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CG 7

This document provides an overview of different models of corporate governance: 1) The Anglo-Saxon model focuses on shareholders' rights and professional management. Board members direct the company and disclosure/transparency rules are strict. 2) The German model has a two-tier board structure with representation of labor. Banks play a large role as shareholders and providers of financial services. 3) The Japanese model emphasizes the role of keiretsu business groups and main banks. Banks are major shareholders and provide a range of financial services to corporations.

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0% found this document useful (0 votes)
54 views47 pages

CG 7

This document provides an overview of different models of corporate governance: 1) The Anglo-Saxon model focuses on shareholders' rights and professional management. Board members direct the company and disclosure/transparency rules are strict. 2) The German model has a two-tier board structure with representation of labor. Banks play a large role as shareholders and providers of financial services. 3) The Japanese model emphasizes the role of keiretsu business groups and main banks. Banks are major shareholders and provide a range of financial services to corporations.

Uploaded by

Puneet Malhotra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 47

Corporate Governance

Lec 4
Oct 12, 2022
Recap
Who is a promoter,
What is a Types of difference between How to register a
company? Companies promoter & company?
director

Principles of
What is Governance, Factors influencing Actors in CG, Need
Governance? Elements of CG in India for CG
Governance

International
Committees in CG Theories of CG
( UK & US)
Models of Corporate
Governance
Shareholder’s rights are recognized
and they are given power to elect all
the Board members

Board members directs the


management of the company

Company is managed by professional


managers with knowledge and skill to
manage business
Disclosure norms are comprehensive
and rules against insider trading or
any other fraudulent activities are
tight

It mentions clear responsibility chart


according to organization structure.
Share ownership: Institutional & Individual Investors
•Range of laws and regulations
governing the relationship between
Shareholders, Directors &
Management

•The stock exchange is also an


essential part of corporate
governance ( Disclosure and
transparency framework )

•Consists of ‘ Insiders’ & ‘


‘Outsiders’

The Anglo-US model involves: Number of different players including: management, directors, shareholders, government
agencies, stock exchanges, consulting firms and stakeholders

US, UK, Australia, Canada, New Zealand and several other countries
Anglo Saxon Model- (Shareholder-oriented) Model

Criticisms: Anglo Saxon Model observes


Agency Theory
• Investor Focused
• Principals can see Agents outcome but not efforts
• Principals incur costs when Agents do not perform
• Focus is only on Agent’s behavior and ignoring the
opportunistic behavior of Principals
German Model: CG Two-tier board model.
• Supervisory Board: The shareholders elect the
members of Supervisory Board. Employees also
elect their representative for Supervisory Board
which are generally one-third or half of the Board.
• Board of Management or Management Board:
The Supervisory Board appoints and monitors the
Management Board.
• The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.

• Interests of Labour, Corporations, Banks &


Shareholders

Banks play a huge role in German model of CG. They are


shareholders and also provide multiple services ( lender,
equity debt, depository etc)
German Model: CG
Two key players: The banks and the corporate
shareholders.

The composition of the board is very


different.
Labor representatives on supervisory boards
are mandatory.

The supervisory board has no ‘insiders’


involved. The numbers in the supervisory
board are set by law.

Workers Rights are recognized as important Regulatory Framework: Disclosure rules are
stakeholders
quite extensive, but not as tough as under
the US-Anglo model.
Applicable for German , Austrian Corp, some elements
Applicable to corporations in Netherlands & Scandanvia
Famous Scams: German
Companies
Reasons for Scams in Germany
• Composition of Germany's supervisory boards: The board members of listed
companies are much older, have longer tenure, and are less likely to have specific
industry experience, compared to other big European economies. The German
supervisory boards are also often bulky, with up to 20 to 30 members.
• Multitude of family-controlled firms: The relationship of trust between the board,
management, minority and controlling shareholders does not always work. This
leads to the departure from the standard control functions that minority
shareholders can exercise over management.
• Absence: Of large, independent institutional investors
• Employee representation: Takes half the seats of the company's supervisory board.
Therefore, a separate management board handles running the day today business
and addresses the interest of all stakeholders.
Japanese Model of CG
The Japanese model
has four players
• The main bank,
• The affiliated company
(keiretsu),
• Management
• Government

Importance of banks and financial


institutions are recognized under this
model.
Horizontal Keiretsu
Keiretsu
• Business network composed of
manufacturers, supply chain
partners, distributors and financiers
who remain financially independent
but work closely together to ensure
each other's success.
• Horizontal & Vertical Keiretsu

