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MODELS OF CORPORATE

GOVERNANCE
i. ANGLO AMERICAN MODEL
ii. GERMAN MODEL

CO RPO RATE G O VERN AN CE
The system of rules, practices and
processes by which a company is
directed and controlled. Corporate
governance
essentially
involves
balancing the interests of the many
stakeholders in a company - these
include its shareholders, management,
customers,
suppliers,
financiers,
government and the community. Since
corporate governance also provides the
framework for attaining a company's
objectives, it encompasses practically
every sphere of management, from action
plans
and
internal
controls
to
performance measurement and corporate
disclosure.

CORPORATE GOVERNANCE MODELS  ANGLO AMERICAN  GERMAN  JAPANESE  INDIAN .

Australia and other commonwealth countries including India .INTODUCTION TO ANGLO AMERICAN This is also known as unitary board model. in which all directors participate in a single board comprising both executive and non-executive directors in varying proportions. This approach to governance tends to be shareholder-oriented. . It is also called the ‘Anglo—Saxon’ approach to corporate governance. Canada. Britain. being the basis of corporate governance in America.

FEATURES OF ANGLO AMERICAN  Ownership is equally divided between individual     and institutional shareholders. . Directors are rarely independent of management. Most institutional investors are reluctant activists Disclosure norms. Run by professional managers who have negligible ownership stake.

shareholders Board of director stakeholder Officers(managers) creditors company Regulatory/le gal system .

SEPARATIO N O F O W N ERSH IP AN D CO N TRO L  SOEs and widely held publicly traded companies typically separate management and ownership.  The professional managers and the shareholders have conflicts of interest.  This raises the possibility that ownership and management may not be perfectly aligned in their business and financial objectives. the so called agency problem arises .

The Goal of Management  Maximization of shareholders’ wealth is the dominant goal of management in the Anglo-American world.  There are basic differences in corporate and investor philosophies globally.  Cultural influence has a bearing on MNEs behavior .

.Shareholder Wealth Maximization  In a Shareholder Wealth Maximization model (SWM). a firm should strive to maximize the return to shareholders  Max (market capitalization + dividend payment) s. t. the firm should minimize the level of risk to shareholders for a given rate of return.  Alternatively. risk.

labor union.  Stakeholders should be involved in corporate governance. Local government.  The board of directors should be monitored and held accountable . etc  Disclosure and transparency is critical.  Good corporate governance practices should: (the so called OECD rule)  protect shareholders rights.  ensure the equitable treatment of all shareholders.  The board of directors of the corporation should focus their on developing and implementing a strategy that ensures corporate growth and improvement in the value of the corporation’s equity.Good Corporate Governance  The objective of corporate governance is the optimization over time of the returns to shareholders.

Key Players in the Anglo-US Model  Players in the Anglo-US model include management." . shareholders (especially institutional investors). Of these. directors. government agencies. They form what is commonly referred to as the "corporate governance triangle. the three major players are management. stock exchanges. directors and shareholders. self-regulatory organizations and consulting firms which advise corporations and/or shareholders on corporate governance and proxy voting.

manager or employee) or who has significant personal or business relationships with corporate management. An “outsider” is a person or institution which has no direct relationship with the corporation or corporate management . .Composition of the Board of Directors in the Anglo-US Model  The board of directors of most corporations that follow the Anglo-US model includes both “insiders” and “outsiders”. An “insider” is as a person who is either employed by the corporation (an executive.A synonym for insider is executive director. a synonym for outsider is non-executive director or independent director.

substantial back ground information on each nominee to the board of directors (including name. occupation. . all shareholders holding more than five percent of the corporation’s total share capital. and ownership of stock in the corporation). who are to be named. a breakdown of the corporation’s capital structure. relationship with the company.Disclosure Requirements in the Anglo-US Model Information is included either in the annual report or in the agenda of the annual general meeting(formally known as the “proxy statement”): corporate financial data ( this is reported on a quarterly basis in the US). the aggregate compensation paid to all executive officers as well as individual compensation data for each of the five highest paid executive officers. and names of individuals and/or companies proposed as auditors.

