GGSR
Chapter 4: Models of Corporate Governance
Three Models of Corporate Governance from
Developed Capital Markets:
1. Anglo-US Model
2. Japanese Model
3. German Model
Constituent Elements:
1. Key players in the corporate environment
2. Share ownership pattern in the given country
3. Composition of the board of directors
4. Regulatory framework
5. Disclosure requirements for publicly-listed stock
corporations
6. Corporate actions requiring shareholder approval
7. Interaction among key players
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.
Key Players in the Anglo-US Model:
1. Management
2. Directors
3. Shareholders
4. Government Agencies
5. Stock Exchanges
6. Self-regulatory Organizations
7. Consulting Firms
Share Ownership Pattern in Anglo-US Model:
-institutional investors held 61%
-individuals held 21%
-institutions held 53.3%
Agency Costs costs of separating ownership and
control.
Composition of Board of Directors in Anglo-US
Model:
1. Insiders is a person who is either employed by
the corporation or somebody who has significant
personal relationships with corporate management.
2. Outsiders is a person or institution which has
no direct relationship with the corporation or
corporate management.
Fiduciary Responsibility it is the responsibility
to exercise stock ownership rights.
Proxy Statement it is the annual report or in the
agenda of the annual general meeting.
Two Routine Corporate Actions requiring
Approval in Anglo-US Model:
1. Elections of directors
2. Appointment of auditors
Non-Routine Corporate Actions which also
require Shareholder Approval:
1. Establishment or amendment of stock option
plans
2. Mergers and takeovers
3. Restructurings
4. Amendment of the articles of incorporation
Japanese Model is characterized by a high level
of stock ownership by affiliated banks and
companies, a banking system characterized by
strong, long-term links between banks and
corporation, a legal, public policy and industrial
policy framework designed to support and promote
keiretsu.
Keiretsu refers to industrial groups linked by
trading relationships a swell as cross-shareholdings
of debt and equity, board of directors composed
almost solely of insiders, comparatively low level of
input of outside shareholders, caused and
exacerbated by complicated procedures for
exercising shareholders votes.
Four Key Players of Japanese Model:
1. Main bank
2. Affiliated Company or Keiretsu
3. Management
4. Government
Share Ownership Pattern in Japanese Model:
-financial institutions held 43%
-corporations held 25%
-foreigners held 3%
Composition of the Board of Directors in
Japanese Model:
1. Composed mainly of insiders of 50 members
Corporate Actions Requiring Shareholder
Approval in Japanese Model:
1. Payment of dividends and allocation of reserves
2. Election of directors and appointment of auditors
3. Capital authorizations
4. Amendments to the articles of association and
charter
5. Payment of retirement bonuses to directors and
auditors
6. Increase of the aggregate compensation ceilings
for directors and auditors
German Model governs German and Austrian
corporations, it differs significantly from both Anglo-
Us and Japanese Models but some resembles the
Japanese Model.
Three Unique Elements of the German Model:
1. It prescribes two boards with separate members.
2. The size of the supervisory board is set by law
and cannot be changed by shareholders.
3. Voting right restrictions are legal.
Two Boards in German Model:
1. Management Board composed of entirely of
insiders, that is executives of the corporation.
2. Supervisory Board composed of labor or
employee representatives and shareholder
representatives.
Voting Right Restrictions limits a shareholder of
voting a certain percentage of the corporations
total share capital, regardless of share ownership
position.
Key Players in German Model:
1. Banks
2. Corporate Shareholders
Share Ownership Pattern in German Model:
-corporations held 41%
-institutional owners held 27%
-foreign investors held 19%
Corporation Actions Requiring Shareholder
Approval in German Model:
1. Allocation of net income
2. Ratification of the acts of the management board
for the previous fiscal year
3. Ratification of the acts of the supervisory board
for the previous fiscal year
4. Election of the supervisory board
5. Appointment of auditors

Seal of Approval or Vote of Confidence it is
the approval of the acts of the management board
and supervisory board.
