Corporate Governance Models Around The World

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. 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.

The corporate governance structure of joint stock corporations in a given country is determined by several factors: the legal and regulatory framework outlining the rights and responsibilities of all parties involved in corporate governance; the de facto realities of the corporate environment in the country; and each corporation’s articles of association. While corporate governance provisions may differ from corporation to corporation, many de facto and de jure factors affect corporations in a similar way. Therefore, it is possible to outline a “model” of corporate governance for a given country. In each country, the corporate governance structure has certain characteristics or constituent elements, which distinguish it from structures in other countries. Each model identifies the following constituent elements: key players in the corporate environment; the share ownership pattern in the given country; the composition of the board of directors, the regulatory framework; disclosure requirements for publicly-listed stock corporations; corporate actions requiring shareholder approval; and interaction among key players. The purpose of this article is to introduce each model, describe the constituent elements of each and demonstrate how each developed in response to country-specific factors and conditions. The following are some of the models of corporate governance:

Anglo-American model – This model is also called an ‘Anglo-Saxon 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. T This system (model) relies on effective communication between shareholders, board and management with all important decisions taken after getting approval of shareholders (by voting).

German model – This is also called as 2 tier board model as there are 2 boards viz. The supervisory board and the management 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 labour unions.

Japanese model – This model is also called as the business network model, usually shareholders are banks/financial institutions, large family shareholders, corporate with cross-shareholding. 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.

Indian model – The model of corporate governances found in India is a mix of the Anglo-American and German models. This is because in India, there are three types of Corporation viz. private companies, public companies and public sectors undertakings (which includes statutory companies, government companies, banks and other kinds of financial institutions. Each of these corporation have a distinct pattern of shareholding. For e.g. in case of companies, the promoter and his family have almost complete control over the company. They depend less on outside equity capital. Hence in private companies the German model of corporate governance is followed.

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American “model” tends to emphasize the interests of shareholders. The coordinated or Multi stakeholder Model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market-orientated and network-orientated models of corporate governance.

Continental Europe

Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.[26] In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions.

India

India’s SEBI Committee on Corporate Governance defines corporate governance as the “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.

United States, United Kingdom

The so-called “Anglo-American model” of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as “the unitary system”. Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.

In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws. Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.