturing, finance, marketing, distribution and supply chain. The management board was
overseen by the supervisory board (Aufischtsrat), which was responsible for appointing members
to the management board, the approval of financial statements, and decisions regarding major
capital expenditures, mergers and acquisitions, and the payment of dividends. No managers
were allowed to sit on the Aufischtsrat.
21
Dechert LLP, “The Higgs Report on Non-Executive Directors: Summary Recommendations,” January 2003,
http://www.dechert.com/library/Summary%20of%20Recommendations1.pdf (December 5, 2007).
22
Cited in: Rob Goffee, “Feedback Helps Boards to Focus on Their Roles,” Financial Times, June 10, 2005.
23
Martin Dickson, “Higgs and the History of Corporate Protest,” Financial Times, February 18, 2003.
24
Paul Davies, “Board Structure in the UK and Germany: Convergence or Continuing Divergence?” London School
of Economics & Political Science, Department of Law, Working Paper Series, June 19, 2001.
25
Grant Thornton UK LLP, “Fifth FTSE 350 Corporate Governance Review 2006,” January 2003,
http://www.gtuk.com/portals/grantthornton/documents/8-corp-gov-review2006.pdf (December 5, 2007).
26
EasyJet PLC, “2006 Annual Report,” http://www.easyjet.com/EN/Investor/investorrelations_financialreports.html
(December 5, 2007).
The supervisory board was required by law to have one-third of its members as labor
representatives if the company had at least 500 employees and half of its members as labor
representatives if the company had 2,000 employees or more. For example, in 2006, the 22-
person supervisory board of BMW Group included members of the Dingolfing, Regensburg,
Landshut, and Munich Works Councils (i.e., local unions), as well as a regional executive, a
division head, and the director of Product Line L7.27 Unlike the British system, the German code
was established as legislation, and these representation requirements were legal obligations that
could not be amended through bylaw changes. As a result, the German system placed greater
emphasis on the preservation of jobs, in contrast to the Anglo-Saxon emphasis on shareholder
returns.
German supervisory boards also had representation from founding family members and German
national banks or insurance companies. Historically, German corporations relied heavily on
banks for financing, rather than capital markets. These relationships grew out of the post-World
War II era in which German finance organizations provided loans to hard-hit businesses and
received portions of the companies’ ownership as collateral. In addition, bank officials were
given a seat on the supervisory board. This structure provided two forms of stability for German
corporations during the rebuilding process: a reliable source of capital for expansion and a major
investor with a long-term outlook.28 For example, in 2001, Deutsche Bank owned a 12.1
percent stake in DaimlerChrysler, 7.5 percent of Munich Re, and 4.2 percent of Allianz, among
others. Likewise, Allianz/Dresdner Holdings owned 1.6 percent of DaimlerChrysler, 29.8
percent of Munich Re, and 4.6 percent of Deutsche Bank (see Exhibit 6 for selected holdings by
these two companies).29
Given the large representation by labor and financial institutions, public shareholders had far less
influence over board matters and could not exhibit the same level of influence as shareholders in
the U.K. and U.S. Bank ownership positions often carried increased voting rights, meaning that
the minority ownership positions of public shareholders were further diluted on a voting basis.
However, increased liberalization of capital markets and a gradual shift from bank financing to
financing through securities markets were beginning to undo some of the stability of the German
governance system. In particular, the global trend toward increased individual shareholder
ownership through mutual funds led to a call for equal voting representation, or the so-called one
share one vote standard. Global investors hoped that such a standard would give public
shareholders a larger say in governance issues.
According to the well-known consultant Roland Berger, “We come from a stakeholder society.
Now the pendulum is swinging toward a shareholder society.”30 The transition would not
necessarily be easy for German society and, for the most part, reflected a broad trend toward
globalization that many other nations faced as well. Joseph Ackermann, the chief executive
officer of Deutsche Bank, explained:
27
BMW Group, “2006 Annual Report,” http://www.bmwgroup.com (December 5, 2007).
28
Christopher Rhoads and Vanessa Fuhrmans, “Trouble Brewing: Corporate Germany Braces for a Big Shift From
Postwar Stability,” Financial Times, June 21, 2001.
29
Source: Deutsche Bank, “2001 List of Shareholdings,” and Allianz “2001 List of Shareholdings.”
30
Christopher Rhoads and Vanessa Fuhrmans, loc. cit.
In parts of Europe at the moment, we are in the middle of a very important

dialogue about how to deal with globalization. Some people are of the view that
we should protect ourselves. Some believe we should open up or at least that we
should adjust in such a way that we become competitive without giving up the
European advantages of having a social system that is very deeply rooted in our
minds and in our hearts. But it has probably to be modified to compete
successfully on a global scale.31
Other European Models
Many other European nations employed a stakeholder model, with significant influence by a
financial institution or founding family and a large emphasis on labor, environmental and other
societal factors. For example, the French company Michelin was structured as a société en
commandite par actions (a limited partnership that was authorized to issue shares to the public).
The general partners of Michelin had sole power to select the managing partners of the company.
Until 2006, the general partnership was entirely controlled by the Michelin family, although a
non-family member was introduced as a general partner subsequently. Furthermore, the
company retained a heavy French influence. The seven-member supervisory board of Michelin
included only one non-French national and the governing documents stated that “the managing
partners must be natural persons.”32 Foreign investors, who owned 40 percent to 50 percent of
the company’s shares, sought a more transparent governance system.
Major Russian companies, particularly in the energy sectors, were subject to significant
government influence. For example, oil and gas producer Rosneft was majority owned by the
Russian government. The company had a history of aggressive behavior toward creditors and
business partners and, through its connections to the government, was able to purchase the assets
of bankrupt Yukos at a steep discount to fair value. Nevertheless, given its profitability in a
strategic industry, the company went public in 2006 on the London Stock Exchange in what was
the largest initial public offering to date. As one investment manager explained: “I do have a
moral problem with [their history], but does that mean we’re not going to look at the investment?
No.”33 Russia’s largest company by market capitalization, Gazprom, was also 50 percent owned
by the Russian government through its holdings in Rosneft and other affiliated companies.
In Sweden, the Wallenberg family, referred to by some as “the royal family of Swedish
business,” had dominated that country’s financial and industrial companies for 100 years.
Through the holding company Investor AB and a family foundation, the Wallenbergs owned
positions in AstraZeneca, Ericsson, GAMBRO, and SAS (Scandinavian Airlines System), and
held board seats on one-third of the companies in the OMX Stockholm 30 Index.34 The
Wallenbergs were dedicated to the preservation of Swedish influence over these multinational
corporations. Jacob Wallenberg, chairman of Investor AB, stated:
31
Patrick Jenkins and Peter Thal Larsen, “Germany Must Adapt to Compete to Ensure Prosperity [Interview with
Joseph Ackermann, chief executive officer of Deutsche Bank],” Financial Times, June 14, 2005.
32
Michelin, “Corporate Governance,” http://www.michelin.com/corporate/ (December 5, 2007).
33
Gregory L. White, “Capital Gains: Flush with Oil, Kremlin Explores Biggest-Ever IPO,” The Wall Street Journal,
April 18, 2006.
34
Ambereen Choudhury, “Wallenbergs Examine Gambro Unit Sale,” Bloomberg News, April 18, 2007.
We have a vested interest in Sweden having as many skilled people as possible in

