Corporate governance

From Wikipedia, the free encyclopedia

Not to be confused with a corporate state, a corporative government rather than the government of a corporation

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is

directed, administered or controlled. Corporategovernance also includes the relationships among the many stakeholders involved and the goals

for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors,

suppliers, and the community at large.

Corporate governance is a multi-faceted subject. [1] An important theme of corporate governance is to ensure the accountability of certain

individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of

discussions focuses on the impact of a corporate governance system ineconomic efficiency, with a strong emphasis on shareholders' welfare.

There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around

the world (see section 9 below).

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile

collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal

government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.

Contents

 [hide]

1 Definition

2 Legal environment

3 History - United States

o 3.1 Impact of Corporate

Governance

o 3.2 Role of Institutional

Investors

4 Parties to corporate governance

5 Principles

6 Mechanisms and controls

o 6.1 Internal corporate

governance controls

o 6.2 External corporate

governance controls

7 Systemic problems of corporate

governance
 8 Role of the accountant

9 Regulation

o 9.1 Rules versus principles

o 9.2 Enforcement

o 9.3 Action Beyond Obligation

o 9.4 Proposals

10 Corporate governance models around the

world

o 10.1 Anglo-American Model

11 Codes and guidelines

12 Ownership structures

13 Corporate governance and firm

performance

o 13.1 Board composition

o 13.2 Remuneration/Compensat

ion

14 See also

15 References

16 Further reading

17 External links

[edit]Definition

This section relies largely or entirely upon a single source. Please help improve this article by introducing
appropriate citationsto additional sources. (July 2010)

In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan defines corporate governance as 'an internal system

encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling

management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external

marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.

O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of

raising capital. Quality is determined by the financial markets, legislation and other external market forces plus how policies and processes are

implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment

is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much

of corporate governance debate has centred on legislative policy, to deter fraudulent activities and transparency policy which misleads

executives to treat the symptoms and not the cause.' [2]

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders,

creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental

and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the

inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is

about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the

management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian

Constitution. Corporate Governance is viewed as business ethics and a moral duty. See also Corporate Social Entrepreneurship regarding

employees who are driven by their sense of integrity (moral conscience) and duty to society. This notion stems from traditional philosophical

ideas of virtue (or self governance) [3]and represents a "bottom-up" approach to corporate governance (agency) which supports the more

obvious "top-down" (systems and processes, i.e. structural) perspective.

[edit]Legal environment

In the United States, corporations are governed under common law, the Model Business Corporation Act, and Delaware law since Delaware,

as of 2004, was the domicile for the majority of publicly-traded corporations. [4] Individual rules for corporations are based upon the corporate

charter and, less authoritatively, the corporate bylaws.[4] In the United States, shareholders cannot initiate changes in the corporate charter

although they can initiate changes to the corporate bylaws. [4] In the UK, however, the analogous corporate constitutional documents (the

memorandum and articles of association) can be modified by a supermajority (75%) of shareholders. [4] Shareholders can initiate 'precatory

proposals' on various initiatives, but the results are nonbinding. Precatory proposals which have received majority support from shareholders,

even for several consecutive years, have historically been rejected by the board of directors. [4]

[edit]History - United States

In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in

exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large

publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has

been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become

increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more

frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and

Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means' monograph "The Modern

Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in

scholarly debates today.

From the Chicago school of economics, Ronald Coase's "The Nature of the Firm" (1937) introduced the notion of transaction costs into the

understanding of why firms are founded and how they continue to behave. Fifty years later, Eugene Fama and Michael Jensen's "The

Separation of Ownership and Control" (1983, Journal of Law and Economics) firmly establishedagency theory as a way of understanding
corporate governance: the firm is seen as a series of contracts. Agency theory's dominance was highlighted in a 1989 article by Kathleen

Eisenhardt ("Agency theory: an assessement and review", Academy of Management Review).

US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class.

Accordingly, the following Harvard Business Schoolmanagement professors published influential monographs studying their prominence: Myles

Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational

behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient

accountability or monitoring by their board of directors."

Since the late 1970’s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to

reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate

ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors’ duties have

expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. [5]

In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO

dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees' Retirement System (CalPERS) led a wave

of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed

by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not

infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely

affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries

highlighted the weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate debacles, such

as Adelphia Communications, AOL,Arthur Andersen, Global Crossing, Tyco, led to increased shareholder and governmental interest in

corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002.[3]

[edit]Impact of Corporate Governance

The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate

governance is a tool for socio-economic development. [6]

[edit]Role of Institutional Investors

Many years ago, worldwide, buyers and sellers of corporation stocks were individual investors, such as wealthy businessmen or families,who

often had a vested, personal and emotional interest in the corporations whose shares they owned. Over time, markets have become

largely institutionalized: buyers and sellers are largely institutions (e.g., pension funds, mutual funds, hedge funds, exchange-traded funds,

other investor groups; insurance companies, banks, brokers, and other financial institutions).

The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of

the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions, of which there are many). Note that
this process occurred simultaneously with the direct growth of individuals investingindirectly in the market (for example individuals have twice

as much money in mutual funds as they do in bank accounts). However this growth occurred primarily by way of individuals turning over their

funds to 'professionals' to manage, such as in mutual funds. In this way, the majority of investment now is described as "institutional

investment" even though the vast majority of the funds are for the benefit of individual investors.

