MODELS OF CORPORATE GOVERNANCE

 Japanese
 Anglo-American/Anglo-Saxon
 German
 Indian

Anglo-American Model
 AKA Anglo-Saxon model
 Prevalent in USA, UK, Canada, Australia, common wealth nations
 Premised on segregation of management and ownership
 Shareholders appoint directors, the directors in turn appoint management to
manage/supervise the business
 Segregation important especially in large corporate organisations with large
board structures
 Optimum board structure
 Board must comprise a mix of executive and non-executive directors (ID)
 Some directors will look into management of the company, and some will
cater to independent judgement
 Board must have limited ownership stakes in the company
 Effective Communication between shareholders, board and management
 All important decisions taken with the approval of the shareholders (by
voting)

German Model
 Prevelant in Germany, Holland, France, etc.
 Emphasis on 2-tier board structure
 2 tiers- Supervisory board and management board
 Management has its own tier
 The supervisory tier is the tier of ownership- and rights of the management
flows out from this tier itself, Owners have right to delegate to the managers

Japanese Model
 Also called business network model
 Emphasis on collective decision making
 Large-scale shareholders exist- banks, financial institutions, large families,
basically, there is cross shareholding
 Supervisory board- board of directors + president
 And the members of the supervisory board are jointly appointed by all the
shareholders
 Premised on power of loan givers- one who gives you loan also has the right
to decide
Indian Model
 Mix of Anglo-American and German model
 We do not follow Japanese model
  India- different corporate structures like public co, private co, PSUs (statutory co, govt
co, banks, other financial institutions). They have different shareholding pattern, who
hold different degree of decision making
 AG/EGM, Board meetings- rights of the directors flow out from the shareholders,
they hold the power to appoint directors in general meeting (German model)
 India aims at maintaining segregation of directors and owners- mainly ensures
through independent directors, disclosure requirements (Anglo-American model)

THEORIES OF CORPORATE GOVERNANCE

 Agency Theory
 Stewardship Theory
 Stakeholders Theory

Agency Theory
The owner of the Company hires the agent, that is, the manager or director, to manage the
affairs of the Company in the best interest of the Company and the owner. The problem
arises when the person so appointed works for self-interest and to secure his basic salary
and does not work to increase the profit and life of the Company. When the agent is
appointed, there is delegation of power, and there is separation of power and control from
the hands of the owner. The agent is responsible for the decisions taken and the working of
the Company.

PRINCIPLE ⇒HIRES ⇒ AGENT ⇒ WORK IN SELF INTEREST.

Stewardship Theory
This theory was introduced by Donaldson and Davis (1989). Stewards in the Company
basically means the directors or the manager of the Company. According to this theory, as a
steward, when managers are given the power to work in the interest of the Company, they
work responsibly for the organisational success and balanced growth of all the stakeholders
—the work in the interest of the shareholders to maximise their wealth.

SHAREHOLDERS ⇒ EMPOWER THE TRUST ⇒ STEWARD STEWARD⇒ ORGANISATIONAL

SUCCESS⇒ SHAREHOLDERS

Stakeholders Theory
According to this theory, the manager should take steps in the interest to secure good
governance to improve the relationship and interaction between the various stakeholders
involved, such as Investors, workers, board of directors’ shareholders, general public,
regulatory bodies, Business Partners, Employees, etc. This theory implies that the director is
responsible and accountable to a wide range of stakeholders involved in the Company. This
theory primarily focuses on balancing the interest of all stakeholders whilst making any
managerial decision and that nobody’s interest is kept above the other’s and is not given
supremacy and the decision are taken in the long run interest of the Company.