STRATEGIC ALLIANCE

Astrategic allianceis an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies betweenmergers and acquisitionsand organic growth.Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is acooperationorcollaborationwhich aims for asynergywhere each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involvestechnology transfer(access to knowledge and expertise),economic specialization, shared expenses and shared risk.CONTENTS 1Definitions and Discussion 1.1Definitions including Joint Ventures 1.2Definitions excluding Joint Ventures 2Terminology 3Typology 4Historical development of Strategic Alliances 5Goals of Strategic Alliances 6Advantages/Disadvantages 6.1Advantages 6.2Further advantages 6.3Disadvantages 7Success factors 7.1Further important factors 8Risks 9Common Mistakes 10Importance of Strategic Alliances 11Life cycle of a Strategic Alliance 11.1Formation 11.2Operation 11.3End/ Development 12References

DEFINITIONS AND DISCUSSIONThere are several ways of defining a strategic alliance. Some of the definitions emphasize the fact that the partners do not create a new legal entity, i.e. a new company. This excludes legal formations like Joint ventures from the field of Strategic Alliances. Others see Joint Ventures as possible manifestations of Strategic Alliances. Some definitions are given here:

Definitions including Joint Ventures A strategic alliance is an agreement between two or more players to share resources or knowledge, to be beneficial to all parties involved. It is a way to supplement internal assets, capabilities and activities, with access to needed resources or processes from outside players such as suppliers, customers, competitors, companies in different industries, brand owners, universities, institutes or divisions of government.

A strategic alliance is an organizational and legal construct wherein partners are willing-in fact, motivated-to act in concert and share core competencies. To a greater or lesser degree, most alliances result in the virtual integration of the parties through partial equity ownership, through contracts that define rights, roles and responsibilities over a span of time or through the purchase of non-controlling equity interests. Many result eventually in integration through acquisition.[3]

Definitions excluding Joint Ventures An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

Agreement for cooperation among two or more independent firms to work together toward common objectives. Unlike in a joint venture, firms in a strategic alliance do not form a new entity to further their aims but collaborate while remaining apart and distinct.

TerminologyVarious terms have been used to describe forms of strategic partnering. These include international coalitions (Porter and Fuller, 1986), strategic networks (Jarillo, 1988) and, most commonly, strategic alliances. Definitions are equally varied. An alliance may be seen as the joining of forces and resources, for a specified or indefinite period, to achieve a common objective.There are seven general areas in which profit can be made from building alliances.[6]TypologySome types of strategic alliances include: Horizontal strategic alliances, which are formed by firms that are active in the same business area. That means that the partners in the alliance used to be competitors and work together In order to improve their position in the market and improve market power compared to other competitors. Research &Development collaborations of enterprises in high-tech markets are typical Horizontal Alliances. Vertical strategic alliances, which describe the collaboration between a company and its upstream and downstream partners in the Supply Chain, that means a partnership between a company its suppliers and distributors. Vertical Alliances aim at intensifying and improving these relationships and to enlarge the companys network to be able to offer lower prices. Especially suppliers get involved in product design and distribution decisions. An example would be the close relation between car manufacturers and their suppliers. Intersectional alliances are partnerships where the involved firms are neither connected by a vertical chain, nor work in the same business area, which means that they normally would not get in touch with each other and have totally different markets and know-how. Joint ventures, in which two or more companies decide to form a new company. This new company is then a separate legal entity. The forming companies invest equity and resources in general, like know-how. These new firms can be formed for a finite time, like for a certain project or for a lasting long-term business relationship, while control, revenues and risks are shared according to their capital contribution. Equity alliances, which are formed when one company acquires equity stake of another company and vice versa. These shareholdings make the company stakeholders and shareholders of each other. The acquired share of a company is a minor equity share, so that decision power remains at the respective companies. This is also called cross-shareholding and leads to complex network structures, especially when several companies are involved. Companies which are connected this way share profits and common goals, which leads to the fact that the will to competition between these firms is reduced. In addition this makes take-overs by other companies more difficult. Non-equity strategic alliances, which cover a wide field of possible cooperation between companies. This can range from close relations between customer and supplier, to outsourcing of certain corporate tasks or licensing, to vast networks in R&D. This cooperation can either be an informal alliance which is not contractually designated, which appears mostly among smaller enterprises, or the alliance can be set by a contract.Michael Porter and Mark Fuller, founding members of the Monitor Group, draw a distinction among types of strategic alliances according to their purposes: Technology development alliances, which are alliances with the purpose of improvement in technology and know-how, for example consolidated Research&Development departments, agreements about simultaneous engineering, technology commercialization agreements as well as licensing or joint development agreements. Operations and logistics alliances, where partners either share the costs of implementing new manufacturing or production facilities, or utilize already existing infrastructure in foreign countries owned by a local company. Marketing, sales and service strategic alliances, in which companies take advantage of the existing marketing and distribution infrastructure of another enterprise in a foreign market to distribute its own products to provide easier access to these markets. Multiple activity alliance, which connect several of the described types of alliances. Marketing Alliances most often operate as single country alliances, international enterprises use several alliances in each country and Technology and Development Alliances are usually multi-country alliances. These different types and characters can be combined in a Multiple Activity AllianceFurther kinds of strategic alliances include: Cartels: Big companies can cooperate unofficially, to control production and /or prices within a certain market segment or business area and constrain their competition Franchising: a franchiser gives the right to use a brand-name and corporate concept to a frachisee who has to pay a fixed amount of money. The franchiser keeps the control over pricing, marketing and corporate decisions in general. Licensing: A company pays for the right to use another companies technology or production processes. Industry Standard Groups: These are groups of normally large enterprises, that try to enforce technical standards according to their own production processes. Outsourcing: Production steps that do not belong to the core competencies of a firm are likely to be outsourced, which means that another company is paid to accomplish these tasks. Affiliate Marketing: Affiliate marketing is a web-based distribution method where one partner provides the possibility of selling products via its sales channels in exchange of a beforehand defined provision.