society, and one of the most important ways of generating that is by having head
offices of businesses [located in the country] because normally they demand the
highest-quality services. So we will always fight to have head offices in
Sweden.35
The Dutch had a two-tiered board system similar to the Germanic system. Unlike the German
model, however, the Dutch supervisory board did not have a requirement for labor
representation. Although individuals could not serve on both the management board and the
supervisory board, management had a significant voice over who was nominated and appointed
to the supervisory board. As a result, the Dutch two-board system operated similarly to the
Anglo-Saxon model where executives provided heavy input into the composition of the board of
directors. In some cases, such as Heineken N.V., founding families continued to have a
significant ownership position and influence over the company (see Exhibit 7 for the ownership
structure of Heineken).
Even though the British and the Dutch had a fierce competitive rivalry that reached back to the
1600s,36 the two countries shared a particular similarity in their method of conducting business.
As a result, 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 United
Kingdom and the Netherlands. For example, Royal Dutch Petroleum and the Shell Transport
and Trading Company merged into the Royal Dutch-Shell Group in 1907 as the two companies
sought to increase their competitiveness against John D. Rockefeller’s Standard Oil. Likewise,
the Dutch margarine producer Margarine Unie and the British soap maker Lever Brothers
merged into the new company Unilever in 1930 to gain buyer power of the raw materials that
both companies imported from abroad. The shares of Royal Dutch-Shell and Unilever traded on
both the London and Amsterdam exchanges, and was subject to both countries’ regulatory
requirements.
Japan
The Japanese model of corporate governance had its roots in post World War II reconstruction.
At the end of the war, Allied Forces banned the Japanese zaibatsu, the powerful industrial and
financial conglomerates that in large part accounted for the country’s economic strength. In their
place, a looser system of interrelation between Japanese companies emerged, called the keiretsu.
Under the keiretsu, companies maintained small but not insignificant ownership positions in
suppliers, customers, and other business affiliates. These ownership positions cemented business
relations throughout the supply chain and encouraged firms to work together. As in Germany,
35
Michael Skapinker, “Patriotism, Business Principles and Investment by Foreigners,” Financial Times, November
12, 2007.
36
The two largest companies of the time, the British East India Company and the Dutch East India Company, each
sought to monopolize trade routes between Europe and Asia.
bank financiers also owned minority stakes in industrial firms.37 Their investment indicated that
capital for financing would be available as needed.
In the keiretsu, a company had few outside directors, and those that were non-executive directors
often included representatives from the lead bank or a major supplier or customer. In 2007,
Toyota Motor Corp had a 30-member board of directors, none of whom were external directors.
All of these board members had extensive experience working at the company. Toyota
explained its rationale for appointing only insiders to the board:
With respect to our system regarding directors, we believe that it is important to

