CORPOTARE GOVERNANCEMODELS

• Major Models in Consideration • Why the Models Differ?• Continental European Model• Indian Model• The US and the UK Model• The Chinese Model Emerges

3. MAJOR MODELS IN CONSIDERATION

Three major models can be distinguished:• Continental European model• Indian Model• US and UK Models

4. WHY THE MODELS DIFFER?

• The variety of capitalism in which they are embedded(Capitalism by its core nature does not differ. Some of the mechanisms of the system’s performance varies in different countries and regions. The major philosophy of capitalism remains the same, despite these differences)• Differences in emphasis of the corporations on the interest groups• Differences in dealings of the business with the stakeholders• Differences in the business entity formation

CONTINENTAL EUROPEAN MODEL

• Two-tired BOD as a means to Corporate Governance in many continental European countries.• The tiers comprise Supervisory Board and Executive Board.• Supervisory Board: i) Comprises non-executive directors; ii) Represents share holders and employees; iii) Performs supervisory role over the Executive Board; iv) Hires and fires the members of the executive Board; v) Determines Executive Board members’ salaries and compensation package; vi) reviews company’s major business disclosures.

6. CONTINENTAL EUROPEAN MODEL

• In a nutshell, the Supervisory Board is the supreme authority of the company, the highest, policy and decision making forum, accountable to the shareholders.

• Executive Board: i) Made up of the company’s executives; ii) Does not represent the shareholders, although some of the members may be shareholders, unless otherwise decided; iii) Accountable to the Supervisory Board;

7. CONTINENTAL EUROPEAN MODEL

iv) Performs day-to-day operation of the company; v) Places before the supervisory board major issues for decision; vi) Submits reports and disclosures to the Supervisory Board for review, approval, etc.

In a nutshell, the Executive Board is an employed by the Supervisory Board forum for conducting company’s business based on broad guidelines provided by the Supervisory Board.

8. INDIAN MODEL

The SEBI Committee on Corporate Governance defines CG as: • “acceptance by the management of the inalienable rights of shareholders as the owners of the corporation and of their own role as the trustees on behalf of the shareholders.”• It is about:–Commitment to values–Ethical business conduct–Making a distinction between personal and corporate funds in the management of a company

9. INDIAN MODEL

It is suggested that:• The Indian Model is drawn from the Gandhian principle of trusteeship • The Directive Principles of Indian constitutionHowever, such conceptualization of the corporate objectives is also prevalent in Alglo-American and most other jurisdictions

10. THE US AND THE UK MODEL

Shareholders’ interests are invariably emphasized in the Anglo-American model. At least much talk about the shareholder interest prevails.• Single-tired Board of Directors • BOD is dominated by the non-executive directors• The proportion of the EDs and NEDs is decided by the constitution or memorandum of association, or by other acceptable means.• The non-executive directors are elected by the shareholders• Popularly known as the ‘Unitary System’

11. THE US AND THE UK MODEL

• Many boards include some executives from the company (who are ex-officio members of the board)• The non-executive directors are expected to out number executive directors • The non-executive directors are expected to hold key positions, including audit and compensation committees• The implication is that in the same BOD the non-executive directors who represent the shareholders have the legal and practical authority to supervise and control the activities of the executive directors

12. THE US AND THE UK MODEL

Critical Differences:• In UK the CEO generally does not serve as the Chairman of the Board, while in US reverse is true.• In US, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation.

THE CHINESE MODEL EMERGES

Emergence of mixed economy in china has prompted capitalism with essence and blend of socialism. While socialism has not disappeared as such, meaning many administrative and controlling mechanisms of socialism and social service elements of that prevails; capitalism has gained ample opportunities to make broad scope for development. Latter has made the strong Chinese economy much stronger and competitive in the world market. Cheap, compared to the West labor market in China; industrious culture of the generations; better business scopes offered by the government are the major positive elements that has prompted development of capitalism in China, with its very specific nature.

THE CHINESE MODEL EMERGES

• The current corporate governance practices adopted in China can be best described as a control-based model, which contrasts strikingly with the market-oriented model commonly used in the US and UK, and championed by most corporate governance advocates.• The Chinese firms, whose corporate governance practices deviate from the control based model, demonstrate stronger performance, and tend to make decisions in line with the shareholders’ interest. • The control-based model root in the ‘administrative governance’ approach adopted by the Chinese regulatory authorities, and is tailed to China’s specific institutional setting.

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