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INTERNATIONAL CORPORATE

GOVERNANCE
Prepared by:
Nyanapriyaa Mageswaran
Noor Shazwani Bt Baharum

Prepared for:
Dr. Nor Zalina binti Mohamad Yusof
Presented on:14th May 2016

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Corporate governance systems vary around the world. This

because in some cases, corporate governance focuses on link


between a shareholder and company, some on formal board
structures and board practices and yet others on social
responsibilities of corporations.

Models Of Corporate
Governance

However, basically, corporate governance is seen as the


process by which organizations are run.

There is no one model of corporate governance which is


universally acceptable as each model has its own advantages
and disadvantages.

Differences in Corporate
Model
There are 2 major corporate models in use in the

world today:
Shareholder Wealth Structure (aka, Anglo-American
or Anglo-Saxon) Model:
Believes that a firms objective should be to maximize
shareholder wealth.
Shareholder Wealth countries include the US, Canada,
Australia, United Kingdom.
Corporate Wealth Structure (aka, Non-Anglo-

American) Model:
Believe that a firms objective should be to maximize
corporate wealth (which includes all stakeholders; e.g.,
employees, community, banks, owners)
Corporate Wealth countries include the EU, Japan and
Latin American countries.

Shareholder Wealth
Model
This model focuses on the importance of

shareholders to the corporate structure.


Wealth is seen as strictly financial.

Within this context, management tools measure impact

of their decisions on equity (common stock) values.


Shareholder Wealth capital budgeting techniques
include:

Net Present Value


Internal Rates of Return
These are aimed at securing returns greater than the
firms cost of capital and thereby increasing returns to
shareholders.

Within this model, there is a general acceptance

of hostile takeovers to ensure appropriate


financial performance.
Again this is seen as benefiting shareholders.

Corporate Wealth Model


The focus of the corporate wealth model is

much broader than the Shareholder Wealths


viewpoint.
Under the Corporate Wealth Model, consideration of

corporate decisions is given to a wider range of


interests, including employees, the community, the
country, shareholders, lenders.
The Corporate Wealth model came about

because of distrust of unrestricted


capitalism especially in Latin America and
post World War II Europe.

Corporate Wealth Model


In Continental Europe and Asia the corporate wealth model

includes:
Advisory Committees (with labor representation): important in

Europe as part of corporate structures and involved by law in


corporate decisions.
Strict labor laws (e.g., on firing employees) in Europe.
Life time employment concept in Japan in early post war years.
Weakened substantially in Japan in the 1990s.

Less attention in Japan capital budgeting techniques; especially

equity cost of capital.


Payback analysis preferred.

Friendly takeovers are the rule in corporate wealth

countries.
This is changing somewhat, e.g., in Japan and in Europe there

are hostile takeovers.

The Anglo-Saxon Model


This model is also called an Anglo-American model and

is used as basis of corporate governance in U.S.A, U.K,


Canada, Australia, and some common wealth countries.

The shareholders appoint directors who in turn appoint


the managers to manage the business. Thus there is
separation of ownership and control.

The board usually consist of executive directors and few


independent directors. The board often has limited
ownership stakes in the company. Moreover, a single
individual holds both the position of CEO and chairman of
the board.

The Anglo-Saxon Model


The Anglo-US model is characterized by shared

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.

The Board of Directors in


Anglo-Saxon Model
The board of directors of most corporations that

follow the Anglo-Saxon model includes both: insiders and outsiders.


An insider is as a person who is either employed by the

corporation (an executive, 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.

A synonym for insider is executive director; a

synonym for outsider is non-executive


director or independent director.

The Anglo-Saxon Model


In the Anglo-Saxon model, a wide range of

institutional investors and financial specialists


monitor a corporation's performance and
corporate governance.
These include: a variety of specialized
investment funds (for example, index funds or
funds that target specific industries);venturecapital funds, or funds that invest in new or
"start-up" corporations; rating agencies;
auditors; and funds that target investment in
bankrupt or problem corporations.

Anglo-Saxon Shareholder
Ownership
The two routine corporate actions requiring

shareholder approval under the Anglo-Saxon model


are elections of directors
appointment of 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)
Mergers and takeovers
Restructurings
Amendment of the articles of incorporation.

Anglo-Saxon Shareholder
Ownership
There is one important distinction between the US and

the UK:
in the US, shareholders do not have the right to vote on the

dividend proposed by the board of directors.


In the UK, shareholders do vote on the dividend proposal.
The Anglo-US model also permits shareholders to submit

proposals to be included on the agenda of the AGM.


The proposals - known as shareholder proposals - must
relate to a corporations business activity.
Shareholders owning at least ten per cent of a
corporations total share capital may also convene an
extraordinary general meeting (EGM) of shareholders.

Anglo-Saxon Shareholder
Ownership
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
rights without attending the annual general
meeting in person.

The-Anglo Saxon Model


Appoint50%

Board of
Directors
(Supervisor)

Appoint50%
Stakeholder
s

Appoints and supervises


Employees and
labor unions

Management
board(including labor
Relation officer)

Stake In

Manage
Monitors & regulates
Creditors

Lien On

Company

Regulatory/L
egal system
Own

The Japanese Model


This model is also called as the business network model,

usually shareholders are banks/financial institutions,


large family shareholders, corporate with crossshareholding.
There is supervisory board which is made up of board of
directors and a president, who are jointly appointed by
shareholder and banks/financial institutions.
This is rejection of the Japanese keiretsu- a form of
cultural relationship among family controlled corporate
and groups of complex interlocking business relationship,
where cross shareholding is common most of the
directors are heads of different divisions of the company.
Outside director or independent directors are rarely
found of the board.