elect individuals that comprehend and engage in Toyota’s strengths, including
commitment to manufacturing, with an emphasis on frontline operations and
problem solving based on the actual situation on the site (genchi genbutsu).
Toyota will consider the appointment of outside directors should there be suitable
individuals.38
To compensate for any potential shortcomings that might arise from having a board consisting
entirely of outsiders, Toyota developed a system of adjunct committees that provided additional
advisory or monitoring services for the board. For example, Toyota convened an International
Advisory Board (IAB) that included 10 external advisors with backgrounds in areas such as
politics, economics, environmental issues, and business. The IAB provided an outside, global
viewpoint on issues that were critical to the company’s long-term strategic planning process.
Toyota also relied on the advice and input of several other committees, including those on labor,
philanthropy, the environment, ethics, and stock options. Toyota also maintained a seven-
member corporate auditor board (comprising three Toyota executives and four external auditors),
which was responsible for reviewing accounting methods and auditing financial results (see
Exhibits 8 for Toyota’s keiretsu ownership positions, corporate governance structure, board of
directors members, and corporate auditor board).
Like the rest of the world, Japan too was moving away from bank financing and toward capital
markets. As a result, the influence of major banks in the governance system was waning, with
individual shareholders taking their place through mutual fund ownership. Many shareholder
activists, particularly those from the U.S., were critical of the Japanese governance system,
which they saw as insular, overly protective of top management and unreceptive to outside
influence. For example, Japanese companies had a history of amassing large cash balances,
which could weigh down a company’s return on capital. They also were known for building out
manufacturing capacity in order to increase market share, often with low incremental returns
(Toyota was a notable exception to this practice). In addition, Japanese companies were seen as
conservative in their strategic practices and unwilling to undergo major restructurings or layoffs.
37
The six major Japanese banks were Mitsui, Mitsubishi, Sumitomo, Daiichi-Kangin, Sanwa, and Fuji Bank. By
the early 2000s, these six merged into three major banking groups: Bank of Tokyo-Mitsubishi UFJ, Sumitomo
Mitsui Banking Corp, and Mizuho Financial Group.
38
Toyota Motor Corp, form 6-K filed with the Securities and Exchange Commission, June 29, 2007. One of the
guiding precepts of the Toyota Production System, genchi genbutsu, means “go and see for yourself.”
Japanese companies were challenged with responding to the pressures that came with capital
market financing. The aggressive behavior of activists and raiders was contrary to the prevailing
culture in Japan of respect and cooperation. For example, in 2006, Japanese paper company Oji
Paper made an unsolicited offer to purchase Hokuetsu Paper Mills, the first attempt by a
Japanese company to engage in a hostile takeover of a competitor. The bid was rejected by the
shareholders of Hokuetsu, but the action nevertheless gained the praise of some activist investors
for challenging the status quo in Japanese corporate culture.39 For their part, Japanese companies
responded to the increased threat of hostile raiders by adopting many of the anti-takeover
provisions used in the U.S. For example, after the Oji offer, Hokuetsu sought a white knight
investment from Nippon Paper, which agreed to purchase an 8 percent stake in company. For its
part, Nippon Paper implemented a poison pill provision that would allow it to issue dilutive
shares if any entity purchased more than 20 percent of its outstanding shares.40
South Korea
South Korea had developed a corporate model known as the chaebol, which was a large
conglomerate similar to the Japanese zaibatsu. The chaebol operated either as one large
corporation with several subsidiaries or as a loose connection of companies under the control of
a group headquarters or founding family. In 2007, the largest chaebol by revenue was Samsung
Group, which included a diverse array of over 30 businesses ranging from electronics to
insurance, construction, shipbuilding, textiles, and consulting. Founding families often
maintained a significant level of influence over the group. For example, Samsung Group was
run by Kun-Hee Lee, the son of founder Byung-Chul Lee. Other major chaebol included
Hyundai Group, LG Group, and SK Group, which also operated across a wide-ranging set of
industries.
For many years, the chaebol benefited from close relations with the Korean government.
Following the Korean War, the leaders of the chaebol worked with government officials to
develop a strategic plan for the economic development of the country. Because the government
offered financial subsidies to the chaebol to encourage their expansion, they entered diverse
business lines in rapid succession, with little incentive to focus on operating efficiencies in
existing businesses. Chaebol also used profits from efficient businesses to support other group
businesses facing financial difficulty. Outsiders criticized the chaebol structure for not doing
enough to force inefficient operations to improve their profitability.
The Asian Financial crisis of 1997, however, brought a number of changes to these and other
business practices. In order to bring economic stability and increase investor confidence in the
Korean economy, the government began to enforce regulations that the chaebol operate their
subsidiaries as legally independent entities. Also, one of the conditions of the bailout of the
Korean economy by the International Monetary Fund was that barriers to foreign ownership be
reduced. As a result, the practice of transferring funds between chaebol companies was
39
Andrew Morse, “Oji Paper Drops Hokuetsu Bid as Japan Braces for ‘Hostile’ Era,” The Wall Street Journal,
September 6, 2006.
40
“Nippon Paper Group Inc.: Company Plans to Introduce Steps to Prevent a Takeover,” The Wall Street Journal,
May 25, 2007.
eliminated. Group companies were forced to become financially self-sufficient, although they
still operated under the strategic direction of group headquarters.
Not all major Korean companies operated under the chaebol structure. For example, Posco, the
third largest steel producer in the world, was founded as a government-owned enterprise in 1968
before being privatized and sold to the public in 2000. During the privatization process, Posco
implemented a series of reforms intended to modernize its governance system. The company
adopted professional management, increased the number of outside directors to 9 out of 15, and
required that outside directors meet independently from executive directors. In 2006, the
company formally separated the positions of chief executive officer and chairman of the board.
China
The Chinese model of corporate governance reflected a transition from a communist regime to a
capitalist economic system. The Chinese government owned full or controlling interest in many
of the country’s major corporations, and while the government sought to improve the efficiency
of its enterprises, it balanced this objective with other concerns. These primarily involved
maintaining high levels of employment as state-owned enterprises transitioned to public
ownership, and ensuring that certain critical sectors—such as banking, telecommunications,
energy, and real estate—be protected from excessive foreign investment and influence.
The Company Law of the People’s Republic of China (revised in 2005) dictated the governance
requirements for publicly traded companies. Chinese companies were required to have a two-
tiered board structure, consisting of a board of directors and a board of supervisors. The board of
directors had to have between 5 and 19 members and which usually included a significant
number of company executives. Company Law expressly stated that the board of directors could
have employee representatives, but was not required to. The board of supervisors, on the other
hand, was required to have three or more members, at least one-third of whom had to be
employee representatives. No members of the board of directors or executives were allowed to
serve on the board of supervisors.41 Companies were not required to have audit or compensation
committees, unless they chose to list their shares on foreign exchanges that required them (such
as the NYSE).42
The two-tiered board system allowed the Chinese government to exert significant influence over
the economy in general, as the government was often majority owner and had representatives
serving on the board of supervisors. For example, in 2007, PetroChina was a publicly traded
company with shares listed on the New York Stock Exchange (American depository shares, or
ADSs), the Hong Kong Stock Exchange (H shares), and the Shanghai Stock Exchange (A
shares). However, only 14 percent of the company’s shares were freely traded by the public in
these three markets; the remaining 86 percent of its shares were held by CNPC (China National
Petroleum Corp), which was itself 100 percent owned by the Chinese government. PetroChina’s
board of directors consisted of 12 members, seven of whom were current directors or otherwise
41
Law Bridge, “The Company Law of the People’s Republic of China (revised 2005),” http://www.law-
bridge.net/english/LAW/20064/0221042566163-5.html (December 5, 2007).
42
Sean Liu, “Corporate Governance and Development: The Case of China,” Managerial and Decision Economics,
Oct/Nov2005, Vol. 26 Issue 7.
affiliated with CNPC and three of whom were independent, non-executive directors. The
company’s supervisory committee consisted of seven members, two of whom were also directors
of CNPC. In addition, the supervisory committee included two independent directors and one
employee representative.43 As a result, individual shareholders who invested in the company
through its publicly traded shares were effectively minority owners in partnership with the
Chinese government.
India
Following India’s independence from British rule in 1947, the country pursued a socialist
economic agenda. Public policy was intended to encourage economic development in a variety
of manufacturing industries, but burdensome regulatory requirements led to low productivity,
poor-quality products, and marginal profitability in many companies. National banks, which
provided financing to private companies, often evaluated loans on the size of capital required and
the number of jobs created, rather than the companies’ return on investment. As a result, private
companies had little incentive to deploy capital efficiently, and a weak system of corporate
governance developed.
By 1991, the economic situation in the country had deteriorated to such an extent that the Indian
government passed a series of major reforms to liberalize the economy and encourage a more
competitive financial system. Along with these reforms came pressure to improve the
governance standards. As a first step, the Confederation of Indian Industries (CII) created a
voluntary Corporate Governance Code in 1998. Large companies were encouraged, though not
required, to adopt the standards of the Corporate Governance Code. One year later, the Securities
and Exchange Board of India (SEBI) commissioned the Kumarmangalam Birla Committee to
propose standards of corporate governance that would apply to companies listed on the Indian
stock exchange. These reforms were incorporated in Clause 49 and applied to all publicly traded
companies. In 2004, a second panel chaired by N. R. Narayana Murthy, chairman of Infosys,
made additional recommendations to revise and further update Clause 49.
Clause 49 required that a majority of board members should be non-executive directors. In