Program trading, the hallmark of institutional trading, averaged over 80% of NYSE trades in some months of 2007. [4] (Moreover, these

statistics do not reveal the full extent of the practice, because of so-called 'iceberg' orders. See Quantity and display instructions under last

reference.)

Unfortunately, there has been a concurrent lapse in the oversight of large corporations, which are now almost all owned by large institutions.

The Board of Directors of large corporations used to be chosen by the principal shareholders, who usually had an emotional as well as

monetary investment in the company (think Ford), and the Board diligently kept an eye on thecompany and its principal executives (they

usually hired and fired the President, or Chief Executive Officer— CEO).1

A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital

enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year.

[5] Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can

have, [BusinessWeek has found], is blood lines." [6] In that last study, "BW identified five key ingredients that contribute to superior

performance. Not all are qualities unique to enterprises with retained family interests. But they do go far to explain why it helps to have

someone at the helm— or active behind the scenes— who has more than a mere paycheck and the prospect of a cozy retirement at

stake." See also, "Revolt in the Boardroom," by Alan Murray.

Nowadays, if the owning institutions don't like what the President/CEO is doing and they feel that firing them will likely be costly (think "golden

handshake") and/or time consuming, they will simply sell out their interest. The Board is now mostly chosen by the President/CEO, and may be

made up primarily of their friends and associates, such as officers of the corporation or business colleagues. Since the (institutional)

shareholders rarely object, the President/CEO generally takes the Chair of the Board position for his/herself (which makes it much more difficult

for the institutional owners to "fire" him/her). Occasionally, but rarely, institutional investors support shareholder resolutions on such matters

as executive pay andanti-takeover, aka, "poison pill" measures.

Finally, the largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for

corporations, State Street Corp.) are designed simply to invest in a very large number of different companies with sufficient liquidity, based on

the idea that this strategy will largely eliminate individual company financial or other risk and, therefore, these investors have even less interest

in a particular company's governance.

Since the marked rise in the use of Internet transactions from the 1990s, both individual and professional stock investors around the world have

emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets: the casual

participant. Even as the purchase of individual shares in any one corporation by individual investors diminishes, the sale

of derivatives (e.g., exchange-traded funds (ETFs), Stock market index options [7], etc.) has soared. So, the interests of most investors are now

increasingly rarely tied to the fortunes of individual corporations.

But, the ownership of stocks in markets around the world varies; for example, the majority of the shares in the Japanese market are held by

financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations

and within S. Korean chaebol 'groups') [8], whereas stock in the USA or the UK and Europe are much more broadly owned, often still by large

individual investors.

[edit]Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of

directors, management, shareholders and Auditors). Other stakeholders who take part include suppliers, employees, creditors, customers and

the community at large.

In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership

from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two

parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders.

With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and

control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop

directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and

authorities.

The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute

of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate

governance, effective operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors,

workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and

services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human,

social and other forms of capital.

A key factor is an individual's decision to participate in an organisation e.g. through providing financial capital and trust that they will receive a

fair share of the organisational returns. If some parties are receiving more than their fair return then participants may choose to not continue

participating leading to organizational collapse.

[edit]Principles

Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility

and accountability, mutual respect, and commitment to the organization.

Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then

evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically,

especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.

Commonly accepted principles of corporate governance include:

 Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to

exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable

and accessible and encouraging shareholders to participate in general meetings.

 Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

 Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business

issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate

level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive

directors.

 Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a

necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and

executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on

the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics

Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

 Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and

management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and

safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely

and balanced to ensure that all investors have access to clear, factual information.

Issues involving corporate governance principles include:

 internal controls and internal auditors

 the independence of the entity's external auditors and the quality of their audits

 oversight and management of risk

 oversight of the preparation of the entity's financial statements

 review of the compensation arrangements for the chief executive officer and other senior executives

 the resources made available to directors in carrying out their duties

 the way in which individuals are nominated for positions on the board

 dividend policy

Nevertheless "corporate governance," despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood

phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must include a

fair, efficient and transparent administration and strive to meet certain well defined,written objectives. Corporate governance must go well

beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director

(BOD) exercise their trustee responsibilities (largely an ethical commitment), and the commitment to run a transparent organization- these
should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the

corporate sector. John G. Smale, a former member of the General Motors board of directors, wrote: "The Board is responsible for the

successful perpetuation of the corporation. That responsibility cannot be relegated to management." [7] However it should be noted that a

corporation should cease to exist if that is in the best interests of its stakeholders. Perpetuation for its own sake may be counterproductive.

[edit]Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection.

For example, to monitor managers' behaviour, an independent third party (the external auditor) attests the accuracy of information provided by

management to investors. An ideal control system should regulate both motivation and ability.

[edit]Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

 Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management,

safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-

executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not

increase performance. [8] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's

executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and

therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It

could be argued, therefore, that executive directors look beyond the financial criteria.

 Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors,

audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to

reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an

organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

 Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer.

This application of separation of power is further developed in companies where separate divisions check and balance each other's

actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third

group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

 Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in

the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes,

however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit

myopic behaviour.

[edit]External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:

 competition
 debt covenants

 demand for and assessment of performance information (especially financial statements)

 government regulations

 managerial labour market

 media pressure

 takeovers

[edit]Systemic problems of corporate governance

 Demand for information: In order to influence the directors, the shareholders must combine with others to form a significant voting group

which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

 Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The

traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that

financial markets are efficient), which suggests that the small shareholder will free ride on the judgements of larger professional investors.

 Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections

in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected

by the working of the external auditing process.