Horizontal Keiretsu
• Dozens of companies in different industries
own shares in one another, with a major
financial institution at the center. 
Vertical Keiretsu
• Vertical keiretsu: large
companies (often associated
with the automotive industry)
own shares in manufacturers,
suppliers, and distributors.
Keiretsu: Advantages & Disadvantages

Advantages Disadvantages
• Companies belonging to a keiretsu often • Can sometimes be a liability and
hold a large amount of each other's prevent the manufacturer from
stock to prevent the threat of hostile responding quickly to changes in
takeovers.
the economy, culture or
• There is close relationships in keiretsu
technology.
which provides stability in supply chain,
protect proprietary technology and • Keiretsu can also lead to closed
discourage partners from disclosing markets and monopolies that
information about each other to control every step in an economic
competitors. chain
Japanese Model of CG
• Japanese corporations have a close
relationship with a main bank.
• The bank provides its corporate client with
loans as well as services related to bond
issues, equity issues, settlement accounts,
and related consulting services.
• The main bank is generally a major
shareholder in the corporation.
• In the US, anti-monopoly legislation prohibits
one bank from providing this multiplicity of
services. Instead, these services are usually
handled by different institutions: commercial
bank - loans; investment bank - equity issues;
specialized consulting firms
Japanese Model of CG
•The Japanese model centers around a network called
keiretsu ( group), and the main bank.

•The bank plays a crucial role in helping the


corporation manage equity issues and other
consulting and regulatory problems.

•Shareholders and banks together appoints the Board


of Directors and President

•The board composition involves mainly insiders like


executive managers.

•President serves as a mediator between BOD’s and


Management of the Company
Japanese Model of CG

• The main role of the executive management


is to keep the financial performance up to
scratch.
• If this doesn’t happen, the bank or the
keiretsu removes the management team.
• The disclosure requirements are relatively
stringent under the model.
• The disclosure often occurs once or twice a
year.
Scams in Japan
The Olympus saga—involving a complex scheme
where executives allegedly concealed $1.5 billion in
investment losses for 13 years—not only damaged the
company's reputation and weakened its finances, but
also raised questions about governance and
transparency at Japanese corporations.
Failure of CG at Japan
The Olympus saga—involving a complex scheme where executives allegedly concealed
$1.5 billion in investment losses for 13 years—not only damaged the company's
reputation and weakened its finances, but also raised questions about governance and
transparency at Japanese corporations.

“The lack of diversity on corporate boards in Japan also adds to the problem. The
people on corporate boards have been together for decades and know each other like
brothers and cousins. This creates a certain power dynamic which leads to a sense of
entitlement that they must be doing things right.”
(Dr Parissa Haghirian, an expert in international management at Tokyo's Sophia
University)
The Indian corporate governance framework
focuses on:

• Protection of minority shareholders;


• Accountability of the board of directors and management of the
company;
• Timely reporting and
• Adequate disclosures to shareholders;
• Corporate social responsibility.

The corporate governance regulatory framework


is composed of statutes and regulations that
require supervision by multiple regulators:
• The Securities and Exchange Board of India (SEBI) is the
principal regulator for listed companies;
Indian Model of CG: Based on Anglo American & German Model • The Ministry of Corporate Affairs (MCA) and the registrar of
companies (Registrar) administer the Companies Act 2013 and
Why? the relevant rules that apply to all companies, including listed
Three types of companies- Private Sector, Public Companies & companies; and
Public Sector Undertakings • Additionally, sector-specific regulation has significant impact on
the governance regime
Indian Model of CG

Maximum number of Indian Shareholders: Elect the Board


companies are dominated by • Board- Policy & Strategy and
Family Members- Maximum monitors performance of the
Shareholding management
• Government regulatory authority
and stock exchange keep control on
Promoter shareholders and the company through various rules,
family members: Control codes and policies
company, less dependence on • Stakeholder value- Corporate takes
care of the stakeholders as per the
external capital legal norms
How has CG evolved in
India
Kumar Mangalam Birla committee: 1997-appointed by SEBI-

Mandatory Recommendations:
• Apply to the listed companies with paid up share capital of 3
crore and above.
Non Mandatory Recommendations
• Composition of board of directors should be optimum • Role of chairman
combination of executive & non-executive directors. • Shareholders’ right for receiving half yearly
• Audit committee should contain 3 independent
financial performance.
directors with one having financial and accounting
knowledge. • Postal ballot covering critical matters like
• Remuneration committee should be setup alteration in memorandum
• The Board should hold at least 4 meetings in a year with • Sale of whole or substantial part of the
maximum gap of 4 months between 2 meetings to review undertaking
operational plans, capital budgets, quarterly results, minutes • Corporate restructuring
of committee’s meeting.
• Further issue of capital
• Director shall not be a member of more than 10 committees
and shall not act as chairman of more than 5 committees • Venturing into new businesses
across all companies
• Management discussion and analysis report covering
Clause 49 to the Listing Agreement was
industry structure, opportunities, threats, risks, outlook,
internal control system should be ready for external review added in 2000 and mandated for NSE &
• Information should be shared with shareholders in regard to BSE listed companies
their investments.
Nareshchandra Committee-2002-appointed
by Department of Corporate Affairs

