CG 7
CG 7
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
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
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
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 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:
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
(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
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)
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