companies where the chairman was an executive, at least half of the directors were required to be
independent; when the chairman was a non-executive, the percentage of independent directors
was reduced to one-third. Board members were limited to serving on no more than 10
committees across all boards to which s/he was elected. Companies were required to have an
audit committee, consisting of at least three members, two of whom had to be independent
directors. Financial statements were to be certified by both the chief executive officer and chief
financial officer. Clause 49 also included extensive disclosure requirements for related party
transactions, board of directors’ compensation and shareholdings in the company, and any
financial relationships that might lead to board member conflicts. Companies were also required
to include a section in the annual report explaining whether they were in compliance with the
governance standards of Clause 49.44
43
PetroChina Company, 2006 form 20-F filed with the Securities and Exchange Commission, May 11, 2007.
44
SEBI, “Corporate Governance in Listed Companies: Clause 49 of the Listing Agreement,” October 29, 2004,
http://www.sebi.gov.in/circulars/2004/cfdcir0104.pdf (December 5, 2007).
As in many other countries, family-run companies continued to dominate the Indian economy.
For instance, the Ambani family controlled Reliance Industries, which owned a vast number of
companies in the energy and telecommunications sectors and accounted for a full 3.5 percent of
the country’s gross domestic product.45 Similarly, the Tata family controlled the Tata Group,
with subsidiaries in software, steel and automobiles whose combined revenues represented 2.8
percent of India’s GDP.46 In aggregate, company insiders and their families owned
approximately 45 percent of the equity value of all Indian companies.47
Some critics complained that founding families retained too much influence over their
companies. According to one economist, “Family businesses can only grow to a certain point,
then they need to transition [to professional management]. The families are still in control in
India. We haven’t seen the transition.”48
One exception, however, was software and outsourcing company Infosys. Founded by N.R.
Narayana Murthy, his wife Sudha Murty, and six others in 1981, Infosys grew to over $3 billion
in annual revenues and a market value of $30 billion by 2007. In 2002, Murthy stepped down
after 20 years as chief executive officer. He retained the position of executive chairman and
chief mentor, while leadership of the company passed to co-founder Nandan Nilekani who
became its next chief executive officer. Murthy explained that control of the company would not
pass to one of his children, and that in fact he preferred that his children not work at Infosys at
all: “In terms of merit they are second to none. But no matter how correct they are, how hard
they work, their progress will be seen as a result of their being my children.”49 He elaborated in
a subsequent interview:
No matter how correct we are, if our family works here and a decision goes in its
favor, people might raise objections. At this point of time in the history of this
country, it is very important to conduct an experiment and create an example….
In a professional company, it is much better that you do not give opportunities to
your own kin.50
TRENDS IN GOVERNANCE AT MAJOR MULTINATIONAL CORPORATIONS
The adoption of global standards of corporate governance for many companies was not without
its challenges. First, companies faced pressure from global investors to increase returns over the
short and long term. Executives who previously had been accustomed to operating with a certain
level of autonomy found themselves forced to engage in dialogue with a diverse and demanding
investor base over how best to run the company. In some cases, demands by investors were not
45
Eric Bellman, “Truce May Be Near in Reliance Family Feud,” The Wall Street Journal, June 17, 2005.
46
Wikipedia, “Tata Group,” http://en.wikipedia.org/wiki/Tata_Group (December 5, 2007).
47
Nandini Rajagopalan and Yan Zhang, “Corporate Governance Reforms in China and India: Challenges and
opportunities,” Business Horizons, Volume 51, Issue 1, Jan/Feb 2008.
48
Eric Bellman, loc. cit.
49
Asha Rai, “Life after Infosys for Narayana Murthy,” The Economic Times, August 28, 2006.
50
Raghavan and Mitu Jayashankar, “Infosys Is Now a Smart & Young Lady,” The Times of India, October 26,
2007.
financial at all, and had more to do with how the company treated a broad set of stakeholders,
such as employees, customers, suppliers, and environmental and human rights advocates.
Companies such as Hewlett Packard tried to demonstrate that they were good global citizens by
publishing sustainability reports that outlined how they were addressing areas of concern for
various stakeholders (see Exhibit 9 for excerpts).
Second, companies were required to demonstrate compliance with a complicated international