[edit]Role of the accountant

Financial reporting is a crucial element necessary for the corporate governance system to function effectively. [9] Accountants and auditors are

the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management

prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence.

Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even

the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting)

imposes extra information costs on users. In the extreme, it can involve non-disclosure of information.

One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing.

This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management.

The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss

accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley

Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting

services. Similar provisions are in place under clause 49 of SEBI Act in India.

The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses by creating illusions that a third party was

contractually obliged to pay the amount of any losses. However, the third party was an entity in which Enron had a substantial economic stake.

In discussions of accounting practices with Arthur Andersen, the partner in charge of auditing, views inevitably led to the client prevailing.
However, good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it, or if the

informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above).[citation needed]

[edit]Regulation

Companies law

Company · Business

Company forms

Sole proprietorship

Partnership

(General · Limited · LLP)

Corporation

Cooperative

United States

S corporation · C corporation

LLC · LLLP · Series LLC

Delaware corporation

Nevada corporation

Massachusetts business trust

UK / Ireland / Commonwealth

Limited company

(by shares · by guarantee

Public · Proprietary)
 Unlimited company

Community interest company

European Union / EEA

SE · SCE · SPE · EEIG

Elsewhere

AB · AG · ANS · A/S · AS · GmbH

K.K. · N.V. · Oy · S.A. · more

Doctrines

Corporate governance

Limited liability · Ultra vires

Business judgment rule

Internal affairs doctrine

De facto corporation and

corporation by estoppel

Piercing the corporate veil

Rochdale Principles

Related areas

Contract · Civil procedure

v • d • e

[edit]Rules versus principles

Rules are typically thought to be simpler to follow than principles, demarcating a clear line between acceptable and unacceptable behaviour.

Rules also reduce discretion on the part of individual managers or auditors.

In practice rules can be more complex than principles. They may be ill-equipped to deal with new types of transactions not covered by the

code. Moreover, even if clear rules are followed, one can still find a way to circumvent their underlying purpose - this is harder to achieve if one

is bound by a broader principle.

Principles on the other hand is a form of self regulation. It allows the sector to determine what standards are acceptable or unacceptable. It also

pre-empts over zealous legislations that might not be practical.

[edit]Enforcement

Enforcement can affect the overall credibility of a regulatory system. They both deter bad actors and level the competitive playing field.

Nevertheless, greater enforcement is not always better, for taken too far it can dampen valuable risk-taking. In practice, however, this is largely

a theoretical, as opposed to a real, risk. There are various integrated governance, risk and compliance solutions available to capture

information in order to evaluate risk and to identify gaps in the organization’s principles and processes. This type of software is based on

project management style methodologies such as the ABACUS methodology which attempts to unify the management of these areas, rather

than treat them as separate entities.

[edit]Action Beyond Obligation

Enlightened boards regard their mission as helping management lead the company. They are more likely to be supportive of the senior

management team. Because enlightened directors strongly believe that it is their duty to involve themselves in an intellectual analysis of how

the company should move forward into the future, most of the time, the enlightened board is aligned on the critically important issues facing

the company.

Unlike traditional boards, enlightened boards do not feel hampered by the rules and regulations of the Sarbanes-Oxley Act. Unlike standard

boards that aim to comply with regulations, enlightened boards regard compliance with regulations as merely a baseline for board performance.

Enlightened directors go far beyond merely meeting the requirements on a checklist. They do not need Sarbanes-Oxley to mandate that they

protect values and ethics or monitor CEO performance.

At the same time, enlightened directors recognize that it is not their role to be involved in the day-to-day operations of the corporation. They

lead by example. Overall, what most distinguishes enlightened directors from traditional and standard directors is the passionate obligation they

feel to engage in the day-to-day challenges and strategizing of the company. Enlightened boards can be found in very large, complex

companies, as well as smaller companies.[10]

[edit]Proposals

The book Money for Nothing suggests importing from England the concept of term limits to prevent independent directors from becoming too

close to management and demanding that directors invest a meaningful amount of their own money (not grants of stock or options that they

receive free) to ensure that the directors' interests align with those of average investors. [11] Another proposal is for the government to allow

poorly-managed businesses to go bankrupt, since after a filing, directors have to cover more of their own legal bills and are frequently sued by

bankruptcy trustees as well as investors. [12]

[edit]Corporate governance models around the world

Although the US model of corporate governance is the most notorious, there is a considerable variation in corporate governance models

around the world. The intricated shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of German firms [9],

the chaebols in South Korea and many others are examples of arrangements which try to respond to the same corporate governance

challenges as in the US.

In the United States, the main problem is the conflict of interest between widely-dispersed shareholders and powerful managers. In Europe, the

main problem is that the voting ownership is tightly-held by families through pyramidal ownership and dual shares (voting and nonvoting). This

can lead to "self-dealing", where the controlling families favor subsidiaries for which they have higher cash flow rights. [13]

[edit]Anglo-American Model

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are

embedded. The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The

coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers,

and the community. Each model has its own distinct competitive advantage. The liberal model of corporate governance encourages radical

innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality

competition. However, there are important differences between the U.S. recent approach to governance issues and what has happened in the

UK. In the United States, a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known

as the chief executive officer. The CEO has broad power to manage the corporation on a daily basis, but needs to get board approval for

certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or

other expensive projects. Other duties of the board may include policy setting, decision making, monitoring management's performance, or

corporate control.