Other Common Corporate Actions which also
requires Shareholder Approval in German
Model:
1. Capital authorizations
2. Affiliation agreements with subsidiaries
3. Amendments to the articles of association and
charter
4. Increase of the aggregate compensation ceiling
for the supervisory board
GGSR
Chapter 5: Agency Problems and
Accountability of Corporate Managers and
Shareholders
Agency Problem in Corporate Governance
Agency Theory suggests that the firm can be
viewed as a loosely defined contract between
resource providers and the resource controllers, it is
a relationship that came into being occasioned by
the existence of one or more individuals called
principals, employ one or more other individuals
called agents to carry out some service and then
entrust decision-making rights to the agents.
Principal-Agent Specific Issues:
1. Diversification vs Dividends
2. Managerial Opportunism
3. Power Supremacy vs Technical Expertise
4. Trust
Identified Agency Problems:
1. Adverse Selection
2. Agency Costs
3. Conflict of Interest
4. Legal Requirement vs Opportunistic Behavior
5. Self-Interested Behavior
Remedies within Shareholders:
1. Proxy Voting
2. Derivative Suit
3. Specific Feature
4. Process
5. Takeover
Proxy Voting is normally used in corporations by
voting shareholders, for it permits shareholders who
have confidence in the judgement of another
shareholder or investment and fund managers to
vote for them.
Benefits of Proxy Voting:
1. Routine Decisions
2. Governance
3. Issues on Anti-takeover
Derivative Suit is a lawsuit filed by a shareholder
on behalf of the corporation against a third party.
Corporate Takeover refers to the transfer of
control of a firm from one group of shareholders to
another group of shareholders.
Types of Takeover:
1. Friendly Takeover before a bidders company
makes an offer for another company, it usually
inform first the board of directors of the company to
be taken over.
2. Hostile Takeover permits the acquirer to be
company to bypass the target companys
management if it is uncooperative and unwilling to
agree to a merger or takeover.
3. Reverse Takeover is a type of merger use by
private companies to become publicly-traded
without passing through initial public offering, the
company has saved itself form paying expensive
fees related to an initial public offering.
4. Tender Offer is a corporate finance term which
means a type of takeover proposal that is public and
open invitation, usually coursed through media by a
prospective acquirer to all stockholder of a publicly-
traded corporation which is the target corporation.
Ways to Perform a Hostile Takeover:
1. Tender Offer acquiring company makes a
public offer the price of which is way higher than the
current market price making it hard for the existing
shareholders to resist.
2. Proxy Fight acquiring company persuades
enough shareholders, usually a simple majority is
sufficient, to replace the management with a new
one.
3. Creeping quietly purchasing enough stock in
the open market, purpose is to gather enough
holdings that can somehow influence the decisions
within the corporation.
Financing a Takeover is an act of funding for the
purpose of obtaining control over a corporation
through the purchase of stock or any other means,
the process of providing capital for someone to
establish control of another corporation.
Ways of Financing a Takeover:
1. Debt Financing a company acquiring another
pays a specific amount of money for the merger
transaction to complete.
2. Partial or Full Equity Conversion is done by
giving the shareholders of the target company offers
that include a debt instrument in partial or in full
payment of shares.
3. Share Swap or All Share Deal the company
issues its own new shares to the shareholders of the
acquired to be company.
External Forces Affecting Governance:
1. Competitors refer to corporations and other
business entities, private or public, offering the
same product or services that the company is
offering.
2. Financiers it is a term given to a person or
entity who manages routinely huge amount of
money.
3. Regulatory Agencies refers to a public
authority or government agency responsible for
existing authority over some area of corporate
activity in a regulatory or supervisory capacity.
4. Watchdog refers to independent organizations
trying to police a particular industry or corporate
conduct to make certain that the activities of these
companies are accordance with the acceptable
standards and existing laws.
5. Information Enhancers, Providers and
Gatekeepers refer to independent third party
persons or entity whose cooperation is important
because they have the capability to at least deter, if
not prevent analysts, rating agencies and
examiners.
