Corporate Governance Models

Anglo American German Japanese Indian

Outsider and Insider Model

An

outsider is a person or institution which has no direct relationship with the corporation or corporate management. insider is a person who is employed by the corporation (an executive, manager or employee) who has significant personal or business relationships with corporate management.

An

Outsider and Insider Model

Insider Share Ownership Voting Power Main Shareholders Concentrated High Concentration Families, Banks, other companies, Government Low level of takeover Outsider Dispersed Low Concentration Institutional Investors , Individual shareholders High activity in corporate control market Public Presence of outside directors Low

Corporate Control Market Information Composition of BOD

Private Large number of directors appointed by the main block holder

Control on Management High

January 24, 2007. Karl Kamb Jr., a former HP vice president of business development and strategy, filed a counter suit in U.S. District Court for the Eastern District of Texas against HP, former HP Chairman Patricia Dunn and former HP attorney Kevin Hunsaker, saying that HP used the illegal tactic of pretexting in order to obtain his private phone records. If true, this would indicate that HP's practice of employing possibly illegal investigation tactics went beyond an effort to find the source of boardroom leaks.

The counter suit is in response to a suit by HP's suit against Kamb, another former HP employee and Byd:sign, a rival rival flat-screen TV company that HP claims Kamb started while still working at HP. HP are seeking $100 million dollars as part of their law suit.
Included in the counter claim is the allegation that in 2002, HP hired Katsumi Iizuka, a president of Dell Japan until 1995, to supply information on Dell's plans to enter the printer business and that "senior HP management" signed off on the payments to Iizuka.

The lawsuit alleged that HP CEO Mark Hurd, together with other senior executives and directors sold about $41.3 million of HP stock in a two-and-ahalf week period in 2006, preceding HP's public disclosure about its involvement in a potentially damaging investigation. Hurd is said to have sold $1.4 million worth of stock options on August 25, the same day he was interviewed by HP attorneys about the company's investigation into news leaks.

The lawsuit contends that the defendants sold shares because they knew "the market's perception of HP would be significantly damaged when (not if) the market became aware of the full extent of distrust and acrimony among board members, the outlandish smear campaign tactics the acrimony had spurned and the illegality of the investigatory tactics being used."

The suit alleged that in addition to the sales of shares by insiders, Hewlett Packard's board approved stock buybacks of about $10 billion "to keep the company's stock price propped up while insiders were selling." HP responded by saying that the lawsuit "represents a transparent effort to exploit issues related to HP's recent investigation for personal gain" and that "HP will defend itself vigorously".

On December 12, 2006, members of Congress Bart Stupak and John Dingell wrote asking Hurd to explain his actions. In a December 21, 2006 reply (made public on January 19, 2007) Hurd states that his August 25, 2006 sale of shares underlying 100,000 options was made in the regular course of an investment strategy, represented only 5 percent of his HP holdings, and did not cause the stock price to decline.

In April 2005, the timing of Hurd's sale of NCR stock was also questioned. Hurd was CEO of NCR from March 2003 to March 2005. In that sale, Hurd made $2.3 million by selling NCR stock in the two months prior to being named HP's CEO. Following the announcement of Hurd's resignation from NCR, NCR's stock fell 17 percent to $31.40 a share.

In 2006, Hurd received $10 million dollars in direct compensation: $8.6 million dollars in bonuses and a salary of $1.4 million dollars.

On a January 24, 2007 U.S. District Court Judge Michael Schneider ordered Kamb to withdraw his counterclaim against HP and to resubmit it under seal. He also issued a restraining order barring parties in the case from discussing the counterclaim allegations with the media. HP Sued: Insider Trading and State Civil Suit - Did HP Bosses Profit During the Scandal? January 31, 2007. On November 30, 2006, a lawsuit against HP was filed in state court in San Jose, California on behalf of investors including a union pension fund

Threatened California State Civil Suit Settled December 7, 2006. California's Attorney General's Office announced that Hewlett-Packard will pay $14.5 million to settle a civil complaint it filed at Santa Clara County Superior Court - a complaint filed at the same time as the settlement.

Threatened California State Civil Suit Settled In addition to the felony charges brought against five individuals, California Attorney General Bill Lockyer, had earlier announced that he was considering a civil-suit against HP on the basis of damages suffered by individuals who were spied upon and whose phone records had been obtained by methods that are the subject of the felony charges.

Threatened California State Civil Suit Settled

Of the $14.5 million settlement, $13.5 million - will fund state and local investigations into privacy rights and intellectual property violations, $650,000 is in civil penalties, and $350,000 will go to cover the state's investigation and other costs.

Threatened California State Civil Suit Settled The settlement includes an agreement that HP will "finance a new law enforcement fund to fight violations of privacy and intellectual-property rights," and adopt corporate governance reforms.

