Vous êtes sur la page 1sur 77

Models of

CORPORATE
GOVERNANCE
CHAPTER 4

Learning Objectives:
After studying this chapter, you should be able to:
Understand and summarize the three models of corporate
governance with emphasis on the key players, share ownership
pattern, composition of the board of directors, regulatory
framework, disclosure requirements, and corporate actions
requiring shareholders approval as wells as interaction among
players.
Diagram and explain the major players under the Anglo-US
model
Diagram and explain the major players under the Japanese
model
Pinpoint the key player unique to the German model
Propose a hybrid model of corporate governance taking into

Good corporate governance is about intellectual honesty and


not just sticking to rules and regulations, capital flowed towards
companies that practiced this type of good governance.
-Mervyn King (Chairman: King report)

NEED FOR A MODEL

Good corporate governance is very important for


economic development, not only for the individual
company, but also for the economy as a whole.

There is a need for a model to measure the quality


of corporate governance.

The various models seem to focus on the inputs


of governance, such as composition of the
boards, the separation of the CEO and Chairman
roles.

But do not pay sufficient attention to quality of


information and decision making processes, or output
measures such as the brand image, employee customer
satisfaction indices, or profitability and value creation.

There is a corporate governance model that tries to remedy these


shortcomings. The essence of the model is to evaluate hoe the
crafted principles are applied to the LOGIC of governance ---Oversight, Guidance, Information, Culture, and continuous learning.

Three Models of Corporate


Governance in Developed Capital
Markets

The corporate governance structure of stock corporations


in a given country is determined by several factors:

The legal and regulatory framework outlining the


rights and responsibilities of all parties involved in
corporate governance;
The public acceptance of realities of the corporate
environment In the country;
And each corporations articles of association.

Each Model Identifies the following


constituent elements:
1)Key players in the corporate environment
2)Share ownership pattern in the given country
3)Composition of the board of directors (or boards, on
the German model)
4)The regulatory framework
5)Disclosure requirements for publicity-listed stock
corporations;
6)Corporate actions requiring shareholder approval;
7)Interaction among key players.

Three Models of Corporate Governance in


Developed Capital Markets
Anglo-US model
Japanese model
German model

Anglo-US Model
The Anglo-US model is characterized by share
ownership of individual, and increasingly
institutional, investors not affiliated with the
corporation (known as outside shareholders or
outsiders); a well-developed legal framework defining
the rights and responsibilities of three key players,
namely management, directors and shareholders;
and a comparatively uncomplicated procedure for
interaction between shareholder and corporation as
well as among shareholders during or outside the AGM.

Anglo-US Model
Equity financing is a common method of raising
capital for corporations in the United Kingdom (UK)
and the US. It is not surprising, therefore, that the US
is the largest capital market in the world, and that the
London Stock Exchange is the third largest stock
exchange in the world (in terms of market
capitalization) after the New York Stock Exchange
(NYSE) and Tokyo.

Anglo-US Model
There is a causal relationship between the importance
of equity financing, the size of the capital market and
the development of a corporate governance system.
The US is both the worlds largest capital market and
the home of the worlds most-developed system of
proxy voting and shareholder activism by institutional
investors. Institutional investors also play an
important role in both the capital market and
corporate governance in the UK, the US, Australia,
Canada, New Zealand and any several other countries.

Key Players in the Anglo-US Model

Management

Shareholders

Directors

They form what is commonly referred to as the "corporate governance


triangle

The Anglo-US model, developed within the context of the free


market economy, assumes the separation of ownership and
control in most publicly-held corporations.
This important legal distinction serves a valuable business and
social purpose: investors contribute capital and maintain
ownership in the enterprise, while generally avoiding legal
liability for the acts of the corporation. Investors avoid legal
liability by ceding to management control of the corporation, and
paying management for acting as their agent by undertaking the
affairs of the corporation.
The cost of this separation of ownership and control is defined as
agency costs. The interests of shareholders and management
may not always coincide.

Share Ownership Pattern


Chart Title

1981

38%
0

0.53
1990

21%
0.61

0%

10%

20%

30%

Instititional Investors(UK corporation)

40%
Individual

50%

60%

Insitutional Investor (US Corporation)

70%

Composition of the Board of Directors


Insiders

A person who is either employed by the corporation;


can be an executive, manager, employee, or
somebody who has significant personal and/or business
relationships with corporate management.
Outsiders

A person or institution which has no direct


relationship with the corporation or corporate
management.