Japanese Share
Ownership
Because

face is paramount in Japanese


society, major industrial shareholders will take
quick, decisive steps when non-performance
becomes imminent.
For example, Nisson Motor assumed operating
control
of
Keiretsu-partner
Fuji
Heavy
Industries in 1986, although Nisson owned only
4% of Fujis stock. Nisson repeatedly sent
executives to become directors at Fuji
effectively creating a takeover that occurred
without restructuring of any debt or a single
share of stock.

The Board of Directors


in Japan
Japanese Boards of Directors differ from those in most

Western countries. They include more members, typically


20 to 25. They almost never include outside directors,
but rather inside managers chosen from the ranks of top
management.
Like the USA, Directors are formally elected (usually
unanimously) at annual shareholder meetings. However,
unlike the West, management itself rather than
shareholders nominate potential directors.
Presidents and Directors of Japanese corporations typically
are members of informal organizations of senior
managers. For example, Presidents of 28 major Mitsubishi
keiretsu-companies are members of a council that meets
regularly to promote friendship and to exchange views
on business and economic matters. Such coordination
would potentially be illegal in the West.

The Japanese Model


Management decisions pursue improving the income and

power of an enterprise, in particular by specific corporate


governance
practices,
although
sometimes
the
shareholders control on the management can be
hampered.
The Japanese model (similar to the German one) is based
on internal control; it does not focus on the influence of
strong capital markets, but on the existence of those
strategic shareholders such as banks.
As in Germany, major shareholders are actively involved
in the management process, to stimulate economic
efficiency and to penalize its absence.
It is also aims to harmonize the interests of social
partners and employees of the entity.

The Japanese Model


The Japanese governance system facilitates the

monitoring and flexible financing of enterprises,


effective communication between them and the
banks, as the main source of financing consists in
bank loans.
It should be noted that the owners are other
companies or even banks, control the management
strategies; ownership is always oriented to the
control, justifying the limited issue of shares
Most packages are held by fix shareholders who can
also be of major creditors, suppliers, customers, in
order to maintain long term relationships of trust
and not only to obtain gain.

The Japanese Model


In

Japan, the corporate policies are


influenced by the active intervention of the
government, since officials are stakeholders
in many companies.
The Central Bank and Ministry of Finance
are monitoring the supervision and control
within the company, in its relations with its
strategic partners.
Government structures have created an
informal negotiation system to implement
certain policies and corporate strategies.

The Japanese Model


Corporate governance oriented to control is

easily achieved in Japan due to a concentrated


shareholder structures, unlike the United States.
The existing situation is seen as a consequence
of the market dominated by companies founded
and ran by families.
Banks and other institutional investors have
usually a minor role in terms of corporate
governance discipline. Their main responsibility
is to provide debt financing, the existence of
equity and bank directors should occupy top
management positions.

The Japanese Model


Appoint

Supervisory
Board (including
President)

Monitors and acts in em

Provides managers

Ratifies the Presidents decision


President
Shareholders

Consults

Main bank

Executive Management
(Primarily Board of
Directors)

Own

Manage
Company

Provides
Loan
Owns

The German Model


This is also called as 2 tier board model as there are 2

boards
The supervisory board
The executive board.

It is used in countries like Germany, Holland, France, etc.

Usually a large majority of shareholders are banks and


financial institutions.
The shareholder can appoint only 50% of members to
constitute the supervisory board.
The rest is appointed by employees and labor unions.

German (Continental)
Model
Co-determination - partnership between

capital and labor


Social cooperation
The two-tier board structure that consists
of a supervisory board and executive
board greater efficiency in separation of
supervision and management
Crossshareholding in financial
industrial groups
Role of banks as major shareholders
Primary sources of capital retained
earnings and loans

The German Model Board


Supervisory board oversees the management board

and appoints its members


Chairman of the supervisory board is representative of
the shareholders
Deputy chairman is a representative of the employees
Members of supervisory board are not involved in the
day to day management of company
Management board is made up of executives inside
the company
The board of management is responsible for
managing the company And representing it in its
dealings with third parties

The German Model


Unlike Japan and the USA, corporate governance is

carried out through a separate and distinct


Supervisory Board and Management Board.
The Supervisory Board appoints a 5 to 15 member
Management Board to run the company. (In the USA,
the Board of Directors appoints a CEO who hires his
own management team).
The
largest German shareholders business
corporations, insurance companies, and banks have
considerable representation on Supervisory Boards.
Similar to Japan, the 9 to 21 members of a
Supervisory Board also typically reflect a companys
financial and commercial relationships.
Under German Law, labor representatives may hold
up to half the seats on a German Supervisory Board.

Unique elements of the


Model
There are three unique elements of the German

model that distinguish it from the other models


outlined in this article. Two of these elements pertain
to board composition and one concerns
shareholders rights:
First, the German model prescribes two boards with separate

members. German corporations have a two-tiered board


structure consisting of a management board (composed
entirely of insiders ,that is, executives of the corporation) and
a supervisory board (composed of labor/employee
representatives and shareholder representatives). The two
boards are completely distinct; no one may serve
simultaneously on a corporations management board and
supervisory board.

Unique elements of the


Model
Second, the size of the supervisory board is

set by law and cannot be changed by


shareholders.
Third, in Germany and other countries

following this model, 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

The German Model


Appoint
-50%

Employees and
Labour unions

Supervisory
Board
Appoint and
supervises
Management
Board
(including
Labour Relation
Board)
Manage

Company

Appoint
50%

Shareholder

Own