Corporate Governance

Dao Thanh Tung

FBM

2023 Faculty of Business Management

 Anglo-US model of CG
• Anglo-US model is characterised by share ownership of
individual and institutional investors not affiliated with
the company (outside shareholders)
• Equity financing is a common method of raising capital
for companies in US and UK. US and UK are the largest
and third largest capital market in the world,
respectively.
• The US companies have dispersed ownership structure.
• Publicly listed companies are a pivotal feature in US
 Key players in the Anglo-US model
• Players in US model include managers, directors,
shareholders, government agencies, stock exchanges, of
which three major players are managers, directors and
shareholders

MANAGEMENT SHAREHOLDERS

BOARD OF DIRECTORS
Composition of BoD in US model
(One tier board)

Corporate Structure
Stock
General Meeting
Corporate Structure Markets
General Meeting
appoints members of
governs confirms
BoardSupervisory
of Directors
Board
discipline dispose of
and control shares
CEO/President
appoints and
supervises reports to
Management
intervene
Board
Bầu ra and Shareholders
Inside in distress
manages
Outside Directors
Corporation
sở hữu
Banks
manages and monitors
pr provide loans to
Corporations
own
 One tier model of CG
• The most important feature of the one-tier model of
governance is the combination of the monitoring and the
managing bodies of the corporation.
• Advantages:
Quick decision making process
• Disadvantage:
- Over power on CEO
 Regulatory Framework in US model

• In the UK and US, a wide range of laws and regulatory

codes define relationship among management, directors
and shareholders
• In comparison with other capital market, the US has the
most comprehensive disclosure requirements and a
complex, well-regulated system for shareholder
communication
• Stock exchanges plays an important role in the US
model by establishing listing, disclosure and other
requirements.
 Disclosure Requirement in US model

• The US has the most comprehensive disclosure

requirements, compared to other countries
• US companies are required to disclose a wide range of
information: corporate financial data (on quarterly
basis), changes in the company’s capital structure,
background information on each nominee to the BoD,
compensation paid to all executive officers, all
shareholders holding more than 5% of the company’s
total share capital
Apple là công ty công nghệ có mức lương cao thứ 2 với
113.319,21 USD.
Features of the Japanese enterprises system
1) Long-term management strategy
2) Japanese employment system: Lifetime employment, seniority
system (length-of-service-based promotion and wages),
enterprise unionism, and cooperative labour-management
relations, OJT (on the job training), QC circle
3) Japanese financial system: main bank system and mutual share
holdings
4) Long-term transaction relationship
In 1992, 76% of firms utilized the long-term transaction (more
than 80% of all the transactions). Then, USA indicated 37.5%.
5) Weak control of shareholders
 The Japanese Model
• The Japanese model is characterised by a high level of
stock ownership by affiliated banks and a network of
affiliate companies (keiretsu).
• Equity financing is important for Japanese companies.
However, insiders and their affiliates are the major
shareholders in most Japanese companies.
• The interests of outside shareholders are marginal
• The percentage of foreign ownership of Japanese stocks
is small
 Keiretsu in Japan
Keiretsu is a set of companies with interlocking business
relationships and shareholdings

Yasuda
Tokyo Tatemono Co.
(insurance)
(real estate)
Yasuda Trust and
Banking Co. OKI Electric
Industrial Co.
Fuji
SA PPORO
Breweries Bank Nissan Motor Co.

Hitachi Ltd.
Canon
NNK Steel Corp.
Key players in Japnese model

Shareholders Government

Management Banks
Board structure of Japanese companies
Two tier board structure

Corporate Structure
General Meeting
Corporate Structure govern Banks
General Meeting Banks
appoints members of confer
appoints members and chairman of
proxies on
Supervisory Board
Supervisory
appoint Shareholders
Board
appoints and
supervises reports torepresentatives
appoints Management
Board
and supervises reports to Employees
Management
manages
Board
Corporation
Keiretsu
manages
Corporation own

provide loans to
 Shareholders in Listed Companies (End of March, %)
1990 1997 2002 2007
Total market price of listed companies

insider 62.8 56.3 41.4 33.9

banks and insurance 31.4 29.8 18.9 12.2

business corporations 29.5 25.6 21.8 20.7

outsider 34.9 42.5 57.9 64.0

foreigners 4.2 11.9 18.3 28.0

domestic institutional 10.2 11.2 19.9 17.9

Top listed companies 500 in market price

Financial and business 32.7 31.8 23.4 19.5

Oversea institutional 4.3 13.2 17.4 28.7

Domestic institutional - - 24.4 21.4

Bottom listed companies 500 in market price

Financial and business 37.9 37.8 31.3 25.9

Oversea institutional 2.6 3.8 2.1 6.9

Domestic institutional - - 8.7 12.2

Some characteristics of BoDs in Japan

• Most of the directors are promoted from within the

company.
• Large.
60% of large companies (capital greater than 500 billion
yen) in 1995 had board with more than 30 directors. It was
not uncommon to see a board with 40 directors or 50
directors.
• Many directors are also employees of the company. They
are typically the top managers of departments within the
company.
 Advantages of the Japanese board of
directors system
• Since it is large, and most of the directors are promoted
from within 🡪 greater chances for employees to be
promoted to the position of a director 🡪 positive incentive
effects.
• Greater change of promotion also provides incentive for
employees to acquire skills that are specific to the
company. This also reduces turnover rate.
• Since most of the directors are also employees of the
company, this makes it possible to utilize information from
actual workplace.
Some problems of the Japanese board of
directors system