6. Investment Bankers is an individual or entity
which acts as an agent for corporation issuing
securities.
7. Stock Exchanges refers to an entity which
offers trading services and facilities for stock
brokers and traders, to buy and sell shares of stock
and other securities, also offer services for the issue
and redemption of securities as well as other
financial instruments including other arrangements
such as the payment of income and dividends.
8. Financial Press refers to newspapers,
magazines, TV channels, broadcast programs and
other media specializing in financial news and
updates.
Primary Issue is the offering in time when
corporation issues and sells new securities to
increase funds.
Role of Investment Banker:
1. Origination (Investigation, Analysis and
Research) covers the secondary operations of
discovery, investigation and negotiation.
-Discovery is the finding of a potential issue of
securities.
-Investigation it is the testing and analyzing of
the investment credit of the potential
security issuer including the inherent reliability of
the issue.
-Negotiation is the determination of the amount,
the price and the terms of the proposed issue.
-Investigation typically involves an analysis of
the financial history of the corporation by
accountants and other finance people, investigation
if legal factors, ocular survey of its physical
property by engineers and other technical
professionals and a thorough review of companys
operation.
2. Underwriting (Public Cash Offerings) is an
arrangement with an investment banker whereby
the investment banker agrees to buy the entire
issue at a set price.
3. Distribution investment banker acts as a
professional firm to distribute securities efficiently
for the corporation.
Roles of Stock Exchanges:
1. Raise Capital
2. Mobilize Savings
3. Facilities Growth
4. Distributes Profit
5. Improves Corporate Governance
6. Creates Opportunities for Small Investors
7. Facilities Raising Capital for the Government
8. Indicator of Economy
GGSR
Chapter 6: Corporate Social Responsibility
Adam Smith suggested that the needs and
desires of society could best be met by the free-for-
all interaction of individuals and organizations in the
marketplace.
Corporate Social Responsibility is the long
term vow by business to perform within the bounds
of ethics and to contribute to economic
advancement at the same time improving the
quality of life of the workforce and their families as
well as of the local community and society at large,
it is a companys positive involvement on society
and the environment through its operations,
products or services and through its relations with
key stakeholders such as employee, customers,
investors, communities and suppliers.
Arguments for and Against Corporate Social
Responsibility:
1. Economic Argument primary responsibility of
business is to make a profit for its owners, albeit
while complying with the law.
2. Competitive Argument addressing social
issues comes at a cost to business, if businesses in
one country expend assets to address social issues,
but those in another country do not.
3. Capability Argument business executives and
managers are typically well trained in the ways of
finance, marketing and operations management,
but not well versed in dealing with complex societal
problems.
4. Self-Interest Argument corporations should
conduct themselves in such a way in the present as
to assure themselves of a favorable operating
environment in the future.
Basic Premises of CSR:
1. Business Leaders understand that long-term
company value is based on the capability of the
enterprise to respond to societys changing needs.
2. Consumers search for products and services of
companies they believe are doing the right thing in
terms of consumer protection, human rights and the
environment.
3. Employees have a preference to work for
companies whom they share similar mission and
values and where they can make a contribution to
society.
4. Investors look for companies that recognize
and manage their risks and are entrepreneurial in
terms of attitude in identifying emerging and
promising business opportunities.
5. Local Communities want to know that
businesses are being good citizens.
6. Media expose some examples of best or worst
practices to spotlight, in this way companies with
good practices are given incentive in the form of
free mileage, companies performing worst practices
are given disincentive through exposure.
7. NGOs expose these examples of irresponsible
corporate conduct and campaign for greater
corporate accountability and transparency.
8. Regulators want to make certain that business
activities not only generate business opportunities,
jobs and economic growth but also help solve
serious problems such as climate change and
environment.
Specific Relevance of CSR:
1. Changing Social Expectations
2. Competitive Labor Markets
3. Disclosure Demands by Stakeholders
4. Dwindling Government Role
5. Globalization
6. Pressure from Investors
7. Supplier Relations
8. Wealth and Vulnerabilities
Ethical Leadership is a leadership that is
concerned in leading in a manner that respects the
right, dignity and stake of others.
