1 Theories of Corporate Governance

7/31/2019 1 Theories of Corporate Governance

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Forever speak thetruthand follow thedharma

- Taittariya Upanishad


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Corporate governance is all

about promoting corporate

fairness, transparency andaccountability.


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IF CORPORATE GOVERNANCE

IS NOT FOLLOWED


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Corporate Governance is the application of bestmanagement practices, Compliance of law in true letter and

spirit and adherence to ethical standards for effectivemanagement and distribution of wealth and discharge ofsocial responsibility for sustainable development of all

stakeholders.

- The Institute of Company Secretaries of India

Purpose of corporate governance is to have a demonstrableIMPACT on a corporations FINANCIAL PERFORMANCE.


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Corporate Bodies: Tasks & Responsibilities

General / Annual Meeting

- not involved in decisions of day-to-day management

- elects of Supervisory Board

- ratification of actions of Board of Management and Supervisory Board

- resolves on appropriation of distributable profits & appointment of external auditor

Board of Management

- Responsible for independently managing and representing the enterprise in

dealings with 3rd parties

Supervisory Board / Board of Directors

- appoints & dismisses members of the Board of Management

- supervises management


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One-Tier vs. Two-Tier System

One-Tier

All directors (both executive directors as well as non-executive

directors) form one board

Two-Tier

(all executive directors) and there is a separate supervisory board

(all non-executive directors)


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Driving Forces of CG inIndia

1) Unethical Business Practices

Security Scams ---Harshad Mehtha Security Scam

Equity allotments at discount rates to the controlling groups

Disappearance of Companies (1993-94) - around 4,000

companies with 25,000 crores without starting business

Misdeed of CompaniesPlantation, Sheep rearing, etc.

2) Impact of Globalization

Integration with Foreign Market

Foreign Investors expectations

New Business Opportunities --- IT & ITES, BPO etc.,New Capital formationFII, FDI

3) Impact of Privatisation

New structure of ownership

Multinational Companies


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Theories of Corporate Governance

Anglo-American model

German model of CG

Japanese model of CG

Polish model of CG


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ANGLO-AMERICAN CORPORATE GOVERNANCE

SYSTEM (THEORY)

(A System of Checks and Balances)


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ANGLO-AMERICAN CORPORATE GOVERNANCE

SYSTEM (PRACTICE)


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GERMAN CORPORATE GOVERNANCE

SYTEM


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American vs. German Corporate Governance

Germany USA

Terms Aufsichtsrat Supervisory Board / Board of Directors

Vorstand Board of Management

Composition Supervisory Board Determined by law. Supervisory board

comprises between 12 and 20 members, 10 of

which are elected by the sharehol-ders, the

other 10 being employee repre-sentatives,

works council representa-tives

employees are granted big influence

Elected by the shareholders, employee

representatives are not required

practically no employee representation

Frequency of Meetings (Supervisory

Board)

Twice a year Six times a year

Composition Board of Management Members of the Board of Management must

not be members of Supervisory Board

Majority of Supervisory Boards are chaired by

the CEO of the respective company and in

many Supervisory Boards at least 1 further

member is member of the Board of

Management

Regulation Clear and specific legislation through Federal

Government

Under control of individual states, multiplicity

of legislation

System Two-Tier: Aufsichtsrat & Vorstand are strictly

separated

One-Tier: at least 1 member of Supervisory

Board / Board of Directors is member of

Board of Management

Focus Long-term well being of company, stakeholders Shareholders


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JAPANESE CORPORATE GOVERNANCE

SYSTEM


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AKeiretsu is a group of closely-related Japanese companies: They own

each others shares and bonds, and give each other preferential treatment

as business partners. Eachkeiretsu is formed around a large bank. This

diagram presents the well-known Fuyokeiretsu with Fuji bank in the

center.

Source: Keiretsu and Industry Map Tomokazu Ohsono

i C G


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The Polish Corporate Governance

System


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ICSI National Award for Excellence in Corporate

Governance

Best Governed Companies


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The biggest corporate scam in India has come from one of

the most respected businessmen. Satyam founder Byrraju

Ramalinga Raju resigned as its chairman after admitting tocooking up the account books. His efforts to fill the

"fictitious assets with real ones" through Maytas acquisition

failed, after which he decided to confess the crime. With a

fraud involving about Rs 8,000 crore (Rs 80 billion), Satyamis heading for more trouble in the days ahead. India's fourth

largest IT company lost a staggering Rs 10,000 crore (Rs

100 billion) in market capitalisation as investors reacted

sharply and dumped shares, pushing down the scrip by 78

per cent to Rs 39.95 on the Bombay Stock Exchange. The

NYSE-listed firm could also face regulator action in the US.


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"I am now prepared to subject myself to the laws of theland and face consequences thereof," Raju said in a

letter to SEBI and the Board of Directors, while giving

details of how the profits were inflated over the years

and his failed attempts to "fill the fictitious assets withreal ones." Raju said the company's balance sheet as of

September 30 carries "inflated (non-existent) cash and

bank balances of Rs 5,040 crore (Rs 50.40 billion) as

against Rs 5,361 crore (Rs 53.61 billion) reflected inthe books."


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References

http://www.businessdictionary.com/definition/corporate-governance.html

http://www.ramin.com.au/itgovernance/as8015.html

http://www.prioritysystem.com/reasons3.html

http://en.wikipedia.org/wiki/Supervisory_board

http://en.wikipedia.org/wiki/Works_council

http://www.economics.phil.uni-erlangen.de/bwl/lehrbuch/gst_kap5/vglshstv/vglshstv.html

http://www.daimler.com


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THANK YOU

Manpreet Kaur (14)

Ramnish Pal (20)

Pharmaceutical Management

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1 Theories of Corporate Governance