regulatory regime. Failure to comply often resulted in shareholder lawsuits and financial
liability. In order to protect themselves from liability, directors relied—sometimes to an
excessive extent—on the advice of third-party experts. Critics alleged that this trend decreased
the effectiveness of boards and “caused a shift in the board’s role from guiding strategy and
advising management to ensuring compliance and performing due diligence.”51
Third, the shift toward professional management at publicly traded companies led to the question
of what constituted an appropriate level of pay. In the U.S. in particular, CEO pay had grown to
exorbitant amounts (179 times the pay of the average American worker, according to one
study52), and in some cases the level of pay was difficult to justify. Many factors encouraged
this trend. By the 2000s, the issue of excessive pay had moved beyond the borders of the U.S.
For example, news that Porsche AG paid chief executive officer €68 million in 2007 led to fierce
complaints that compensation at European companies was getting out of hand. Critics feared
executives in international countries saw the compensation levels of their peers at U.S.
companies and lobbied to have their pay packages match them. To some extent, the trend also
reflected a move toward compensating chief executives as owners rather than as employees, with
the justification that equity compensation aligned the interests of management and shareholders.
The CEO of Porsche echoed this line of reasoning, by stating, “I think when the company does
well, then those who have contributed should share in that.”53 Companies, wanting to attract the
best professional management talent, found themselves struggling to provide competitive levels
of pay while still being able to justify the amounts to shareholders. In the U.K., regulators
sought to reign in excessive compensation by requiring that companies put proposed pay
packages before shareholders for an advisory vote. Activists in the U.S. believed that similar say
on pay practices should be adopted in that country.54
All of these trends meant that the obligations of serving either on the board of directors or as an
executive were greater than ever. Company officials were required to respond to the needs of a
broad and demanding group of constituents, all the while serving their managerial or strategic
function to ensure that their companies remained competitive. One governance specialist
summed it up by stating, “The bar has been significantly raised by governance reforms and the
idea that there’s a stewardship for public capital.”55
51
Martin Lipton, “Shareholder Activism and the ‘Eclipse of the Public Corporation,’” Keynote Address to the 25th
Annual Institute on Federal Securities, Miami Florida, February 7, 2007, http://blogs.law.harvard.edu/corpgov/
files/2007/02/20070210%20Lipton%20Address.pdf (October 15, 2007).
52
Cited in Alan Murray, “CEOs Get off the Ropes on Executive Pay,” The Wall Street Journal, July 5, 2006, p. A2.
53
Stephen Power, “Porsche CEO Adds to Pay Debate,” The Wall Street Journal, December 1, 2007.
54
See “Say on Pay: Does the Buck Stop Here?” GSB No. CG-12.
55
George Anders et al, “All in the Family—Why should executive posts at publicly traded companies be passed on
like heirlooms?” The Wall Street Journal, August 1, 2005.
QUESTIONS
1. Imagine that you have been commissioned by your government to design from scratch an
entirely new system for corporate governance. Your system is to be the most effective
governance system and you are allowed to borrow freely from the standards of any country
in the world. What are your recommended best practices? Be specific and make sure to
comment on unitary board versus two-tiered board, board composition, independence,
committees, auditor requirements, and other factors mentioned in the case.
2. Do you believe standards of governance should be required through legal mandate (as in
China and Germany) or adopted at the discretion of the company based on recommended
best practices and pressure from shareholders?
3. How effective do you find the standard of comply-or-explain? Provide an analysis of the
economic and social forces of this standard.
4. Do you believe employees should have representation on the board? What impact would this
have on governance and board discussion? If you ran a major company, would you want
employees serving on the board? If so, would they serve in a supervisory or strategic
capacity?
5. How effective do you find the keiretsu system, relative to the other models presented in the
case? What are the benefits and drawbacks of having customers, suppliers, and banks
influence the board of directors? Are representatives from affiliated companies more or less
effective board members than independent directors?
6. What is your evaluation of the board and committee structure adopted by Toyota? Do you
believe that Toyota has achieved its tremendous success as a company because of its
governance structure or in spite of its governance structure?
7. Consider the cases of Michelin, Rosneft, the Wallenberg holdings, and PetroChina. Do you
consider it a positive, negative, or neutral factor when a company retains a national identity
and national influence?
Exhibit 1
Components of Corporate Governance
Exhibit 2
Governance Metrics International: Ratings on International Corporations (2007)
Company Country GMI Rating
BHP Billiton Australia 9.5