Abuses
1.

Concentration of power in the hands of one person.

2.

Concentration of power in a small group of persons.

3.

Management and/or the board of directors attempts to retain power


over a long period of time, without regard for the interests of other
players entrenchment.

4.

The board of directors flagrant disregard for the interests of outside


shareholders.

Factors (Corporate Governance -US & UK)


1.

The increase in institutional investment in both countries

2.

Greater government regulations in the US, including regulations requiring some


institutional investors to vote at AGMs

3.

The takeover activity of the mid-to-late-1980s

4.

Excessive executive compensation at many US companies and a growing sense of loss of


competitiveness vis--vis German and Japanese competitors

Factors (Outsiders on BOD- UK & US


Corporation)
1.

The pattern of stock ownership

2.

Recommendations of self-regulatory organizations

3.

Trends in the G7 countries over the next ten years

Regulatory Framework
In the UK & US, a wide range of laws and regulatory codes define
relationships among management, directors and shareholders.
Laws regulating pension funds also have an important impact on
corporate governance

Regulatory Framework (Comparison)


US has the most comprehensive disclosure requirements and a complex, well-regulated
system for shareholder communication.
The regulatory framework of corporate governance in the UK is established in
parliamentary acts and rules established by self-regulatory organizations. Although the
framework of disclosure and shareholder communication is well-developed, some observers
claim that self-regulations in the UK is inadequate, and suggest that a government agency
similar to the US SEC would be more effective .
Stock exchanges also play an important role in the Anglo-US model by establishing
listing, disclosure, and other requirements.

Disclosure Requirements
1.

Corporate Financial Data

2.

Breakdown of the corporations capital structure

3.

Substantial background information on each nominee to the board of directors,


including name, occupation, relationship with the company, and ownership of
stock in the corporation.

4.

The aggregate compensation paid to all the executives officers as well as


individual compensation data for each of the five highest paid executive
officers, who are to be named.

5.

All shareholders holding more than 5% of the corporations total share capital.

6.

Information on proposed mergers and restructurings.

7.

Proposed amendments to the articles of associations

8.

Names of individuals and/or companies proposed as auditors

CORPORATE ACTIONS REQUIRING


SHAREHOLDER APPROVAL

The two routine corporate actions requiring


shareholder approval under the Anglo-US
model are:
1. Elections of directors.
2. Appointment of auditors.

Non-routine corporate actions which also


require shareholder approval include:

1.

Establishment or amendment of stock option plans.

2.

Merge and takeovers.

3.

Restructurings.

4.

Amendment of articles of incorporations.

US

Shareholders do not have the right to vote on the dividend proposed by the board
of directors.

UK

Shareholders vote on the dividend


proposal

The Anglo-US model

Permits shareholders to submit proposals (must relate to a corporations business


activity) to be included on the agenda of the AGM.

Shareholders owning at least 10% of a corporations total share capital may also
convene an extraordinary general meeting (EGM) of shareholders.

The Anglo-US model

In the US, the SEC has issued a wide range of regulations concerning the format,
substance, timing & production of shareholders proposals.
The SEC also regulates communication among shareholders.

INTERACTION AMONG PLAYERS


The Anglo-US model establishes a complex, well-regulated system
communication and interaction between shareholders and corporations.

for

Shareholders may exercise their voting rights without attending the annual
general meeting in person. All registered shareholders receive the following
by mail: the agenda for the meeting including background information an
all proposals.

Proxy statement

the corporations annual report and voting card.

Shareholders may vote by proxy, that is, they complete the voting card and return it by mail to the
corporation. By mailing the voting card back to the corporation, the shareholder authorizes the
chairman of the board of directors to act as his proxy and cast his votes as indicated on the voting
card.

In the Anglo-US model, a wide range of


institutional investors and financial
specialists monitor a corporations
performance and corporate governance:
1.
2.

A variety of specialized investment funds.


Venture-capital funds, or funds that invest in new or start-up corporation.

3.

Rating agencies.

4.

Auditors;

5.

Funds that target investment in bankrupt or problem corporations.

JAPANESE MODEL

JAPANESE MODEL

Characterized by a high level of stock ownership by affiliated banks and companies.

A banking system characterized by strong, long-term links between bank and


corporations.

A legal policy and industrial policy framework designed to support and promote
keiretsu.