1. It is large. Therefore, it is difficult to make speedy

decision.
2. Many directors are also the top managers of
departments within the company. They tend to place a
priority to the interest of his/her department. Conflict
of interests among directors make difficult to come up
with a unified decision.
Some problems of the Japanese board of
directors system (Contd)
3. Many directors are also employees of the company
who report to the president. Thus, although the board if
directors is required to monitor the management
(president, etc), it is impossible to effectively monitor
the management.
4. Similarly, since the elected managers are also the
members of the board, this system is a
‘self-monitoring’ system, which reduces the
effectiveness of monitoring.
 Recent trend

• The problems of the Japanese board of directors system

began to be recognized in the late 1990s, and some company
began to reform the system. In particular, several companies
began to introduce US style Chief-Officer System
• The first company to introduce such a system was Sony.
Sony introduced Chief-Officer system in 1997. At the same
time, it reduces the size of the board from 38 to 10, and
increased the number of outside directors.
 Ownership structure
• The Japanese companies have concentrated ownership
structure
• Financial institutions and industrial companies are key
shareholder and develop strong relationships with
company
• Financial institutions (banks and insurance companies)
held approximately 43% of the Japanese equity market,
corporations held 25%.
• Foreigner currently own approximately three percent
 Two tier board structure
• Shareholder meeting appoints the members of the
supervisory board. The supervisory board then appoints
the management board, whose principal function is to
manage the corporation.
Disclosure requirements in the Japanese model
• Disclosure requirement in Japan is not as strict as in US
• Corporations are required to disclose a wide range of
information in the annual report including: financial data
(required on a semi-annual basis), data on the corporation’s
capital structure, aggregate data on compensation
• Japan’s disclosure requirements differ from US
- Semi-annual disclosure of financial data vs. quarterly
disclosure in the US
- Aggregate disclosure of executive and board compensation
compared to individual data as in US
- Disclosure of company’s 10 largest shareholders,
compared with US requirement to disclose all
shareholders holding more than 5% of total share
 German model of CG
• The German CG model is basically similar to Japanese
model in that board structure is two tier and banks play a
central role in CG
• However, the German CG model has some difference
compared to the Japanese model
- Unlike the situation in Japan where bank
representative are elected to a corporate board only in
times of financial distress, this representative is
constant in German corporation
- The size of supervisory board is regulated by law and
shareholders are not allowed to change
Board structure of Vietnam companies

Corporate Structure
reports to
General Meeting
Corporate Structure
General Meeting
appoints members of
Supervisory
appoints members and chairman of board
Supervisory Board
Board of monitors
directors
appoints and
supervises reports to
appoints Management
Board
and supervises reports to
Management
manages
monitors
Board
Corporation

manages Banks
Corporation
provide loans to
Whether there is a convergence of CG systems?

• Justification for the convergence:

- Globalisation of capital market
- Growing competition
- Increased power of US companies
• Justification againts the convergence:
- Differences in economic, legal and culture ground
- There is a substantial variation in governance structures
across different countries and across companies.
 Transitions of Japanese-style management
1960s ・・・1980s 1990s 2000～

High-growth period Economic bubbles Lost decade New corporate governance

(Limitation of Japanese-style governance)

Japanese-style management
Mutual dependence among
companies
Reform of the
Crossholding of shares, Change of capital market
board
Era of Japanese-style corporate governance

main financing bank system,

Governance by management, bank and

company groups, etc. of directors

Indirect financing → Direct financing

Introduction of
economic agencies of state

Japanese-style employment
practice Shift to borderless economy US-style
Lifetime employment, Global economization Independent
seniority system, Trade and capital liberalization board
company union, etc. Big ban, IT revolution members
System
selectivity
Industrial policy Enhancement
Administrative control, of auditor's
public-private cooperation framework, Corporate scandal
authority
coordination in a industry group, etc. Executive
officers
Ambiguous corporate ・ Shareholder
accounting value
practice ・
Limited disclosure of corporate ・
information
 Request for establishment of corporate governance
with emphasis on shareholders
Fund-raising of the companies has consistently depended on indirect financing centered on banks since the
World War II. It is now shifted to direct financing-oriented fund-raising after experiencing financial Big Bang
and collapse of bubble economy.

Change of company's fund raising

Corporate
Main financing

Loan

Individual
・Financial crisis
・Big Bang
stock
bank

・Deregulation of stock
Crossholdi market
ngs Credit
of shares
＜Indirect financing＞ ＜Direct financing＞
Transition of
shareholding ratio by
％ holder
70.0
Financial institutions
Individual shareholders
60.0
Increase of individual shareholders
50.0
The total number of individual
40.0 shareholders
Business corporations
30.0 increased 250, 000 to 33,770,000.
It has been increasing for 7 years in a row.
20.0
Foreign shareholders Annuity trust
10.0 Investment trust National stock exchange 2002

0.0
1950 55 60 65 70 75 80 85 90 95 2000 02
 ‘One size fits all’ model?

• Each country has its own history, culture and stage

of development
• However, most countries tend to have a
convergence on core aspects of CG: disclosure and
transparency, important contribution that
independent directors can make.
 Models of CG
Each model has its own distinct competitive advantage.
The outsider model of corporate governance encourages
radical innovation and cost competition, whereas the
insider model of corporate governance facilitates
incremental innovation and quality competition.
 Discussion

• How does corporate governance impact the internal

functions of corporation?
• Does the corporate governance model have an impact on
investment?
 What are main characteristics
of US and Japan enterprise system

Comparative study of Canon, Toyota and Xrox, GM:

Key stakeholders
Board structures
Value and culture
Strategy