The board of directors is nominally selected by and responsible to the shareholders, but the bylaws of many companies make it difficult for all

but the largest shareholders to have any influence over the makeup of the board; normally, individual shareholders are not offered a choice of

board nominees among which to choose, but are merely asked to rubberstamp the nominees of the sitting board. Perverse incentives have

pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended

to oversee. Frequently, members of the boards of directors are CEOs of other corporations, which some [14] see as a conflict of interest.

[edit]Codes and guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations,

institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As

a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing

requirements may have a coercive effect.

For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their

respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they

should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for

compliance.
In the United States, companies are primarily regulated by the state in which they incorporate though they are also regulated by the federal

government and, if they are public, by their stock exchange. The highest number of companies are incorporated in Delaware, including more

than half of the Fortune 500. This is due to Delaware's generally management-friendly corporate legal environment and the existence of a state

court dedicated solely to business issues (Delaware Court of Chancery).

Most states' corporate law generally follow the American Bar Association's Model Business Corporation Act. While Delaware does not follow

the Act, it still considers its provisions and several prominent Delaware justices, including former Delaware Supreme Court Chief Justice E.

Norman Veasey, participate on ABA committees.

One issue that has been raised since the Disney decision [15] in 2005 is the degree to which companies manage their governance

responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to

the level of best practice. For example, the guidelines issued by associations of directors (see Section 3 above), corporate managers and

individual companies tend to be wholly voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve its own

governance capacity. Such documents, however, may have a wider multiplying effect prompting other companies to adopt similar documents

and standards of best practice.

One of the most influential guidelines has been the 1999 OECD Principles of Corporate Governance. This was revised in 2004. The OECD

remains a proponent of corporate governance principles throughout the world.

Building on the work of the OECD, other international organisations, private sector associations and more than 20 national corporate

governance codes, the United NationsIntergovernmental Working Group of Experts on International Standards of Accounting and Reporting

(ISAR) has produced voluntary Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed[16] benchmark

consists of more than fifty distinct disclosure items across five broad categories: [17]

 Auditing

 Board and management structure and process

 Corporate responsibility and compliance

 Financial transparency and information disclosure

 Ownership structure and exercise of control rights

The World Business Council for Sustainable Development WBCSD has done work on corporate governance, particularly on accountability and

reporting, and in 2004 created an Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes,

standards, and frameworks.This document aims to provide general information, a "snap-shot" of the landscape and a perspective from a think-

tank/professional association on a few key codes, standards and frameworks relevant to the sustainability agenda.

[edit]Ownership structures

Ownership structures refers to the various patterns in which shareholders seem to set up with respect to a certain group of firms. It is a tool

frequently employed by policy-makers and researchers in their analyses of corporate governance within a country or business group.And

ownership can be changed by the stakeholders of the company.

Generally, ownership structures are identified by using some observable measures of ownership concentration (i.e. concentration ratios) and

then making a sketch showing its visual representation. The idea behind the concept of ownership structures is to be able to understand the

way in which shareholders interact with firms and, whenever possible, to locate the ultimate owner of a particular group of firms. Some

examples of ownership structures include pyramids, cross-share holdings, rings, and webs.

[edit]Corporate governance and firm performance

In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that

80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly

out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for

information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies

where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia).

Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative

returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al. found that those "most admired" had an average return of

125%, whilst the 'least admired' firms returned 80%. In a separate study Business Weekenlisted institutional investors and 'experts' to assist in

differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial

returns.

On the other hand, research into the relationship between specific corporate governance controls and some definitions of firm performance has

been mixed and often weak. The following examples are illustrative.

[edit]Board composition

Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative

relationship between the proportion of external directors and profitability, while others found no relationship between external board

membership and profitability. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable

than other companies. It is unlikely that board composition has a direct impact on profitability, one measure of firm performance.

[edit]Remuneration/Compensation

The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and

significant relationships between executives' remuneration and firm performance. Low average levels of pay-performance alignment do not

necessarily imply that this form of governance control is inefficient. Not all firms experience the same levels of agency conflict, and external and

internal monitoring devices may be more effective for some than for others.

Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers

found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that

increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders.

Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend

their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under
 substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of

option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street

Journal.

Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A

particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs.

Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with

stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard

& Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works

on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006.

A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006

progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the

preferred means of implementing a share repurchase plan.

[edit]See also

Advantages and Disadvantages of Forming a Corporation

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 Advantages and Disadvantages of C Corporations

 Costs of Incorporating

 Avoiding Personal Liability for Business Debts and Claims

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A corporation is defined as a legal entity or structure created under the authority of a state's laws, consisting of a person or group of persons who

become shareholders. The entity's existence is considered separate and distinct from that of its members. Like a real person, a corporation can enter

into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business.

Incorporation can be a complicated process. You may choose to hire an attorney to guide you through the process (read Do I Need an Attorney to

Form a Corporation? for more information).

 Regardless of the tack you take, take into consideration the advantages and disadvantages listed below before you embark on incorporating your

company. And when you're ready to incorporate, make sure to read Once You've Decided to Incorporate.

Advantages

 Limited liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a

corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of

shareholders are not at risk for satisfying corporate debts or liabilities.

 Corporate tax treatment. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the

typical C corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends.

The corporation pays taxes, at the corporate rate, on any profits.

 Attractive investment. The built-in stock structure of a corporation makes it attractive to investors.

 Capital incentive. The stock structure also allows corporations to attract key and talented employees by offering them an ownership

interest in the form of stock options or stock.

