Models of Corporate Governance

Canadian Model:

Canada has a history of French and British colonisation. The industries inherited those cultures. The cultural background in these industries affected subsequent developments. The country has large influence of French merchantism.

In 19th century the Canadian industries were controlled by rich families. Since last five decades wealthy Canadian families sold their stocks during stock boom periods. Canada now resembles United States in industry structure.

Since last four decades there is change in industries in Canada in the areas:

  1. Family owned companies are on the increase
  2. Use of new technologies
  3. More entrepreneurial activities
  4. Early entrance in initiating corporate governance
  5. Diffuse ownership from earlier colonial masters.

UK and American Model:

Sarbanes Oxley Act:

In July 2002, the U.S. Congress passed the Sarbanes Oxley Act (SOX), particularly designed to make US corporations more transparent and accountable to their stakeholders.

The Act seeks to re-establish investor confidence by providing good corporate governance practice to prevent corporate scams and frauds in business corporations, to improve accuracy and transparency in financial reporting, accounting service of listed companies, enhance corporate responsibility and independent auditing.

The applicability of the Act is not confined only to publicly owned US companies, but also extends to other units registered with the Securities Exchange Commission. However, there is a common thread running between them, i.e., that governance matters. Unless corporate governance is integrated with strategic planning and shareholders are willing to bear the additional required expenses, effective governance cannot be achieved.

The above events encouraged the development of the present situation where different aspects of the Sarbanes Oxley Act are discusses, and its effects, limitations and internal control after the act were passed and what lies beyond its compliance.

Also discussed are the varied applications of the act in areas such as IT, the fee structure of the Big Four Accounting Firms, the mid-size accounting firms, supply chain management and insurance.

German Model:

Germany is known for industrialisation since beginning of 19th century. Germany exports sophisticated machinery in a large way since last five decades. The industries are financed by wealthy German families, small shareholders, banks and foreign investors. The large private bankers who invested in industry had a bigger say in running those industries and hence performance was not up to the mark.

Germany is considering proper steps towards corporate governance since second half of 19th century. The company law in Germany of 1870 created dual board structure to care of small investors and the public. The company law in 1884 made information and openness as the key theme. The law also mandated minimum attendance at the first shareholders meeting of any company.

World War I saw considerable changes in industries in Germany by dismantling the rich. As on date Germany has large number of family controlled companies. The smaller companies are controlled by banks. The proxy voting by small investors was introduced in Germany in year 1884.

The German Model of industry and corporate governance is shown in Fig. 2.2:

Italian Model:

The Italian business was also controlled by family holdings. The business groups and the families were powerful by mid of 20th century. Slowly the stock market gained importance during the second half of the 20th century. The Italian government did not intervene in the company management or their working.

When the Italian all the investment banks collapsed in 1931 the Fascist government in Italy took over the industrial shares and imposed a legal separation of investment from commercial banking. The Second World War brought a change from the government side to have a direct role in the economy, helping the weak companies and using corporate governance to improve these companies. This helped the economic growth of Italy particularly in capital intensive industries.

Since World War II the industrial policy was introduced. The policy had no need for investor protection. It led the investors to buy a government bonds and not invest in company shares. The growth of Italian industry came from the small specialised industries which remained unlisted in stock markets.

The small firms were controlled by families. The corporate governance was in the hands of bureaucrats or wealthy families. The corporate governance activities and confidence in stock markets started developing since last two decades. The Italian investors are aware of the importance of the corporate governance and protection of the rights.

France Model:

The French financial system traditionally was regulated by the religion. The controlling methods, borrowing and lending with the state constituting the main borrower. Religion had prohibited the interest to some extent. The lending was based on mainly mortgages of real estates. In early 19th century the French public took to hoarding gold and silver.

Coins composed measure part of money transactions in that period. The French industry was conservative in its outlook. The business used the retained earnings of one company to build other areas of business and companies.

The business was controlled by wealthy families who funded these business groups. The control of the company continued from generation to generation. Stage wise the corporate government was introduced in France along with economic development activities. This led to wealthy families controlling corporate sector to come under the watchful guidance of the state.

Japanese Model:

Japan was a deeply conservative country were the hereditary caste system was important. Business families where at the bottom of the period i.e., beneath priests, warriors, peasants and craftsmen. Due to lack of funds at the lowest level of the pyramid led to the stagnation of the business.

The large population of the country needed goods and services and the importance was given to prominent mercantile families like Mitsui and Sumitomo. The World War II brought a sea change in the business, commerce and industry and opened the Japanese markets to the American traders. The young Japanese started taking higher education in Europe and America and learnt foreign technology, business management.

These led to building of new culture in industry, commerce and economic outlook in Japan. The government also started establishing stated owned companies. These companies ended up in losses and huge debts. To come out of the problem the government made mass privatization of most of these companies. Many of these were sold to Mitsui and Sumitomo families.

In the mean while Mitsubishi gained prominence. The three companies groups were called Zaibatsu “meaning controlled by pyramids of listed corporations”. The growth of Japanese industry is a mix of private and state capitalism. Meanwhile large companies developed in the auto area like Nissan and Suzuki. The Suzuki company was owned by the Suzuki family.