InBev Belgium 4.5
Banco Bradesco Brazil 3.5
Royal Bank of Canada Canada 10.0
PetroChina China 1.5
Dansk Bank Group Denmark 7.0
Nokia Finland 9.0
Michelin France 3.0
BMW Group Germany 7.0
Infosys India 7.5
ENI Italy 8.0
Sony Japan 7.0
Toyota Motor Corp Japan 4.5
Kuala Lumpur Kepong Malaysia 5.0
Aegon Netherlands 7.0
Heineken Holdings Netherlands 1.5
Norsk Hydro Norway 6.5
Gazprom Russia 4.5
Flextronics International Singapore 7.5
Posco South Korea 5.5
Samsung Electronics South Korea 4.0
Banco Santander Spain 7.5
Ericsson Sweden 6.5
UBS Switzerland 6.0
Hon Hai Precision Industry Taiwan 4.5
Bangkok Bank Thailand 6.0
Turkcell Iletisim Hizmetleri Turkey 6.0
BP United Kingdom 8.5
HSBC United Kingdom 8.0
Royal Dutch/Shell UK/Netherlands 8.0
Unilever UK/Netherlands 10.0
General Electric United States 8.5
Johnson & Johnson United States 9.0
Microsoft United States 8.0
Procter & Gamble United States 10.0
Washington Post United States 7.0
Note: Ratings on a scale of 1 to 10.
Source: Bloomberg.
Exhibit 3
Johnson & Johnson: Board of Directors (2007)
Yes / No
Independent
Audit
& Benefits
Compensation
Finance
& Governance
Nominating
Policy
Public
Technology
Science &
Executive Directors
William C. Weldon
Chairman, Board of Directors and Chief
No X*
Executive Officer; Chairman, Executive
Committee, Johnson & Johnson
Christine A. Poon
Vice Chairman, Board of Directors; Member, No X
Executive Committee, Johnson & Johnson
Non-executive Directors
Mary Sue Coleman, Ph. D.
Yes X X
President, University of Michigan
James G. Cullen
Retired President and Chief Operating Officer, Yes X* X X
Bell Atlantic Corporation
Michael M.E. Johns, M.D.
Yes X X
Chancellor, Emory University
Arnold G. Langbo
Retired Chairman of the Board and Chief Yes X* X
Executive Officer, Kellogg Company
Susan L. Lindquist, Ph.D.
Member and Former Director, Whitehead
Yes X X
Institute for Biomedical Research; Professor of
Biology, Massachusetts Institute of Technology
Leo F. Mullin
Retired Chairman and Chief Executive Officer, Yes X X*
Delta Air Lines, Inc.
William D. Perez
President and Chief Executive Officer, Wm. Yes X X
Wrigley Jr. Company
Charles Prince
Retired Chairman and Chief Executive Officer, Yes X X
Citigroup Inc.
Steven S Reinemund
Retired Chairman and Chief Executive Officer, Yes X X*
PepsiCo, Inc.
David Satcher, M.D., Ph.D.
Director, Center of Excellence on Health
Yes X X*
Disparities, Morehouse School of Medicine;
Former U.S. Surgeon General
* Indicates committee chair
Source: Johnson & Johnson Company
Exhibit 4
Cadbury Committee on Corporate Governance: Code of Best Practices (1992)
Relating to the Board of Directors:
! The Board should meet regularly, retain full and effective control over the company and monitor the executive
management.
! There should be a clearly accepted division of responsibilities at the head of a company, which will ensure
balance of power and authority, such that no individual has unfettered powers of decision. In companies where
the Chairman is also the Chief Executive, it is essential that there should be a strong and independent element
on the Board, with a recognized senior member.
! The Board should include non-executive Directors of sufficient caliber and number for their views to carry
significant weight in the Board’s decisions.
! The Board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the
direction and control of the company is firmly in its hands.
! There should be an agreed procedure for Directors in the furtherance of their duties to take independent
professional advice if necessary, at the company’s expense.
! All Directors should have access to the advice and services of the Company Secretary, who is responsible to the
Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied
with. Any question of the removal of Company Secretary should be a matter for the Board as a whole.
Relating to Non-executive Directors:
! Non-executive Directors should bring an independent judgment to bear on issues of strategy, performance,
resources, including key appointments and standards of conduct.
! The majority should be independent of the management and free from any business or other relationship, which
could materially interfere with the exercise of their independent judgment, apart from their fees and
shareholding. Their fees should reflect the time which they commit to the company.
! Non-executive Directors should be appointed for specified terms and reappointment should not be automatic.
! Non-executive Directors should be selected through a formal process, and both this process and their
appointment should be a matter for the Board as a whole.
For the Executive Directors:
! Directors’ service contracts should not exceed three years without shareholders’ approval.
! There should be full and clear disclosure of their total emoluments and those of the Chairman and the highest-
paid UK Directors, including pension contributions and stock options. Separate figures should be given for
salary and performance-related elements and the basis on which performance is measured should be explained.
! Executive Directors’ pay should be subject to the recommendations of a Remuneration Committee made up
wholly or mainly of Non-Executive Directors.
On Reporting and Controls:
! It is the Board’s duty to present a balanced and understandable assessment of the company’s position.
! The Board should ensure that an objective and professional relationship is maintained with the Auditors.
! The Board should establish an Audit Committee of at least 3 Non-Executive Directors with written terms of
reference, which deal clearly with its authority and duties.
! The Directors should explain their responsibility for preparing the accounts next to a statement by the Auditors
about their reporting responsibilities.
! The Directors should report on the effectiveness of the company’s system of internal control.
! The Directors should report that the business is a going concern
Source: “Report of the Committee on the Financial Aspects of Corporate Governance,” December 1, 1992.
Exhibit 5
EasyJet PLC: Comply or Explain Report (2006)
Statement of compliance
The Company complied with the provisions of the Combined Code during the year, with the exception of the
following four items:
a. (Combined Code B.1.1: The performance-related elements of remuneration should form a significant portion of
the total remuneration package of executive directors and should be designed to align their interests with those
of shareholders and to give these directors keen incentives to perform at the highest levels…)
Prior to Admission to the Official List of the UK Listing Authority, the Group granted share options without
performance criteria attached to them. The majority of these options have now been exercised. Options granted
since December 2000 have had performance conditions attached. The Group does not intend to grant further
share options to employees without attaching performance conditions to their exercise;
b. (Combined Code A.3.3: The board should appoint one of the independent non-executive directors to be the
senior independent director. The senior independent director should be available to shareholders if they have
concerns which contact through the normal channels of chairman, chief executive or finance director has failed
to resolve or for which such contact is inappropriate.)
The Company did not have a Senior Independent Non-Executive Director for the entire year. Following the
resignation of the previous Senior Independent Non-Executive Director, Tony Illsley, on 30 September 2005,
the Board conducted a search for a suitable replacement culminating in the appointment of Sir David Michels as
Senior Independent Non-Executive Director on 6 March 2006.
c. (Combined Code B.1.3: … Remuneration for non-executive directors should not include share options. If,
exceptionally, options are granted, shareholder approval should be sought in advance and any shares acquired
by exercise of the options should be held until at least one year after the non-executive director leaves the
board…)
Where Non-Executive Directors exercise share options, they are not required to retain these until at least one
year after they have resigned from the Board. Following the resignation of Amir Eilon during the year, there
are no Non-Executive Directors currently holding share options. In addition, the Board has decided not to grant
any further options to Non-Executive Directors.
d. (Combined Code A.4.1: … A majority of the members of the nomination committee should be independent non-
executive directors… Combined Code B.2.1: The board should establish a remunerations committee of at least
three… members who should all be independent non-executive directors… Combined Code C.3.1: The board
should establish an audit committee of at least three… members who should all be independent non-executive
directors… )
During at least part of the year, Sir Colin Chandler (Chairman) has sat on each of the Audit, Nominations and
Remuneration Committees. Sir Colin’s appointment to the Audit and Remuneration Committees was a
transitional arrangement until the appointment of a further Independent Non-Executive Director to the Board.
Sir David Michels was appointed as Chairman of the Remuneration Committee and as a member of the Audit
Committee in April 2006 following which Sir Colin stepped down from each of these Committees. Sir Colin’s
appointment to the Nominations Committee is not a transitional arrangement. The Board is satisfied that the
Chairman’s personal integrity and experience make him a highly effective member of the Nominations
Committee.
Source: EasyJet PLC 2006 Annual Report. The provisions of the Combined Code referenced by EasyJet have been
added by the case writer for clarification .
Exhibit 6
Holdings in German Corporations by German Finance Companies (2001)
Deutsche Bank Allianz/Dresdner Holdings

(selected ownership positions) (selected ownership positions)
DaimlerChrysler 12.1% DaimlerChrysler 1.6%
Munich Re 7.5% Munich Re 29.8%
Allianz 4.2% Deutsche Bank 4.6%
Linde 10.0% Linde 12.4%
mg technologies 9.3% mg technologies 12.3%
Heidelberger Zement 9.2% Heidelberger Zement 17.1%
Deutsche Börse 10.1% Deutsche Börse 5.5%
Eon 4.8% Eon 10.6%
Philipp Holzmann 19.6% Siemens 3.6%
Source: Deutsche Bank “2001 List of Shareholdings” and Allianz “2001 List of Shareholdings.”
Exhibit 7
Heineken N.V.: Ownership Structure (2007)
Heineken Holding N.V. holds a 50.005% interest in Heineken N.V. The shares of both companies are listed on
Euronext Amsterdam. Options of both shares are traded on the Euronext.Liffe options exchange.
L’Arche Green N.V. is for 88.42% owned by the Heineken Family. L’Arche Green N.V. holds a 58.78% interest in
Heineken Holding N.V..
Standing at the head of the Heineken group Heineken Holding N.V. is not an ordinary holding company. Since its
formation in 1952, Heineken Holding N.V.’s objective pursuant to its Articles of Association has been to manage or
supervise the Heineken group and to provide services for Heineken N.V.
The role Heineken Holding N.V. has performed for the Heineken group since 1952 has been to safeguard its
continuity, independence and stability and create conditions for controlled, steady growth of the Heineken group’s
activities. The stability provided by this structure has enabled the Heineken group to rise to its present position as
the brewer with the widest international presence and one of the world’s largest brewing groups.
Note: Every Heineken N.V. share held by Heineken Holding N.V. is matched by one share issued by Heineken
Holding. The net asset value of one Heineken Holding N.V. share is therefore identical to the net asset value of one
Heineken N.V. share. The dividend payable on the two shares is also identical. However, historically, Heineken
Holding N.V. shares have traded at a lower price due to technical factors that are market-specific.
Source: Heineken N.V., “Ownership Structure,” http://ww9.heinekeninternational.com/ownership_cg.aspx