Consequent to the several corporate debacles in the USA in 2001,


followed by the stringent enactments of Sarbanes Oxley Act,
Government of India appointed Naresh Chandra Committee in
2002
To examine and recommend drastic amendments to the law
pertaining to auditor-client relationships and the role of
independent directors.
Nareshchandra Committee-2002-appointed by MCA

(a) The minimum board size of all listed/ unlisted public


limited companies with paid-up share capital and free
Certain services should not be provided by an
reserves of Rs. 100 million and above, or turnover of Rs. audit firm to any audit client, viz.:
500 million and above, should be seven, of which at least • (i) Accounting and book keeping,
four should be independent directors. • (ii) Internal audit,
(b) 50% of the BOD of listed/ unlisted public limited • (iii) Financial information design,
companies should consist of independent directors. • (iv) Actuarial,
• (v) Broker, dealer, investment advisor, investment banking,
c) List of disqualification for audit assignment which • (vi) Outsourcing,
included prohibition of: • (vii) Valuation,
(i) Any direct financial interest in the audit client, • (viii) Staff recruitment for the client etc

(ii) Receiving any loans and/or guarantees, Certification on compliance of various aspects
(iii) Any business relationship, regarding corporate governance by the CEO and
CFO of a listed company
(iv) Personal relationship by the audit firm, its
partners, as well as their direct relatives,
(v) Undue dependence on an audit client. Majority of the recommendations of this committee are
the culmination of the provisions of Sarbanes Oxley Act
of the USA.
Narayanmurthy Committee appointed in 2003 by SEBI. Report in 2004

Mandatory recommendations focus on


• Strengthening the responsibilities of audit committees Non-mandatory
• At least one member should be ‘financially knowledgeable’ and at least
one member should have accounting or related financial management
recommendations 
proficiency.
• Quality of financial disclosures
• Instituting a system of training of
• Improving the quality of financial disclosures, including those related to board members; and the evaluation of
related party transactions. performance of board members.
• Proceeds from initial public offerings
• Companies raising money through an IPO should disclose to the Audit • Whistle Blower Policy
Committee, the uses / applications of funds by major category like capital • Personnel who observe an unethical
expenditure, sales and marketing, working capital, etc.
• Other recommendations or improper practice should be able to
• Requiring corporate executive boards to assess and disclose business approach the audit committee
risks in the annual reports of companies. without necessarily informing their
• Board to lay down the code of conduct for all Board members and senior
management of a company.
superiors.
• Improved disclosures relating to compensation paid to non-executive
directors. Revised Clause 49 of Listing
Agreement in 2006- align with
Sarbanes-Oxley Act 2002
Dr. J.J. Irani Committee: MCA
( appointed in 2004)

On December 2, 2004, the


On August 4, 2004 MCA published a Government appointed an Expert
Concept Paper on Company Law to A large number of comments and Committee on Company Law under
enable a broad-based examination of suggestions were received on the the Chairmanship of Dr. J.J. Irani to
various Company Law issues requiring Concept Paper. make recommendations in the area of
revision. legal changes to improve Corporate
Governance
Dr. J.J. Irani Committee:
Recommendations

Measures to make the Measures to be taken in


Addressed a range of The issues concerned
governance in respect of proper
issues including a with classification and
companies more disclosure of related
perspective on the registration of
accountable and party transactions and
scope of Company Law companies
transparent minority interests,

Changes desirable in the Ways and means of Effective investigation


Providing a model,
regime governing access making the process of and prosecution for
balanced and efficient
to capital, maintenance mergers and company offences with
regime for addressing
of accounts and conduct acquisitions more proper focus on officers
corporate insolvency
of audit of companies efficient, in default.