JAPANESE MODEL

Keiretsu which refers to industrial groups linked by trading relationship as well as


cross-shareholdings of debt & equity.

JAPANESE MODEL

Board of directors composed solely of insiders; and a comparatively low level of input of
outside shareholders, caused and exacerbated by complicated procedures for exercising
shareholders votes.

JAPANESE MODEL

Equity financing is important for Japanese corporations. However, insiders and their
affiliates are the major shareholders is most Japanese corporations.

JAPANESE MODEL

Conversely, the interest of outside shareholders are marginal. The interest of foreign
ownership of Japanese stocks is small, but it may become an important factor is making
the model more responsive to outside shareholders.

Key Players

The Japanese system of corporate governance is many-sided, centering


around the main bank and a financial/industrial network or keiretsu.

MAIN BANK SYSTEM

provides its corporate client with loans as well as service related to bond
issues, equity issues, settlement accounts, and related consulting services.
is generally a major shareholders in the corporations.

Many Japanese corporations also have strong financial relationship with a


network affiliated companies. These networks, characterized by
crossholdings of debt and equity, trading of goods and services, and
informal business contracts are known as keiretsu.

Government-directed industrial policy also plays a key role in Japanese governance. Since the
1930s, the Japanese government has pursued an active industrial policy designed to assist
Japanese corporations. This policy includes official and unofficial representation on corporate
boards, when a corporation faces financial difficulty.

In the Japanese model, the four key players are:


1.

Main Bank.

2.

Affiliated company or keiretsu

3.

Management and the

4.

Government

The interaction among these players serves to link


relationships rather than balance power, as in the case in the
Anglo-US model. In contrast with the Anglo-US model, nonaffiliated shareholders have little or no voice in the Japanese
government.

The Japanese model may be diagrammed


as an open-ended hexagon:
Outside
Shareholders

Government

Management

Independent
Directors

Keiretsu

Bank

SHARE OWNERSHIP PATTERN


Financial Institutions and Corporations- hold ownership of the equity market

1990- financial institutions like the insurance companies and banks held
approximately 43% of the Japanese equity market, and corporations (excluding
financial institutions) held 25%. Foreigners currently own 3%.

Board of Directors
Japanese Corporations composed mostly of insiders, that is, EXECUTIVE
MANAGERS heads of major divisions of the company and its central
administrative body.
The MAIN BANK AND KEIRETSU may remove directors and appoint their
own candidates if a companys profits fall over an extended period.
JAPANESE BOARD contains of 50 members

REGULATORY FRAMEWORK
FACTORS:

The growing role of Japanese corporations, policy formation became


fragmented due to the involvement of numerous ministries.

the increasing internationalization of Japanese corporations made them


less dependent on their domestic market and therefore somewhat less
dependent on industrial policy.

The growth of Japanese capital markets

led to their partial liberalization to global standards.

PRIMARY REGULATORY BODIES:

Securities Bureau of the Ministry of Finance


Securities Exchange Surveillance Committee

DISCLOSURE REQUIREMENTS

Financial data on the corporation

Data on the corporations capital structure

Background information on each nominee to the board of directors

Aggregate date on compensation, namely the maximum amount of


compensation payable to all executive officers and the board of
directors

Information on proposed mergers and restructurings

Proposed amendments to the articles of association

Names of individuals and/or companies proposed as auditors.

JAPANS DISCLOSURE
REGIME

US DISCLOSURE REGIME

Semi-annual disclosure of financial data

Quarterly disclosure of financial data

Aggregate disclosure of executive and


board compensation

Individual data on the executive


compensation in the US

Disclosure of the corporations ten


largest shareholders

disclose all shareholders holding more


than five percent of the corporations
total share capital

Significant differences between


Japanese accounting standards

Generally Accepted Accounting Practices


(US GAAP).

CORPORATE ACTIONS REQUIRING


SHAREHOLDER APPROVAL
ROUTINE CORPORATE ACTIONS

Payment of dividends and allocation of reserves

Election of directors; and appointment of auditors.

COMMON CORPORATE ACTIONS

Capital authorizations

Amendments to the articles of association and/or charter

Payment of retirement bonuses to directors and auditors

Increase of the aggregate compensation ceilings for directors and auditor

NON-ROUTINE CORPORATE ACTION

Mergers, takeovers, and restructurings

INTERACTION AMONG PLAYERS

Japanese corporations prefer that a majority of its shareholders be longterm, preferably affiliated parties.
Shareholders may attend the annual general meeting, vote by proxy or
vote by mail.