 Owner/employee. A business owner who works in his or her own business may become an employee and thus be eligible for

reimbursement or deduction of many types of expenses, including health and life insurance.

 Operational structure. Corporations have a set management structure. The owners of a corporation are shareholders, who elect a

Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the

corporation. The Board of Directors is responsible for managing and exercising the rights and responsibilities of the corporation. The Board sets

corporate policy and the strategy for the corporation, and elects officers — usually a CEO, vice president, treasurer, and secretary — to follow the

policies set by the Board, and manage the corporation on a day-to-day basis. In a small corporation, the lines between the shareholders, Board of

Directors, and officers tends to blur because the same people may be serving in all capacities.

 Perpetual existence. A corporation continues to exist until the shareholders decide to dissolve it or merge with another business.

 Freely transferable shares. Shares of corporations are freely transferable, because as a separate entity, the existence of a corporation

is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity, and is not

terminated or dissolved even when shareholders die or sell their shares. Shares of corporations are freely transferable unless shareholders have

"buy-sell" agreements limiting when and to whom shares may be sold or transferred. Also, securities laws may restrict the transferability of shares.

Disadvantages 

 Fees. It costs money to incorporate. There are four types of fees: a fee to file the Articles of Incorporation with the Secretary of State, a

first-year franchise tax prepayment, fees for various governmental filings, and attorneys' fees. But every year, tens of thousands of businesses

choose to incorporate online without the use of an attorney. For example, basic incorporation before filing fees at a site like LegalZoom.com costs

just $99.
  Formalities. The proper corporate formalities of organizing and running a corporation must be followed, to receive the benefits of being a

corporation.

 Paperwork. Paperwork is a huge component of the corporate formalities that must followed. Reports and tax returns must be compiled

and filed in a timely fashion; business bank accounts and records must be maintained and kept separate from personal accounts and assets;

records must be kept of corporate actions, including meetings of shareholders and Board of Directors; and licenses must be maintained.

 Disclosure of names of corporate officers and directors. Most states do not require that names of shareholders be a matter of public

record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed

with the Secretary of State.

 Dissolution. Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its

assets. Dissolution does not happen automatically. A corporation can be dissolved voluntarily or involuntarily. A corporation's officers and

directors are charged with responsibility for dissolving the corporation, including gathering corporate assets, paying creditors and outstanding

claims, and distributing the remaining assets to shareholders.

 Tax consequences. C corporations have potential double-tax consequences — once when the company makes its profit, and a second

time when dividends are paid to shareholders. S corporations can mitigate this tax issue.

If you're ready to incorporate now and do not need to use a lawyer, check out LegalZoom.com or another online incorporation service.

Advantages & Disadvantages of a Limited Company

ByMario McDaniel,eHow Contributor
updated: May 10, 2010

The main differentiations of a limited liability company (LLC) are its limited liability and simultaneous pass-through taxation. In essence, this

entity gives an entrepreneur the best of both worlds.

Purpose
1. An LLC is abusinessentity designed to give its shareholders the benefits of both a corporation and a partnership. This hybrid form

allows the company owners to have limited liability from debts and lawsuits and to be taxed federally as a partnership. Most states implement

the same rules for LLCs as they do for corporations, and LLCs have the same powers, including the ability to sue or be sued and to hold

property.

An LLC ceases to exist when its period of duration expires, when there are no more members, upon consent of all members, upon an event

declared in the articles of incorporation or when ordered by a court to dissolve.

General Characteristics
2. The General characteristics of an LLC can be summarized in three major points: Members and managers usually are not liable for

company debts; the duration or life of an LLC can be continuous in many states; members may freely transfer their interest in losses and

profits.
Advantages
3. The main advantages to an LLC are: limited liability, which means that each shareholder or member is liable only up to the

amount he invests; pass-through taxation, meaning an LLC avoids the double taxation inherent to the C corporation form.
Disadvantages
4. Even though an LLC may sound like the best possible entity for business purposes, it does have disadvantages, including

restrictive transfer of ownership. Some jurisdictions can complicate how shares in an LLC are transferred, and because of this, most outside
 investors typically stay away from LLCs and often require firms to change their corporate structure before venture or angel capital is invested.

The duration of a limited liability company can end with the withdrawal of one member.
Conclusion
5. An LLC is often a good starting point for manysmall businesses, because it eliminates double taxation but still offers the protection of

a corporation. However, if a business owner plans to receive outside funding via venture capital or angel investors, other options should be

considered as well.
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Disadvantageof Being a Private Limited Company

ByNellie Day,eHow Contributor
updated: May 10, 2010

Private limited companies are often considered the United Kingdom's version of limited liability companies. Though they have many

advantages, including shareholders' limited liability, the ability to make agreed-uponbusinessdecisions and business stability--the business is

not interrupted by events such as the death of a shareholder, for instance--there are also many disadvantages. High taxes, smaller dividends

and complex set-ups often deter small- and medium-sized business owners from setting up private limited companies.

Profit Sharing
1. Many private limited companies, or PLCs, are very profitable. Unfortunately, these profits can become diluted because they must

be evenly distributed among all shareholders, and many PLCs have up to 50 shareholders.
Taxes
2. Registered directors of PLCs must maintain impeccable records of profits and losses, including income and expenditures. These

records must be kept for at least seven years and are used to complete the corporation's tax returns every year. PLCs must also pay taxes

and insurance for their employees.