Clause 49 amended and implemented in 2006


Companies Bill was tabled in 2008
Journey so far : Companies Act 2013 ( April
1, 2014- executed)
• The Companies Act, 1956 remained in force for a
The Companies Act, 2013
long time, though amended from time to time. The Companies (Amendment) Act, 2015
• Major amendments: In the year 2000 (postal ballot, The Companies (Amendment) Act, 2017
audit committee, shelf prospectus, etc. introduced The Companies (Amendment) Act, 2019
The Companies (Amendment) Act, 2020
with emphasis on Corporate Governance). 
• Satyam Scam: Stringencies in the new Act were
proposed
• J.J. Irani Committee recommendations: finally https://www.taxmann.com/post/blog/
6181/the-journey-of-companies-act-from-
culminated in the form of the Companies Act, 2013 1956-to-2021/
which applies to the entire country
• Act has: 470 sections, 7 Schedules & 29 chapters
Difference between Listing Agreement &
Listing Requirements
On 2nd September 2015, SEBI notified about the
Listing Agreement is the basic document Security and Exchange Board of India (Listing
which is executed between companies Obligations and Disclosure Requirements)
and the Stock Exchange when companies Regulations, 2015.
are listed on the stock exchange.
• The primary objective of bringing this regulation into force was
• The main purposes of the listing agreement are to first to align the Listing agreement with the Companies Act, 2013.
ensure that companies are following good corporate • The listing regulations will apply to the companies recognized on
governance. the stock exchange.
• The Listing Agreement comprises of 54 clauses • Section 2(52) of the Companies Act provides for the listed
stating corporate governance, which listed companies and any companies which have listed its securities
companies have to follow, failing which companies under-recognized stock exchange and hence the listing
have to face disciplinary actions, suspension, and regulations would be applied to them.
delisting of securities. • With the introduction of the listing regulations, the contractual
obligations have been converted to a legal requirement, which
• The companies also have to make certain disclosures
gives the regulations a legal recognition.
and act by the clauses of the agreement.
SEBI Listing Obligations Disclosure Requirements ( LODR) Revised in 2015

• The provisions in Listing


Regulations have been aligned
with those of the Companies
Act, 2013.

Listed entity: Comply with the corporate governance


principles displayed in the Figure
Revised Clause 49: SEBI Listing Agreement 2015

The substance of Clause 49 can now be found in Regulation 18 of SEBI (LODR) Regulations.
Complete details:
Source: SEBI available at https://www.sebi.gov.in/sebi_data/attachdocs/1410777212906.pdf
National Guidelines on responsible Business conduct ( MCA)

Principle 1: Businesses should conduct and govern


themselves with integrity, and in a manner that is Principle 6: Businesses should respect and make
ethical, transparent, and accountable. efforts to protect and restore the environment.

Principle 2: Businesses should provide goods and


services in a manner that is sustainable and safe. Principle 7: Businesses, when engaging in
influencing public and regulatory policy, should do
Principle 3: Businesses should respect and promote so in a manner that is responsible and transparent.
the well-being of all employees, including those in
their value chains. Principle 8: Businesses should promote inclusive
Principle 4: Businesses should respect the interests growth and equitable development.
of and be responsive to all its stakeholders.
Principle 9: Businesses should engage with and
Principle 5: Businesses should respect and promote provide value to their consumers in a responsible
human rights. manner.

Based on NGRBC, top 1000 Listed companies- Submit BRR Report


The National Company Law Tribunal

Is a quasi-judicial body in India that adjudicates issues relating


to Indian companies. The tribunal was established under
the Companies Act 2013 

Proceedings relating to arbitration, compromise, arrangements,


reconstructions and the winding up of companies shall be
disposed off by the National Company Law Tribunal. 
Despite stringent measures
why do we have scams?
PMC Bank & HDIL Scam
7,000 homebuyers are facing an
uncertain future .

Homebuyers have put in Rs 875 crore as


their total claim. HDIL owes around
Rs 8,000 crore to all its creditors. 

In April 2021 HDIL went into


insolvency when NCLT admitted a
petition by Bank of India to recover dues
worth Rs 522 crore.
Causes: Scams & Scandals Individual level
• Underestimate risks
(Normalcy bias)- Over
Fundamental Cause: Mediating Cause investment/Debts
• Overestimate future
• Excessive Concentration • Illusion of success results
of Power • Internal atmosphere of • Irrational obedience to
• Ineffective Board of authority- Frauds
greed and arrogance
Directors • Irrational escalation of
• Lack of ethical tone at commitment- Personal
• Passivity of Investors the leadership level attachment to projects
• Failure of gatekeepers • CG is seen as marketing • Gamblers Fallacy
• Poor Regulation tool • Poor perspective of
future- Markets may not
accept products
Summary of International &
National Committees: Improve
Corporate Governance
CORPORATE GOVERNANCE ISSUES AND ACTION BY INTERNATIONAL & NATIONAL COMMITTEES

SI Governance Issues Recommended International Committees and enactments National Committees Enactments in India