Historical development of Strategic AlliancesSome analysts may say that Strategic Alliances are a recent phenomena in our time, in fact collaborations between enterprises are as old as the existence of such enterprises. Examples would be early credit institutions or trade associations like the early Dutch Guilds. There have always been strategic Alliances, but in the last couple of decades the focus and reasons for Strategic Alliances has evolved very quickly:[7][9]In the 1970s, the focus of Strategic Alliances was the performance of the product. The partners wanted to attain raw material at the best quality at the lowest price possible, the best technology and improved market penetration, while the focus was always on the product.In the 1980s, Strategic Alliances aimed at building economies of scale and scope. The involved enterprises tried to consolidate their positions in their respective sectors. During this time the number of Strategic Alliances increased dramatically. Some of these partnerships lead to great product successes like photocopiers by Canon sold under the brand of Kodak, or the partnership of Toshiba and Motorola whose joining of resources and technology lead to great success with microprocessors.In the 1990s, geographical borders between markets collapsed and new markets were enterable. Higher requirements for the companies lead to the need for constant innovation for competitive advantage. The focus of Strategic Alliances relocated on the development of capabilities and competencies.

Goals of Strategic Alliances All-in-one solution Flexibility Aqcuisition of new customers Add strengths, reduce weaknesses Access to new markets+technologies Common sources Shared risk

Advantages/DisadvantagesAdvantagesFor companies there are many reasons to enter a Strategic Alliance: Shared risk: The partnerships allow the involved companies to offset their market exposure. Strategic Alliances probably work best if the companies portfolio complement each other, but do not directly compete. Shared knowledge: Sharing skills (distribution, marketing, management), brands, market knowledge, technical know-how and assets leads to synergistic effects, which result in pool of resources which is more valuable than the separated single resources in the particular company. Opportunities for growth: Using the partners distribution networks in combination with taking advantage of a good brand image can help a company to grow faster than it would on its own. The organic growth of a company might often not be sufficient enough to satisfy the strategic requirements of a company, that means that a firm often cannot grow and extend itself fast enough without expertise and support from partners Speed to market: Speed to market is an essential success factor In nowadays competitive markets and the right partner can help to distinctly improve this. Complexity: As complexity increases, it is more and more difficult to manage all requirements and challenges a company has to face, so pooling of expertise and knowledge can help to best serve customers. Costs: Partnerships can help to lower costs, especially in non-profit areas like Research&Development. Access to resources: Partners in a Strategic Alliance can help each other by giving access to resources, (personnel, finances, technology) which enable the partner to produce its products in a higher quality or more cost efficient way. Access to target markets: Sometimes, collaboration with a local partner is the only way to enter a specific market. Especially developing countries want to avoid that their resources are exploited, which makes it hard for foreign companies to enter these markets alone. Economies of Scale: When companies pool their resources and enable each other to access manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate strategies also allows smaller enterprises to work together and to compete against large competitors.Further advantages Access to new technology, intellectual property rights, Create critical mass, common standards, new businesses, Diversification, Improve agility, R&D, material flow, speed to market, Reduce administrative costs, R&D costs, cycle time Allowing each partner to concentrate on their competitive advantage. Learning from partners and developing competencies that may be more widely exploited elsewhere. To reduce political risk while entering into a new market