No Trading
3. Shareholders in a PLC are not able to sell or transfer their shares to the general public. The 50 or so shareholders that comprise a

PLC must keep their shares and cannot trade them on any stock exchange.
Cost
4. A PLC can be very expensive to create, as it must not only pay taxes and employee insurance, but also anylegalfees or other

incidentals involved in the business. PLCs can also be quite complex, meaning that lawyers and accountants almost always need to be

involved in the PLC from the start, which can be costly.

Lack of Privacy
5. Even though shares in a PLC cannot be publicly traded, information concerning the company is made public. Account balances

and details about the company's directors, including their names and contact information, must be made available upon request.
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Disadvantages of Incorporating

While it would appear that the argument for incorporating is strong, it is not
always the business structure for everyone.  You may decide not to
incorporate due to one of the following reasons:

1. Maintaining a corporation requires more paperwork and record keeping than sole
proprietorships. Each individual state has its own legal procedures and regulations
for forming and maintaining a corporation in good standing.

Also, it is usually more costly to set up a corporation than any of the other major
business structures. If you incorporate with a lawyer, fees could run between $500
to $2,000 or more. (Please see how you can have New Magnolia, Inc. form your
corporation in Mississippi for much less.)

2. If the profit from the business is not significant there may not be enough income
to take advantage of the tax and other benefits of a corporation.

Chapter 15. Company Types
Table of Contents

What Are Company Types?

Company Type Categories
Default Company Types
Additional Company Types
How Company Types Are Assigned
Viewing and Managing Company Types
Adding a Company Type

What Are Company Types?

As the name implies, Company Types are used to classify companies. They may also be associated with
roles that grant access. When a Company Type has roles associated with it, users who belong to a
company with this Company Type inherit these roles. In company-based organizations, the majority of
site users inherit basic access privileges through Company Types assigned to their company.

For example, Member Companies are assigned a Company Type when they join the organization. This
type usually confers the 'member' role. When people who belong to this company sign up asCompany
Representatives they inherit the 'member' role, which gives them access to Member Areas of the
organization's site. Staff and administrators may inherit basic access the same way.

The most significant difference between Company Types and other types (i.e., User Types, Contact
Types is this inheritance of roles through the company's Company Type(s). For this reason, Company
Types usually confer roles that provide Member Area and Groups access only. Roles that grant
administrative or editorial access are usually associated with User Types so they can be assigned to
specific users, rather than everyone in a company.

This document assumes you are familiar with Roles, Types and Membership Types.

Back to top

Company Type Categories

Your organization's website may have only one category of Company Types: 'General' Company Types.
If Kavi Membership is installed on your site, you'll also have the Category 'General : Assigned through
Membership Only'. A few organizations have an 'Admin' Company Type that is assigned to organization
or management company staff.

General Company Types

General Company Types are used to classify companies, and on sites without Kavi Membership, they are
likely to confer the 'member' role, and possibly the 'wg_access' role, which provides access to Kavi
Groups.

General: Assigned through Membership Only

On sites with Kavi Membership, the majority of Company Types correspond one-to-one to a specific
Company Membership Type. The Company Membership Type is configured to assign the Company Type
automatically assigned to a company when it acquires a certain type of membership. To make it easy to
search for companies by membership type, most organizations create a Company Type for each
Company Membership Type and assign the same name (or similar names) to both. For example, a
'Board' Company Membership Type and a 'Board' Company Type.

Depending on the membership structure, there may be a one-to-one correspondence between these
types (so that every Company Membership Type has a single corresponding Company Type), or a single
Company Type may correspond to multiple Company Membership Types or several Company Types may
be assigned through a single Company Membership Type. Whatever the ratio of correspondence, it is
important that at least one of the Company Types has a name that is instantly recognizable when
searching for companies with a given Membership Type in searches.

Company Types assigned through Company Membership Types are usually associated with roles that
confer access privileges, such as the default 'member' role that grants access to Member areas of the
site. When a company is assigned a Company Type with roles, its users inherit the roles and access
privileges. In organizations that offer memberships to companies, most users acquire their basic access
privileges through a Company Type assigned to their company.

General types without roles may be used classify users by geographic region, area of interest, or as
potential members, etc.

Admin Company Types

Admin Company Types confer roles that grant access to Admin Area tools. They are usually assigned to
staff who belong to the organization or a staff company. Since most organizations prefer to assign
administrative access to select individuals, there may not be any Admin Company Types on your website.
If there is one, it may be assigned to only one or two companies, possibly including a "company" added to
group organization staff. A privileged Company Type may be created and assigned to this "company" to
grant the organization staff the roles and access permissions they require.

Back to top

Default Company Types

There are only two default Company Types, but they may not be in use on your website. 'Members Area
Access', which is associated with the 'member' role, confers access to Member Areas of the site and
Member Area Tools. This type is installed so that Members Area access can be granted to users out-of-
the-box, without any additional configuration. 'Groups Access', which confers the 'wg_access' role and
access to Kavi Groups may also be in use on your website. Some websites use this role, but some base
Kavi Groups access on the 'member' role.

Back to top
Additional Company Types
Additional Company Types can be added as required, and deleted if no longer needed. To add a
Company Type, use the Add a Company Type tool. Examples of additional Company Types include types
that mirror Company Membership Types (e.g., 'Founding', 'Sponsor'), types assigned to nonmembers to
indicate which sector of the community they fall into (e.g., 'Adopter', 'Academic'), and general types that
may be assigned to members and nonmembers alike to classify them according to geographic area or
area of interest (e.g., 'Asia-Pacific Region', 'Electronics').