1 Composition, strength and size of the Cadbury (1192), CII (1998) Clause 49 of the Listing
board Hampel (1998) KMB (2000) Agreement (2000)
LSE Combined Code (1998), NCC(2002)
OECD (1999) JJI (2005)
2. Non-executive (Independent) director Cadbury (1192), KMB (2000), Clause 49 (2000)-
and related matters Hampel (1998), NCC(2002), Revised Clause 49 (2004)
LSE Combined Code ( 1998), NMC (2003),
OECD (1999) JJI (2005)
3. Orientation and Training of Directors Cabdury (1192), NCC (2002), Revised Clause 49 (2004)
Hampel (1998), NMC (2003),
LSE Combined Code (1998) JJI (2005)
4. Remuneration of Directors Greenbury (1995) KMB (2000), Clause 49 (2001)
Hampel (1998), NCC(2002), Revised Clause 49 ( 2004)
LSE Combined Code (1998) NMC (2003),
JJI (2005)
5. Disclosure of remuneration policy, Cadbury (1992), KMB ( 2000), Clause 49 (2000)
directors’ remuneration and bio- Greenburg ( 1995), NMC (2003),
graphical information Hampel (1998), LSE JJI (2005)
Combine Code (1994),
OECD ( 1999)

LSE- London Stock Exchange; CII- Confederation of Indian Industries; KMB- Kumar Mangalam Birla; NCC-
Nareshchandra Committee; JII- Dr. J.J. Irani Committee; NMC- Narayan Murthy Committee
CORPORATE GOVERNANCE ISSUES AND ACTION BY INTERNATIONAL & NATIONAL
COMMITTEES (CONTD.)
SI Governance Issues Recommended International Committees and National Committees Enactments in India
enactments
6. Board meeting and matters to be Cadbury (1992), CII (1998) Clause 49 (2000)
reserved for board decision LSE Combined Code (1998) KMB (2000),
NCC (2002),
JJI (2005)
7 Board’s performance evaluation LSE combined code (1998) NMC (2003) Revised Clause 49 (2004)

8. Audit committee and related matters Cadbury ( 1992), CII (1998) Clause 49 (2000) –
Hampel (1998), KMB (2000) Revised Clause 49 (2004),
LSE Combined Code (1998) NCC (2002) Companies (Amendment
Blue Ribbon (1999) NMC (2003) Act 2000,
JJI (2005) Section 292 A
9. Remuneration Committee and related Cadbury (1992), KMB (2000), Clause 49 (2000)
matters Greenburg (1995), JJI (2005)
Hampel (1998),
LSE Combined Code ( 1998)
10. General body meetings Cadbury (1992), KMB (2000), Clause 49 (2000)
Hampel (1998), JJI (2005)
LSE Combined Code (1998)
OECD (1999)

LSE- London Stock Exchange; CII- Confederation of Indian Industries; KMB- Kumar Mangalam Birla; NCC-
Nareshchandra Committee; JII- Dr. J.J. Irani Committee; NMC- Narayan Murthy Committee
CORPORATE GOVERNANCE ISSUES AND ACTION BY INTERNATIONAL & NATIONAL COMMITTEES (CONTD.)
SI Governance Issues Recommended International Committees and enactments National Committees Enactments in India

11. Auditors Cadbury ( 1992), NCC (2002), Companies (Amendment)Act


Hampel ( 1998), JJI (2003) 2000,
OECD (1999) Section 227)
12. Accounting standards Cabdury ( 1992), KMB (2000), Clause – 49 (2000),
OECD (1999) NMC (2003) Companies (Amendment) Act
2000,
Section 217 (2AA)
13. Financial reporting Cadbury (1992), CII (1998) Clause 49 (2000)
Hampel ( 1998), KMB (2000)
LSE Combined Code (1998), NCC (2002)
OECD (1999) NMC (2003)
14. CEO/CFO Certification Sarbanes Oxley Act (SOX) of USA, (2002) NCC (2002), Revised Clause 49 (2004)
NMC (2003)
15. Code of Conduct Sarbanes Oxley Act ( SOX) of USA, (2002) NCC (2002) Revised Clause 49 (2004)
NMC (2003)
JJI (2005)
16. Internal code of ethics including Sarbanes Oxley Act (SOX) of USA, (2002) NMC (2003), Revised Clause 49 (2004)
protection to whistle blowers JJI (2005)
17. Disclosures and transparency Cadbury ( 1992), CII (1998), Clause 49 (2000)
Greenburg (1995), KMB (2000), Revised Clause 49 (2004)
Hampel (1998), NCC (2002),
LSE Combined Code (1998), NMC (2003),
OECD (1999) JJI (2005)

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