The depression period of 1930’s brought economic stagnation and eroded the appreciation of the Japanese public for the family companies. The family companies always kept their family rights ahead of their shareholders and public interest. The private company resorted to short-term gains and did not care for long-term investments or projects of long gestation.

The large companies in Japan also had their own banks. In 1945’s the American occupied and took charge of the Japanese economy that changed the face of Japanese industry and economy. By the beginning of 1950’s the Japanese large companies were free standing and widely held similar to United Kingdom and United States.

The companies which were poorly governed were the targets for takeover by the large companies. The banks controlled the large groups of industry which are called as Keiretsu. The Keiretsu system is in place even today. The large companies also influence government in a big way. The corporate governance has evolved in Japan since last 2 decades.

The Japanese Model of industry and corporate governance is shown in Fig. 2.3:

Indian Model:

East India Co. (EIC) in its trade had malpractices.

Current practice since 400 years since industrialisation in companies.

Environmental and world commercial are classic cases.

Family owned cos.

India has long history of commercial activities 2500 years old.

(a) The Managing Agency system 1850-1955

(b) The Promoter System 1956-1991

(c) The Anglo American System 1992 onwards

The Securities and Exchange Board of India (SEBI):

Established SEBI Act in Jan. 1992 gave statutory powers and introduced had 2 issues.

(a) Investor protection and

(b) Market Development.

SEBI is part of department of Company Affairs Govt. of India.

SEBI has moved from control regime to prudential regulation.

It is empowered to regulate working of stock exchanges and its players including all listed us.

SEBI is playing a key role in corporate governance in India.

These developments in U.K. had significant influence on India. Confederation of Indian Industries (CII) appointed a National Task Force headed by Rahul Bajaj, who submitted a ‘Desirable Corporate Governance in India – a Code’ in April 1998 containing 17 recommendations.

Thereafter Securities and Exchange Board of India (SEBI) appointed a Committee under the Chairmanship of Kumar Mangalam Birla. This committee submitted its report on 7 May 1999, Containing 19 Mandatory and 6 non-mandatory recommendations. SEBI implemented the report by requiring the Stock Exchanges to introduce a separate clause 49 in the Listing Agreements.

In April 2002 Ganguly Committee report was made for improving corporate governance in Banks and Financial Institutions. The Central Government (Ministry of Finance and Company Affairs) appointed a Committee under the Chairmanship of Mr. Naresh Chandra on Corporate Audit and Governance. This committee submitted its report on 23 December 2002.

Finally SEBI appointed another committee on Corporate Governance under the Chairmanship of N.R. Narayan Murthy. The committee submitted its report to SEBI on 8 Feb. 2003. SEBI thereafter revised clause 49 of the Listing Agreement, which has come into force with effect from 01 January 2006.

Some of the recommendations of these various committees were given legal recognition by amending the Companies Act in 1999, 2000 and twice in 2002. With a view to gear company law for competition with business in developed countries, the Central Government (Ministry of Company Affairs) appointed an expert committee under the Chairmanship of Dr. Jamshed J. Irani in December 2004.

The Committee submitted its report to the Central Government on 31 May 2005. The Central Government had announced that the company law would be extensively revised based on Dr. Irani’s Committee Report.

Corporate world is awaiting the changes to be made in company law. Parliament on 15 May 2006 had approved the Companies (Amendment) Bill, 2006 which envisages implementation of a comprehensive e-governance system through the well-known MCA-21 project.

Corporate governance has once again become the focus of media/public attention in India following the debacles of Enron, Xerox and WorldCom abroad, and Tata Finance/Ferguson, Satyam, telecom scams by few companies and black money laundering, employed by few at home.

With the opening of the markets post liberalisation in early 1990’s and as India get integrated into world economy, the Indian companies can no longer afford to ignore better corporate practices which are essential to enhance efficiency to survive international competition.

The question that comes to the minds of Indian investors now is, whether our institutions and procedures are strong enough to ensure that such incidents will not happen again, or has the Indian corporate sector matured enough to practice effective self-regulation? These developments tempt us to re-evaluate the effectiveness of corporate governance structures and systems in India.

Economic liberalisation and globalisation have brought about a manifold increase in the foreign direct investment (FDI) and foreign institutional investment (FII) into India. More and more Indian companies are getting themselves listed on stock exchanges abroad. Indian companies are also tapping world financial markets for low cost funds with ADR/GDR issues.

Companies now have to deal with newer and more demanding Indian and global shareholders and stakeholder groups who seek greater disclosure, more transparent explanation for major decisions, and, above all, a better return for their stake. There is, thus, an increased need for Indian boards to ensure that the corporations are run in the best interests of these highly demanding international stakeholders.

Initiatives by some Indian companies and the CII have brought corporate governance to a regulatory form with the introduction of Clause-49 in the Listing Agreement of companies with the stock exchanges from January 2000. The first to comply with the requirements of Clause-49 were the Group-A companies, which were required to report compliance by March 31, 2001.

However, the code draws heavily from the UK’s Cadbury committee, which is based on the assumption of a dispersed share ownership more common in the UK than the concentrated and family-dominated pattern of share ownership in India. In addition in regard to corporate governance the Indian corporate have also overhauled themselves.

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