(December 5, 2007).
Exhibit 8
Toyota Motor Corp: First Tier Auto Suppliers in Production Keiretsu
Is Toyota the Largest Market value

Supplier Company Name Toyota’s Ownership Share
Shareholder? (in ¥ billions)
Toyota Auto Body 50.0% Yes ¥ 242
Kanto Auto Works 50.0% Yes 89
Toyoda Gosei 42.7% Yes 248
Aisan Industry 34.7% Yes 59
Tokai Rica 27.0% Yes 147
Koyo Seiko 24.0% Yes 308
Toyoda Koki 23.6% Yes 140
Toyota Industries 23.5% Yes 955
Denso 23.2% Yes 2,184
Aisin Seiki 22.2% Yes 713
Koito Manufacturing 20.0% Yes 188
Shiroki 16.9% No (2nd Largest) 25
Akebono Brake 13.8% Yes 60
Futaba Industrial Company 12.2% Yes 145
KYB (Kayaba) 8.8% Yes 81
Ichikoh (Ichimitsu) Industries 6.1% No (2nd Largest) 26
Owari Precise Products 5.5% No (3rd Largest) 4
T. Rad (Toyo Radiator) 4.9% Yes 36
Note: Figures as of May 2005
Source: Masao Nakamura, University of British Columbia, “Japanese Corporate Governance Practices in the Post-
Bubble Era: Implications of Institutional and Legal Reforms in the 1990s and Early 2000s,” Forthcoming in the
International Journal of Disclosure and Governance, May 2006.
Exhibit 8 (continued)
Toyota Corporation: Corporate Governance Structure
Source: Toyota Motor Corp, “2006 Annual Report,” http://www.toyota.co.jp/en/ir/library/annual/pdf/2006/

index.html (December 5, 2007).
Toyota Corporation: Corporate Governance Structure
Joined
Board of Directors Title Position
Toyota
Fujio Cho Chairman of the Board - 1960
Katsuhiro Nakagawa Vice Chairman - 2001
Katsuaki Watanabe President - 1964
Tokuichi Uranishi Executive Vice President - 1966
Kazuo Okamoto Executive Vice President - 1967
Kyoji Sasazu Executive Vice President - 1967
Mitsuo Kinoshita Executive Vice President - 1968
Takeshi Uchiyamada Executive Vice President - 1969
Masatami Takimoto Executive Vice President - 1970
Akio Toyoda Executive Vice President - 1984
Yukitoshi Funo Senior Managing Director Chief North America Operations Officer 1970
Takeshi Suzuki Senior Managing Director Chief Accounting and Business Dev. Officer 1970
Atsushi Niimi Senior Managing Director Chief Purchasing Officer 1971
Hiroshi Takada Senior Managing Director Chief Global Planning Operations Officer 1969
Teiji Tachibana Senior Managing Director Chief Government & Public Affairs Officer 1969
Shinichi Sasaki Senior Managing Director Chief Quality Group Officer 1970
Akira Okabe Senior Managing Director Chief Asia, Oceania & Middle East Ops. Officer 1971
Yoichiro Ichimaru Senior Managing Director Chief Domestic Sales Operations Officer 1971
Shoji Ikawa Senior Managing Director Chief Production Engineering Officer 1975
Chief Strategic Production Planning and
Koichi Ina Senior Managing Director 1973
Manufacturing Officer
Takeshi Yoshida Senior Managing Director Chief Product Development Officer 1974
Shinzo Kobuki Senior Managing Director Chief Power Train Development Officer 1972
Akira Sasaki Senior Managing Director Chief China Operations Officer 1970
Hiroshi Kawakami Senior Managing Director Chief Customer Service Operations Officer 1972
Tadashi Arashima Senior Managing Director Chief Europe & Africa Operations Officer 1973
Mamoru Furuhashi Senior Managing Director Deputy Chief Gov’t & Public Affairs Officer 1973
Satoshi Ozawa Senior Managing Director Chief General Admin & HR Officer 1974
James E. Press Senior Managing Director President of Toyota Motor North America 1970
Shoichiro Toyoda Honorary Chairman - 1952
Hiroshi Okuda Senior Advisor - 1955
Corporate Auditor Joined
Title Position
Board Toyota
Yoshikazu Amano Corporate Auditor - 1972
Chiaki Yamaguchi Corporate Auditor - 1972
Masaki Nakatsugawa Corporate Auditor - 1976
Research Institute of Innovative Technology for
Yoichi Kaya Corporate Auditor -
the Earth
Corporate Counsellor of Matsushita Electric
Yoichi Morishita Corporate Auditor -
Industrial Co
Advisor of Sumitomo Mitsui Banking
Akishige Okada Corporate Auditor -
Corporation
Prosecutor-General of the Supreme Public
Kunihiro Matsuo Corporate Auditor -
Prosecutors Office
Source: Toyota Motor Corp, 2006 form 20-F, filed with the Securities and Exchange Commission, June 25, 2007.
Exhibit 9
Hewlett Packard: FY06 Global Citizenship Report
Priorities and Goals
Global citizenship at HP covers a wide range of issues, illustrated by the contents of this report. Leadership requires
commitment across this spectrum of issues and focus on the most critical areas. In 2006, we reviewed our global
citizenship strategy and revised our priorities for the coming year based on the strategic importance of issues to our
business, stakeholder concerns and our ability to have a positive impact….
These are our global citizenship priorities for the coming year:
Supply chain responsibility