GERMAN MODEL
governs

German
Austrian
Corporations Corporations
Some elements also apply

Netherlands

France

Belgium

Scandinavia

The Japanese Model

The German Model

- Banks hold long term


stakes in Japanese
corporations
- bank representatives
are elected to
Japanese boards

-banks hold long term


stakes in German
corporations
-bank representatives
are elected to German
boards

UNIQUE ELEMENTS of the GERMAN MODEL


Two-tiered Board Structure
Which means it consist of a management board and supervisory board.
The 2 boards are completely distinct; no one may serve simultaneously
on a corporations management board.

Size of supervisory board


It is set by law cannot be change by shareholders

Voting right restrictions


Voting right restrictions are legal; these limit a shareholder to
voting a certain percentage of the corporations total share
capital, regardless of share ownership position

BOARD COMPOSITIONS
Two-tiered Board
Management Board
VORSTAND

Responsible for daily


management of the company

Supervisory Board
Aufsichtsrat

Responsible for appointing the


management board

Employees/labour
Union &
Shareholders

Responsible for appointing


members to the supervisory
board

Comparison
Management Board

Supervisory Board

Responsible for the daily


management of the company
Composed solely of insiders
( executives )

Appoints and dismisses the


management board
Approves major management
decisions
Advises the management board
Has no insiders. It is mainly
composed of labour/employee
representatives or shareholder
representatives

Role of Employees/labour Unions and


shareholders

In small corporations with less than 500 employees, shareholders elect


the entire supervisory board

In medium sized companies, employees elect 1/3 of a 9 member


supervisory board

In larger corporations, employees elect of a 20 member supervisory


board

UNIQUE ELEMENTS of the GERMAN MODEL


Two-tiered Board Structure
Which means it consist of a management board and supervisory board.
The 2 boards are completely distinct; no one may serve simultaneously
on a corporations management board.

Size of supervisory board


It is set by law cannot be change by shareholders

Voting right restrictions


Voting right restrictions are legal; these limit a shareholder to
voting a certain percentage of the corporations total share
capital, regardless of share ownership position

Most German corporations have traditionally


preferred bank financing rather than equity
financing. As a result German stock market
capitalization is small in relation to the size of
the German economy.
The level of individual stock ownership in
Germany is low, reflecting Germans
conservative investment strategy

KEY PLAYERS
BANKS
Corporate shareholders
Banks usually play a multi- role as shareholder, lender, issuer of
both equity and debt, depository. German and Austrian
corporations use the abbreviations AG following their names

Share Ownership Pattern


Corporations

41%

Banks

27%

Pension Funds

3%

Individual Owners

4%

Foreign investors

19%

Disclosure Requirements
Corporate financial data, requires on a semi-annual basis.
Data on capital structure
Limited information on each supervisory board nominee, including
name, hometown and occupation/affiliation.
Aggregate data for compensation of management and supervisory
board.
Any substantial shareholder holding more than 5% of the
corporations total share capital.
Information on proposed mergers and restructurings.
Proposed amendments to the articles of association.
Names of individuals and/or companies proposed as auditors

The diclosure regime in Germany differs from the US


regime, generally considered the worlds strictest, in
several notable ways. This include:
1. semi-annual disclosure of financial data
2. aggregate disclosure of executive compensation
and supervisory board compensation
3. no disclosure of share ownership of members of the
supervisory board
4. Significant differences between German accounting
standards and US GAAP

Corporate Actions Requiring


Shareholder Approval
Allocation of net Income (payment of dividends and
reserves.
Ratification of the acts of the management board
for the previous fiscal year.
Ratification of the acts of the supervisory board for
the previous fiscal year.
Election of the supervisory board.
Appointment of auditors.

Other corporate actions which also


require shareholders
approval
Capital Authorization

Affiliation agreements with subsidiaries

Amendments to the articles of association and/or charter

Increase of the aggregate compensation ceiling of the supervisory


board.

Non Routine acts include :


Mergers, takeovers, restructuring

Interaction among players

German
Legal and
PublicPolicy
Framewor
k

Labour

Interest of
Corporations

and Shareholders

Banks

How do they interact?

Corporations
announce their
AGM

Banks forward
documents to
Beneficial Owners

Beneficial Share
holders provides
the bank with his /
her voting
instructions

Forward annual report to


custody bank