Back to top

How Company Types Are Assigned

It isn't mandatory for every company to be assigned a Company Type, but any companies that didn't have
a type would be harder to retrieve in searches. Company Types may convey roles that grant access to
the Members Area or Kavi Groups. It is unusual for them to convey higher-level access. If the
organization allows nonmembers to login, these users need to acquire the 'member' role (and possibly the
'wg_access' role as well), so they can access Member Area Tools that allow them to manage their
personal account data.

 A Company Type may be assigned automatically as a company is added to the Pending tables
during the membership application process.
 When a Super Admin adds companies in bulk through the Upload Data tool, the data file may
specify one or more Company Types, or one may be assigned automatically.
 An Organization Admin adding a new company manually through the Add a Company tool may
assign a Company Type. If there is a default Company Type for a company with this Company
Purpose, it is is preselected. The administrator may check additional Company Types if desired,
and may unselect the default.
 After a company is added, the Organization Admin can edit the assigned Company Types
through the Edit a Company tool, or a Super Admin may use Upload Data when Company Types
for multiple companies need to be edited.

In Company-based and Mixed Organizations

In company-based organizations, most users inherit the roles required to access the website through
Company Types assigned to their company. Companies may be automatically assigned 'Members Area
Access' and 'Groups Access' Company Types when they are added to the database.

If Kavi Membership is installed, Member Companies are assigned types through their membership. There
is probably one Company Type for every Company Membership Type.

In Individual-based Organizations
In individual-based organizations or mixed organizations, Individual Members may acquire basic access
to Member Areas of the website through Company Types. This is especially true of organizations that use
one or two Company for Individuals to group all Individual Members. An individual-based organization
may not have any additional Company Types, or may have one that applies only to Staff Companies.

To Staff

If the organization has a Company Type specifically for Staff Companies, it commonly has no roles, or
may confer just the 'member' and 'wg_access' roles only. In some cases, Staff Company may be
associated with high-level roles such as 'org_admin'.

Back to top

Viewing and Managing Company Types

All Company Types installed on the site are managed through Kavi Members.

Users

Company Types are not visible to regular users.

Company Administrators

Company Types are not visible to company administrators.

Organization Admins

Organization Admins can view, and assign or revoke, company's Company Types through the Manage a
Company tool. Organization Admins who are managing a company or company can click the link to
the View Access Configuration page to view all available types and roles on the website.

Super Admins

Super Admins can view and manage Company Types through the Manage Company Types tool, and can
view all installed types and roles through the View Access Configuration tool. Super Admins can edit
default Company Types as required, and add, edit and delete non-default Company Types. You can
change which roles are associated with a Contact Type by editing the type.

Back to top

Adding a Company Type

Super Admins may add Company Types for Company Memberships, semantic tagging or other needs
that aren't met by the default set. Go to Manage Contact Types and click the link to Add a Company Type
tool. Use the Edit a Company Type tool if you want to rename any one of the default Company Types, or
edit descriptions or roles.

Table 15.1. Configuring Company Type Options

Option Tips
Company Types used to classify companies by their membership type should be named
after the membership type they represent so they can be instantly recognized in pull-down
lists. For example, a Company Type assigned through a Sponsor Membership could be
named 'Sponsor'.
Naming
Conventions If your organization has multiple membership types at the same general level of
membership, such as different types of 'Affiliate' memberships, you may need an 'Affiliate'
Company Type to allow these members to be retrieved as a group. You may also need to
add Company Types to distinguish the different membership types under the 'Affiliate'
umbrella, such as 'Business Sector, 'Academic Sector' and 'Government Sector'.
The description should spell out any access granted through the type. If you edit a default
Description type by adding or removing roles, be sure to update the description to reflect the new
level of access.
In most cases, only the 'member' and 'wg_access' role should be associated with build-
your-own Company Types (if any). Default roles reserved for Contact Types (e.g.,
'company_admin') won't be available when configuring Company Types.
Roles
On sites where additional roles are added to provide access to areas or support
functionality created by Kavi Web Developers, Company Types may be added and
named after the role they confer.

Adding Company Types for Company Memberships

If you are adding a type to be assigned to companies when they acquire a company membership, here
are some hints. Every organization's membership structure is unique, so these hints aren't universally
applicable.

Tips

 These types belong in the category 'General (only through membership)'.

 At least one of the Company Types assigned through membership should be associated with the
'member' role to grant access to the Members area, or else you should associate the default
'Member Area Access' Company Type with the Company Membership Type, so that multiple
Company Types are automatically assigned when a company acquires this type of membership.
 If your organization uses the 'wg_access' role to provide access to Kavi Groups, include this role
or associate the default 'Groups Access' Company Type with the membership type. If there are
areas that are unique to your website that this type of member needs to be able to access,
associate the role that controls access to this area as well.
 Most Company Types assigned through membership correspond 1-to-1 to an Company
Membership Type, but this isn't applicable to all membership structures. Some organizations
assign multiple Company Types through a single membership type, and others assign a single
Company Type through multiple membership types. Do whatever makes the most sense for your
organization's membership structure.
For example, if there are multiple types at the same level that have only slight differences, the
same Company Type might be appropriate for all these Company Membership Types.
Conversely, if your organization has member chapters, members might be assigned two types,
one that is assigned to everyone with this type of membership and a second type assigned only
to members in this region. This approach is uncommon and the Company Types are generally
created by Kavi when implementing this kind of built-to-suit solution.
Back to top
Company Types
The Difference Between Service, Merchandising and Manufacturing Craft Companies
By Maire Loughran, About.com Guide
See More About:
 types of companies
 service
 merchandising
 manufacturing
 cost of goods sold
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MerchandisingGarments ManufacturingBusiness to BusinessGlobal Business CompanyBusiness

There are three different types of companies and each type of company will have a slightly
different financial statement presentation. The main difference is with the cost of goods sold.
Service companies usually won’t have a cost of goods sold as they aren’t selling a product, they
are selling an idea. As the other two company types are selling a tangible product, they will have
a cost of goods sold.