In 2006, HP spent approximately $50 billion on materials, manufacturing and transportation, in one of the IT
industry’s largest supply chains. We require and help our suppliers to meet high social and environmental
responsibility standards. Investing in supply chain responsibility meets stakeholder expectations, protects our
reputation and decreases risks to HP from inadequate supplier standards. We were the first IT company to
implement a Supplier Code of Conduct. We conduct site visits and supplier audits, follow up to drive continuous
improvement in supplier standards, and collaborate on capability building projects to support the implementation of
our Supplier Code of Conduct. We will largely complete auditing our high priority supplier sites in 2007 and audits
will cumulatively cover more than 300,000 workers engaged in manufacturing HP products.
Energy efficiency
Rising energy prices, concerns about energy security and increasing pressure from society to reduce greenhouse gas
(GHG) emissions related to fossil fuels, have heightened the demand for energy efficiency and renewable energy
sources. Customers are increasingly concerned with the cost of energy and the energy consumption of IT equipment.
Improving energy efficiency helps address their concerns and also reduces the environmental impacts associated
with product use. We enhance HP’s short- and long-term competitiveness, as well as demonstrate environmental
leadership by improving the energy efficiency of our products and our operations. Additionally, we collaborate with
others to extend the effect of our efforts. In 2006, we adopted new goals for product energy efficiency and internal
energy use.
Product reuse and recycling

More than 200 million new PCs are bought each year worldwide. Many of these (and other IT products such as
printers and servers) replace existing equipment. As one of the world’s leading suppliers of IT equipment, we can
play a major role in reducing the environmental impact of IT products, beginning with their design, which makes
reuse or recycling easier. We offer effective and responsible take-back systems and work with others to develop
sound regulatory approaches. We are on target to achieve our long-term goal of recycling 1 billion pounds since our
product recycling program began in 1987.
This table shows some of our current and future goals in each of our three priority areas….
Goal for 2006 Progress Future Goals

Supply chain Conduct new and follow- Conducted 125 site audits Audit 95% of high risk
responsibility up/verification audits at 90 product materials, component
sites and manufacturing supplier
sites by the end of 2007
Energy Reduce HP’s on-site Through several process Reduce the combined energy
efficiency greenhouse gas emissions by changes, we reduced site consumption of HP
18% from 2005 levels emissions by 31% operations and products 20%
below 2005 levels by 2010
Product reuse Recycle 1 billion pounds of To date, HP has recycled Recycle 1 billion pounds of
and recycling electronic products and more than 920 million pounds electronic products and
supplies by the end of 2007 since 1987 supplies by the end of 2007
Hewlett Packard: FY06 Global Citizenship Report
Economic Value
HP has direct economic impacts on customers, employees, suppliers and governments through financial transactions
in the course of its business. The company also has broader, indirect economic impacts on many stakeholders. These
stem from the direct financial transactions by further circulation of money throughout the economy, and increased
productivity through the use of HP products.
Although rules for recording financial transactions have been refined over centuries, formulas for measuring a
company's overall economic contribution to society are less developed. We can quantify some aspects and describe
others in general terms. The table below outlines our direct and indirect economic impacts for each group we
affect….
HP’s economic stakeholders and impacts
Group HP’s direct economic impacts (on HP’s indirect economic impacts
relevant group) (through relevant group)
Suppliers HP spent approximately $50 billion in Our supply chain spending in turn creates
2006 in its supply chain on products, jobs in supplier companies. These
materials, components and services. companies and their workers pay taxes
and support local economies. Suppliers
also pay taxes to governments and pay
dividends to their investors.
Employees Compensation and benefits are a Employees' private spending generates

significant proportion of HP's overall economic activity and taxes, and supports
expenses. We also invest in training and their local communities.
development ($306 million in 2006),
which increases employees' skills and
competencies and expands their
opportunities.
Customers Customers paid HP $91.7 billion in 2006 Equipment and services we sell to
in exchange for our products and customers improve their productivity,
services. which may increase their economic
contribution to society through greater
employment, more purchases from their
suppliers and more taxes.
Local, regional, and Philanthropic investments ($46.3 million HP social investments and taxes in turn
national communities in 2006), support of non-governmental support further economic activity.
organizations, and employee giving and
volunteering support communities
directly. Local, state and national
governments benefit from taxes paid by
HP.
Investors Owners of HP stock receive dividends Investors may pay taxes on stock gains
and may benefit from growth in the value when they sell their shares.
of their shares.
Source: Hewlett Packard Company, “HP FY06 Global Citizenship Report,”

http://www.hp.com/hpinfo/globalcitizenship/gcreport/index.html (December 5, 2007).

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ROCK CENTER FOR CORPORATE GOVERNANCE

MODELS OF CORPORATE GOVERNANCE:

Several third-party organizations—such as The Corporate Library, Governance Metrics

GLOBAL CORPORATE GOVERNANCE

company’s financing or acquisition deals. Alternatively, the involvement of the Massachusetts

Governance Regulations and Procedures

As a result, companies were subject to a complicated intersection of corporate law, securities

In parts of Europe at the moment, we are in the middle of a very important

Other European Models

We have a vested interest in Sweden having as many skilled people as possible in

With respect to our system regarding directors, we believe that it is important to

Clause 49 required that a majority of board members should be non-executive directors. In

TRENDS IN GOVERNANCE AT MAJOR MULTINATIONAL CORPORATIONS

Second, companies were required to demonstrate compliance with a complicated international

Company Country GMI Rating

BHP Billiton Australia 9.5

Note: Ratings on a scale of 1 to 10.

* Indicates committee chair

Source: Johnson & Johnson Company

Relating to the Board of Directors:

Relating to Non-executive Directors:

For the Executive Directors:

On Reporting and Controls:

Deutsche Bank Allianz/Dresdner Holdings

DaimlerChrysler 12.1% DaimlerChrysler 1.6%

Munich Re 7.5% Munich Re 29.8%

Allianz 4.2% Deutsche Bank 4.6%

Linde 10.0% Linde 12.4%

mg technologies 9.3% mg technologies 12.3%

Heidelberger Zement 9.2% Heidelberger Zement 17.1%

Deutsche Börse 10.1% Deutsche Börse 5.5%

Eon 4.8% Eon 10.6%

Philipp Holzmann 19.6% Siemens 3.6%

Source: Heineken N.V., “Ownership Structure,” http://ww9.heinekeninternational.com/ownership_cg.aspx

Is Toyota the Largest Market value

Note: Figures as of May 2005

Source: Toyota Motor Corp, “2006 Annual Report,” http://www.toyota.co.jp/en/ir/library/annual/pdf/2006/

Priorities and Goals

Supply chain responsibility

Product reuse and recycling

Goal for 2006 Progress Future Goals

HP’s economic stakeholders and impacts

Employees Compensation and benefits are a Employees' private spending generates

Source: Hewlett Packard Company, “HP FY06 Global Citizenship Report,”

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