GOVERNAN

CE
NEED FOR A MODEL
• The essence of the model is to evaluate
the “crafted” principles are applied to the
“LOGIC” of governance: continuous
earning
versight,
uidance,
nformation,
ulture
Three Models of Corporate Governance
from Developed Capital Markets

Anglo-US Model

Japanese Model

German 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.
KEY PLAYERS

“Corporate Governance Triangle”

 Share Ownership Pattern
• In 1990, institutional investors held
approximately 61 percent of the shares of UK
corporations, and individuals held
approximately 21 percent. (In 1981,
individuals held 38 percent.) In 1990,
institutions held 53.3 percent of the shares of
US corporations.
Composition of the Board of
Directors
Insiders (executive director)
Is a person who is either employed by the corporation
who has significant business relationship with corporate
management.

Outsiders (non-executive director or

independent director)
Is a person/institution which has no direct
relationship with the corporation or management
 The same person has served as both chairman
of the BOD and CEO which led to ff. abuses:
 Concentration of power in the hands of one person
 Concentration of power in a small group of persons
 Management and/or the board of directors’
attempts to retain power over long period of time
 The board of directors’ flagrant disregard for the
interests of outside shareholders
Several factors contributed to an increased
interest in corporate governance in the UK and
US. These included:
• increase in institutional investment in both countries;
• greater governmental regulation in the US, including
regulation requiring some institutional investors to vote
at AGMs;
• the takeover activity of the mid- to late-1980s;
• excessive executive compensation at many US
companies and a growing sense of loss of
competitiveness vis-а-vis German and Japanese
competitors.
Several factors influenced towards an
increasing percentage of OUTSIDERS:
• the pattern of stock ownership, specifically the
above-mentioned increase in institutional
investment the growing importance of institutional
investors and their voting behavior at AGMs;
• recommendations of self-regulatory organizations
such as the Committee on the Financial Aspects of
Corporate Governance in the UK and shareholder
organizations in the US.
REGULATORY FRAMEWORK
Laws regulating pension funds also have an important impact on
Corporate Governance.In 1988, the agency of the U.S. Department of
Labor ruled that:
Pension Fund have a "fiduciary responsibility" to exercise their stock
ownership right
-huge impact on behavior of Private Pension Funds and other institutional
investors;Institutional investors have taken a keen interest in all aspects of
corporate governance, shareholder's right and voting at annual general
meetings

U.S. has the most comprehensive disclosure requirements and a complex,

well-regulated system for shareholder communication
The regulatory framework of UK in corporate governance is established in
parliamentary acts and rules established by self-regulatory organizations
such as Securities and Investment Board which is responsible for oversight
of securities market, this is not a government agency like the SEC in US.
DISCLOSURE REQUIREMENT
1. Corporate Financial Data(quarterly basis in the U.S)
2. Breakdown of Corporation's 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 executive officers(upper mgmt.) as wel 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 corporation's total share capital
6. Information on proposed mergers and restructuring
7. Proposed amendments to the articles of association
8. And the names of individuals and/or companies proposed as auditors.
Disclosure requirements in the UK and other countries that follow the Anglo-US model
ae similar. However, they generally require semi-annual reporting and less data in
most categories, including financial statistics and the information provided on
nominees.
CORPORATE ACTIONS REQUIRING
SHAREHOLDERS APPROVAL
The 2 routine corporate actions requiring shareholders approval under the
Anglo-uS model are:
1. Election of Directors
2. Appointment of Auditors

Non-routine corporate actions which also require shareholder approval include:

1. Establishment or amendment of stock option plac(because these plans affect
executive and board compensation)
2. mergers and takeovers
3. Restructuring
4. Amendments of the articles of incorporation
INTERACTION AMONG
PLAYERS
• The Anglo-US model establishes a complex, well-regulated
system for communication and interaction between
shareholders and corporations. A wide range of regulatory and
independent organizations play an important role in corporate
governance.
• Shareholders may exercise their voting right without attending
the annual general meeting in person
• All registered shareholders received the following by mail(the
agenda for the meeting including background information on all
proposals"proxy statements", the corporation's annual report
and a voting card.
• Shareholders may vote by proxy
In the Anglo-US model, a wide range of institutional
investors and financial specialists monitor a corporation's
performance and corporate governance. These include:
1. A variety of specialized investment funds
2. 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
corporation.

In contrast, One bank serves many of these functions in the Japanese and
German models. As a result, one important element of both of these
models is the strong relationship between a corporation and its main
bank.
JAPANESE MODEL
The 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"
● BOD composed of solely insiders and
comparatively low(in some corp., non-
existent)level of input of outside shareholders
● Equity Financing is important for Japanese
Corporations
● Insiders and their affiliates are the major
shareholders in most Japanese corporations.
KEY PLAYERS
The Japanese system of Corporate Governance is many-sided, centering around a
main bank and a financial/industrial network or keiretsu

● The bank provides its corporate clients with loans as well as services related to
bond issues, equity issues, settlement accounts and related consulting services.
● The main bank is generally a major shareholder in the corporation.
● In the US, Anti-monopoly prohibits one bank from providing this multiplicity of
services
● Many Japanese corporation also have a strong financial relationships with a
network of affiliated companies. These networks, characterized by crossholding
of a debt and equity, trading of goods and services, and informal business
contacts, are known as Keiretsu
● Government-directed industrial policy plays a key role in Japanese Governance,
this 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(a major inside shareholder)
2. Affiliated company or keiretsu(a major inside
shareholder)
3. Management and the
4. Government

Interaction among these players serves to link relationship rather balance

power, as in the case of Anglo-US Model
- non-affiliated shareholders have little or no voice in japanese Governance
-As a result, there are few truly independent directors(representing outside
shareholders)
Share Ownership Pattern
In Japan, Financial institutions and corporations firmly hold
ownership of the equity market.

Insurance companies
43 %
Banks

Corporations 25 %
Foreign 3%
Composition of the board of directors
Executive managers – the heads of major divisions of the
company and its central administrative body.

COMMON PRACTICE:
• If a company’s profit fall over an extended period, the
main bank and member of the keiretsu may remove
directors and appoint their own candidates to the
company’s board.
• Appointment of retiring government bureaucrats to
corporate boards
• The average japanese board contains 50 members
 governs
German Austrian
Corporations Corporations

Some elements also apply

Netherlands France Belgium Scandinavia
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 corporation’s total
share capital, regardless of share ownership position
BOARD COMPOSITIONS
Two-tiered Board
Management Board Responsible for daily
“VORSTAND” management of the company

Supervisory Board Responsible for appointing the

“Aufsichtsrat” management board

Employees/labour Responsible for appointing

Union & members to the supervisory
Shareholders board
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
❶ Corporate financial data, requires on a semi-annual basis.
❷ Data on capital structure
❸ Limited information on each supervisory board nominee,
including name, hometown and occupation/affiliation.
❹ Aggregate data for compensation of management and
supervisory board.
❺ Any substantial shareholder holding more than 5% of the
corporation’s total share capital.
❻ Information on proposed mergers and restructurings.
❼ Proposed amendments to the articles of association.
❽ Names of individuals and/or companies proposed as
auditors
Corporate Actions Requiring
Shareholder Approval
❶ Allocation of net Income (payment of dividends and
reserves.
❷ Ratification of the acts of the management board
for the previous fiscal year.
❸ Ratification of the acts of the supervisory board for
the previous fiscal year.
❹ Election of the supervisory board.
❺Appointment of auditors.