Non-routine corporate actions which also require shareholder approval include: the establishment or amendment of stock option plans (because these plans affect executive and board compensation). and amendment of the articles of incorporation . restructurings. mergers and takeovers.Corporate Actions Requiring Shareholder Approval in the Anglo-US Model  The two routine corporate actions requiring shareholder approval under the Anglo-US model are elections of directors and appointment of auditors.

M O D ELS O F CO RPO RATE G O VERN AN CE GERMAN MODEL OF CORPORATE GOVERNANCE .

 Shareholder elect 50% members of the supervisory board and rest is by labor unions. .GERMAN MODEL OF CORORATE GOVERNANCE  Two tier board model  Upper board supervises the executive board on behalf of stakeholders and its typically social oriented.  Supervisory board appoints and monitors the management board.  Shareholder do not dictate the governance mechanism. ensuring they enjoy share in governance.

This is somewhat similar.Key Players in the German Model  German banks. corporations are also shareholders. In 1990. are the key players in the German corporate governance system. and to a lesser extent. sometimes holding long-term stakes in other corporations. Banks usually play a multi-faceted role as shareholder. In Germany. corporate shareholders. the three largest German banks (Deutsche Bank AG Dresdner Bank AG and Commerce bank AG) held seats on the supervisory boards of 85 of the 100 largest German corporations. depository (custodian bank) and voting agent at AGMs. to the Japanese model. even where there is no industrial or commercial affiliation between the two. lender. issuer of both equity and debt. but not parallel. yet very different from the Anglo-US model where neither banks nor corporations are key institutional investors .

TW O TIER BO ARD .

Foreign investors held 19 percent in 1990. Neither institutional agents. corporations held 41 percent of the German equity market. In 1990.S hare Ownership Pattern in the German Model  German banks and corporations are the dominant shareholders in Germany. such as pension funds (three percent) or individual owners (four percent) are significant in Germany. and institutional owners (primarily banks) held 27 percent. . and their impact on the German corporate governance system is increasing.

and advises the management board. . The management board is composed solely of “insiders”. The supervisory board usually meets once a month. employees elect one-half of a 20-member supervisory board. The supervisory board contains no “insiders”. it is composed of labor/employee representatives and shareholder representatives. or executives. In medium-size corporations employees elect one-third of a nine member supervisory board. In larger corporations. The numbers of members of the supervisory board is set by law.Composition of the Management Board  German corporations are governed by a supervisory board and a management board. The management board is responsible for daily management of the company. approves major management decisions. In small corporations shareholders elect the entire supervisory board. The supervisory board appoints and dismisses the management board.

Corporations are required to disclose a wide range of information in the annual report and/or agenda for the AGM. information on proposed mergers and restructurings. . limited information on each supervisory board nominee (including name. proposed amendments to the articles of . and names of individuals and/or companies proposed as auditors. any substantial shareholder holding more than 5 percent of the corporation’s total share capital. data on the capital structure. aggregate data for compensation of the management board and supervisory board. hometown and occupation/affiliation). but not as stringent as in the US. including: corporate financial data (required on a semi-annual basis).Disclosure Requirements in the German Model  Disclosure requirements in Germany are relatively stringent.

. election of the supervisory board. and appointment of auditors. ratification of the acts of the supervisory board for the previous fiscal year.Corporate Actions Requiring Shareholder Approval in the German Model  The routine corporate actions requiring shareholder approval under the German model are: allocation of net income (payment of dividends and allocation to reserves). ratification of the acts of the management board for the previous fiscal year.

1. 3. .ANGLO AMERICAN VERSUS GERMAN MODEL Anglo American model German model 1. 4. Maximize shareholders value. Executive and non-executive directors sit together. 4.Supervisory board totally independent from management board. Chairman ad chief executive officers work closely together and there are board committees for audit . Seek profitability and efficiency 2. 2.remuneration and nomination. Less concerned about profits. 3. Look after stakeholder interest. Supervisory board consist of nonexecutive directors and lower management consist of full time managing directors.