Ethics in an Organization refers to systems,
values, philosophies and principles that govern the
behavior of organizational members which are the
consequences of organizational pronouncement.
Ethical Decision Making is the process of trying
to establish organizational values from which ethical
decisions will be based from.
What Ethics is not:
1. Ethics is not the same as Feelings
2. Ethics is not Religion
3. Ethics is not just following Culturally Accepted
Norms
4. Ethics is not Science
Myths about Organizational Ethics:
1. Being Ethical is Easy
2. Being Ethical is Not Part of Doing Business
3. Being Ethical Brings No Benefit
Help in Decision Makers of Organizations with
CSR Principles:
1. Withdraw
2. Be an Archivist
3. The Option of Doing Nothing
4. Be Conscious of Long Term Effects
5. Consider Legalities and Ethics
6. Ask Around
7. Be Comprehensively Sensitive
8. Do not be a Dangerous Alpha Male
9. Find a Win-Win Situation
Corporate Citizenship refers to the acceptance
by business of a conscious effort in focusing and in
satisfying the economic, legal, ethical, philanthropic
and social responsibilities and other acts expected
from the corporation to do its stakeholders.
Key Elements of Corporate Citizenship:
1. Commitment to Quality
2. Ethical Legal Compliance
3. Stewardship and Governance
4. Superior Employee Relation
5. Social Advocacy
6. Environmental Advocacy
7. Community Involvement
Philanthropy is the practice of giving money and
time to help make life better for other people.
Corporate Philanthropy refers to the giving of
the companys profit directly to charitable
organizations or to individual in need with the
intention of helping and improving the quality of life
of the different corporate stakeholders.
Forms of Philanthropy:
1. Cash
2. Product Donations
3. Employee Volunteerism
Benefits of Corporate Philanthropy:
1. Benefits to Business
- enhances corporate reputation
- improves relations with the government, the
community and the key stakeholders
- supports a companys strategic business goals
2. Benefits to Stakeholders
- build employee morale and engagements
- enlarges sense of community and social
obligations
- develops future workplace contributing to a
sustainable company
3. Benefits to the Community
- improves quality of life of the community members
- provides human and capital resources to non-profit
organizations
Social Screening of Investments give some
modern examples in order for us to outline ethical
considerations based on scenarios that are
generally acceptable as reference.
Ways of Social Screening:
1. Scare-Off From Strategy considered as the
most rigid way to screen investments, characterized
by hard policies.
2. Impact Mitigation founded upon the idea that
for everything the company does there is always an
impact to the stakeholders.
3. Whoever is the Best involves a kind of free
market model where companies within the same
industries compete with one another for the best
records on a variety of social issues.
4. Main or Derivative Connections requires
investors to decide whether or not they are
concerned if an investment has a secondary
involvement with a social problem, it involves
asking how far back in the industrial process one
wants a particular social screen to go.
Greenwashing refers to the practice of
companies characterized by deceptively making it
appear that their products, services and policies are
environmentally friendly by projecting cost cuts as
reduction in use of resources or investments in
green concerns like in areas of ecology and
environment.
Green Marketing Tactics deceiving use of green
PR to win the hearts of consumer for purposes of
improving image, building up goodwill and
eventually, drawing more revenues.
Greenwashing Sins:
1. Sin of Hidden Trade Off
2. Sin of No Proof
3. Sin of Vagueness
4. Sin of Irrelevance
5. Sin of Fibbing
6. Sin of Lesser of Two Evils
7. Sin of Worshipping False Labels
Ways on How to Spot Greenwashing:
1. Poor use of scientific facts or lack of any common
scientific knowledge.
2. Use of buzz words.
3. Look at the environment label on the product,
some are not regulated and are just marketing
cosmetics.
4. Never abandon common sense.
5. Look out for negligible green claims.