Threatened California State Civil Suit Settled "With its corporate governance reforms, this settlement should help guide companies across the country as they seek to protect confidential business information without violating corporate ethics or privacy rights." The attorney general added that the new fund will help ensure that businesses will be held accountable when they step across legal boundaries.

Threatened California State Civil Suit ettled As part of the settlement, HP will for five years:

Continue to employ a chief ethics and compliance officer Expand the role of its chief privacy officer to review HP's investigation practices Expand its employee and vendor codes to ensure that they address ethical standards regarding investigations, and

Threatened California State Civil Suit Settled

Retain an expert in the field of investigations to assist the company's chief ethics officer with regard to investigations. HP recently appointed G. Kennedy Thompson, the CEO of Wachovia, as an independent director with the responsibility for reviewing and reporting on HP's compliance with legal and ethical requirements related to investigations.

Anglo American
Single Tier Board
Anglo-Saxon

model where executive and non-executive directors sit together works closely with CEO, and there are board committees for audit, remuneration and nomination

Chairman

Fig.1 : The Anglo-American Model Elect

Shareholders

Board of Directors (Supervisors) Appoints & Supervises

Creditors

Own

Officers (Managers)

Stakeholders

Stake in Monitors & Regulates

Manage Company

Legal/Regulatory System

Continental European Model

Two tier Board Continental European model where a Supervisory Board consists solely of non-executives and a lower level management board consists of full-time managing directors. Supervisory Board totally independent from management board.

The German Model

Shareholders

Appoint 50%

Supervisory Board Appoints and Supervises Management Board (Including Labour Relations Officer) Manage

Appoint 50% Employees and Labour Unions

Company

The Japanese Model

Shareholders elect Provides Loans Supervisory Board (Including President)
Ratifies the Presidents Decisions

President Provides Managers Monitors & Acts in Emergencies

Consults
Executive Management (Primarily Board of Directors)

Manages Main Bank

Own
Owns

Company

Provides Loans

Fig.4 : Indian Corporate Governance Model

External Environment Government Regulations, Policies, Guidelines etc.

Company Acts

Corporate Culture, Structure, Characteristics, Influences

Internal Environment Company vision; mission, policies, norms Internal Stakeholders Auditors Board of Directors

Depositors, Borrowers,

SEBI Stock Exchanges

Customers and other External Stakeholders

CORPORATE GOVERNANCE SYSTEM

Proper governance value Corporate Governance Outcomes / Benefits to Society Transparency Investor protection customer

Shareholder

Concern for Healthy corporate sector development

What Is Good Corporate Governance?

Obligation to society at large
o National Interest o Political Non-alignment o Legal Compliances o Rule of Law o Honest and Ethical Conduct o Corporate Citizenship

o Ethical Behaviour
o Social Concerns o Corporate Social Responsibility

o Environment-friendliness

o Health, Safety and Working Environment

o Competition o Trusteeship

o Accountability
o Effectiveness and Efficiency o Timely Responsiveness o Corporations Should Uphold the Fair Name of the Country

ligation to investors
o o o o

Towards Shareholders Measures Promoting Transparency and Informed Shareholder Participation Transparency Financial Reporting and Records

Obligation to customers
o Quality of Products and Services o Products at Affordable Prices o Unwavering Commitment to o Customer Satisfaction

Obligation to employees
o Fair Employment Practices

o Equal-opportunities Employer
o Encouraging Whistle Blowing o Humane Treatment

o Participation o Empowerment o Equity and Inclusiveness o Participative and Collaborative Environment

Managerial obligation
o o o o o o o o

Protecting Companys Assets Behaviour Towards Government Agencies Control Consensus Oriented Gifts and Donations Role and Responsibilities of Corporate Board and Directors Direction and Management must be Distinguished Managing and Whole-Time Directors

Johnson & Johnsons excellent Credo exemplarily epitomises what an ideal corporate should aspire to be.
Our Credo We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.
Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched.

Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return. Johnson & Johnson

Corporate Governance in India

Problems
o

Inadequate Sanction and Enforcement.

o
o o o o o

No clear demarcation of control mechanisms between SEBI, DCA and Stock Exchanges.
Lack of Professionalism of Directors Institutional Investors show poor commitment Indian boards are not professional Unindependent Independent directors Whistle Blower Policy not in place

o
o o o

Too many unlisted companies

Accounting gimmicks Poor Shareholder participation Obliging auditors

Soft State, lethargic judiciary, inefficient market regulator, poor enforcement machinery, and a value system which is indifferent to moral turpitudes.

However things are improving now

o

The market is competition driven

o
o o o o o o

Professional new players are coming in

High growth in market capitalisation Well-focussed, well-researched portfolio investors Media influences Influence of banks and financial institutions Realisation among Indian companies of the benefits of corporate governance and Impending Capital Account Convertibility will exert its own pressure.