1. Arts and Crafts Service Company:

Examples of services type companies are doctors, accountants, architects, actuaries and
lawyers. I can only think of one type of art or craft business that would fall under this
classification. And that would be an arts or craft designer who comes up with the designs for
other related businesses but doesn’t make any product for resale.

One example of this can be a fabric designer. Fashion designers come to my business looking
for specific surface design of fabric for their garments. I come up with the pattern, design and
color scheme and use software to replicate the design in a shareable image file that the
 designer can send to their fabric dyers. I am paid for my design work but I am not involved in
the manufacturing process.

If you only make design prototypes, that type of craft business would also fall into the service
category. One example - a jewelry designer that designs and makes a sample piece of jewelry
based on the customer’s – maybe a jewelry manufacturer - specs. In essence, these types of
arts or craft businesses are consultants.

One major tipoff that you’re a service type of craft company is if you don’t have any
appreciable inventory. Most service type companies only make purchases for the job at hand
so they won’t carry an inventory – purchases will be expensed. If they do retain some
purchases, the amount is inconsequential especially when compared to a merchandising or
manufacturing company.

2. Arts and Crafts Merchandising Companies:

These are retail businesses such as a gallery, craft store, online shop or boutique. A
merchandiser purchases goods from an art or craft business and in turn sells the goods to the
end user - a consumer like you or me. In many cases, arts and crafts businesses are both
merchandising and manufacturing companies. You handcraft your products and sell them
yourself either online, at shows or in a storefront.

To me it is the best of both worlds if an artist or crafter can generate enough business to have
their own retail location to sell their products. I have been in storefronts and galleries where a
portion of the shop was the artist’s studio. While this is too much of a distraction for me and
somewhat of a potential lawsuit waiting to happen depending on the type of tools and
chemicals in use, it is a great marketing tool.

3. Arts and Crafts Manufacturing Companies:

This type of business makes the tangible arts and crafts products that are sold to either
merchandisers or directly to the customer. Going back to the service company jewelry
designer, after creating the prototype, instead of selling the design to another manufacturer,
the jewelry designer creates multiple copies of the piece of jewelry and sells the jewelry to
either merchandisers or the consumer.

As you can tell, it’s possible for you to wear different company type hats as an owner of an arts
or crafts business. If you make and sell your product directly to the customer you are both a
merchandiser and a manufacturer. If you make your product and sell it to a merchandiser you’re
a manufacturer only. Designers who only sell the concept have a service type business.

Suggested Reading

 Artists and Cost of Goods Sold

  Cost of Goods Sold
Related Articles

 Income Statements
 Start Up - Arts and Crafts Business Start Up Information
 Business Service Franchises - Business to Business Franchises
 M-N-O-P
 What Type of Business Entity is Good for an Arts / Crafts Business?

Maire Loughran
Arts / Crafts Business Guide
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Set up and register a limited company (private or public)

Types of limited company
There are four main types of company:

 private company limited by shares

 private company limited by guarantee
 private unlimited company
 public limited company (plc)
Most small and medium-sized businesses that opt for limited company status
become private limited companies.
Private company limited by shares
Most private limited companies are owned by their shareholders and
are limited by shares. This means that the liability of each member is
limited to the amount unpaid on shares held by them.
Private company limited by guarantee
Companies limited by guarantee do not have shares, and its members are
guarantors rather than shareholders. The members' liability is limited to the
amount they have agreed to contribute to the company's assets if it is
wound up. This structure is often used by charities, Right to
Manage,commonhold companies and social enterprises to limit the
personal liability of their directors and trustees. See our guide on how to set
up a social enterprise.
Private unlimited company
This type of company may or may not have a share capital but there is no
limit to the members' liability. There are relatively few unlimited companies.
PLCs
This type of company has a share capital and limits the liability of each
member to the amount unpaid on their shares. PLCs:

 can raise money by selling shares on the stock market

 must have share capital of at least £50,000 or the prescribed
equivalent in euros
 must have at least two directors and a qualified company secretary

See the page in this guide on requirements for public limited

companies.
A private company limited by shares can convert into a plc, but it will need
to re-register in order to do this. For more information on changing from a
private limited company to a plc, see our guide on company changes you
must report to Companies House.
Naming your company
You cannot choose a name that is the same as an existing company and you
should avoid a name:

 that people may find offensive

 that is 'too much like' an existing company name unless it is part of
the same group
 You will need to obtain special approval for a name that:

 Suggests a connection to a government department, a devolved

administration, a local authority or specified public body.
 Includes any sensitive words and expressions that require approval
from Companies House. For example, you are not allowed to choose a
name which includes words that are potentially misleading, such as
'international' if you are a UK-only business.

See our guide on how to choose the right name for your business.

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Subjects covered in this guide

 Introduction
 Registration documents and forms
 The company's officers
 Types of limited company
 Requirements for public limited companies
 Where to register your company and get help
 Tax matters of a limited company
 Checklist: setting up and registering a limited company (private or
public)
 Right to manage companies and commonhold associations

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