DisadvantagesDisadvantages of strategic alliances include: Sharing: In a Strategic Alliance the partners must share resources and profits and often skills and know-how. This can be critical if business secrets are included in this knowledge. Agreements can protect these secrets but the partner might not be willing to stick to such an agreement. Creating a Competitor: The partner in a Strategic Alliance might become a competitor one day, if it profited enough from the alliance and grew enough to end the partnership and then is able to operate on its own in the same market segment. Opportunity Costs: Focusing and committing is necessary to run a Strategic Alliance successfully but might discourage from taking other opportunities, which might be benefitial as well. Uneven Alliances: When the decision powers are distributed very uneven, the weaker partner might be forced to act according to the will of the more powerful partners even if it is actually not willing to do so. Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the government of this country might try to seize this local business so that the domestic company can have all the market on its own. Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing. Coordination difficulties due to informal cooperation settings and highly costly dispute resolution. Success factorsThe success of any alliance very much depends on how effective the capabilities of the involved enterprises are matched and weather the full commitment of each partner to the alliance is achieved. There is no partnership without trade-offs, but the benefits of it must preponderate the disadvantages, because alliances are made to fill gaps in each otherscapabilities and capacities. Poor alignment of objectives, performance metrics, and a clash of corporate cultures can weaken and constrain the effectiveness of the alliance effectiveness. Some key factors that have to be considered to be able to manage a successful alliance include: Understanding: The cooperating companies need a clear understanding of the potential partners resources and interests and this understanding should be the base of set the alliance goals. No time pressure: During negotiations time pressure must not have an influence on the outcome of the process. Managers need time to establish a working relationship with each other, develop a time plan set milestones and design communication channels. Limited alliances: Some incompatibilities between enterprises might not be avoidable, so the number of alliances should be limited to a necessary amount, which enables the companies to achieve their goals. Good connection: Negotiations need experienced managers especially the managers from the larger firm need to be connected very well so that they have the possibility to integrate different departments and business areas over internal borders and they need legitimations and support from the top management. Creation of trust and goodwill: The best basis for a profit-yielding cooperation between enterprises is the creation of trust and goodwill, because it increases tolerance, intensity and openness of communication and makes the common work easier. Further it leads to equal and satisfied partners. Intense Relationship: Intensifying the partnership leads to the fact that partners get to know each other better, each other's interests and operating styles and increases trust.

Further important factors Ability to meet performance expectations Clear goals Partner compatibility Commitment to long term relationship Alignment

RisksUsing and operating Strategic Alliances does not only bring chances and benefits. There are also risks and limitations that have to be taken in consideration. Failures are often attributed to unrealistic expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust. Some of the risks are listed below: Partner experiences financial difficulties Hidden costs Inefficient management Activities outside scope of original agreement Information leakage Loss of competencies Loss of operational control Partner lock-in Partner product or service failure Partner unable or unwilling to supply key resources Partner's quality performance Partner takes advantage of its positionCommon MistakesMany Companies struggle to operate their alliances in the way they imagined it and many of these partnerships fail to reach their defined goals. There are some very popular mistakes which can be seen again and again. Some are mentioned here: Low commitment Poor operating/planning integration Strategic weakness Rigidity/ poor adaptability Too strong focus on internal alliance issues instead on customer value Not enough preparation time Hidden agenda leading to distrust Lack of understanding of what is involved Unrealistic expectations Wrong expectation of public perception leading to damage of reputation Underestimated complexity Reactive behavior instead of prepared, proactive actions Overdependence Legal problemsImportance of Strategic AlliancesStrategic Alliances have developed from an option to a necessity in many markets and industries. Variation in markets and requirements leads to an increasing use of Strategic Alliances. It is of essential importance to integrate Strategic Alliance management into the overall corporate strategy to advance products and services, enter new markets and leverage technology and Research&Development. Nowadays, global companies have many alliances on inland markets as well as global partnerships, sometimes even with competitors, which leads to challenges such as keeping up competition or protecting own interests while managing the Alliance. So nowadays managing an alliance focuses on leveraging the differences to create value for the customer, dealing with internal challenges, managing daily competition of the alliance with competitors and Risk Management which has become a company-wide concern. Statistics show that the percentage of revenues for the top 1000 U.S. public corporations generated by Strategic Alliances increased from 3-6% in the 1990s up to 40% in the year 2010, which shows the fast changing necessity to align in partnerships. The number of equity-based alliances has dramatically increased in the last couple of years, whereas the number of acquisitions has decreased by 65% since the year 2000. For a statistically examination over 3000 announced alliances in the USA have been reviewed in the years 1997 to 1997 and results showed that only 25% of these alliances were equity based. In the years 2000 until 2002 this percentage increased up to 62% equity-based alliances among 2500 newly formed alliances. Life cycle of a Strategic AllianceFormationForming a Strategic Alliance is a process which usually implies some major steps that are mentioned below: Strategy Development: In this stage the possibility of a Strategic Alliance is examined with respect to objectives, major issues, resource strategies for production, technology and people. It is necessary that objectives of the company and of the alliance are compatible. Partner Assessment: In this phase potential partners for the Strategic Alliance are analyzed, in order to find an appropriate company to cooperate with. A company must know the weaknesses and strengths and the motivation for joining an alliance of another company. Besides that appropriate criteria for the partner selection are defined and strategies are developed how to accommodate the partners management style. Contract Negotiations: After having selected the right partner for a Strategic Alliance the contract negotiations start. At first all parties involved discuss if their goals and objectives are realistic and feasible. Dedicated negotiation teams are formed which determine each partners role in the alliance like contribution and reward, penalties and retaining companies interests.

OperationIn this phase in the life of a Strategic Alliance, an internal structure occurs under which its functions develop. While operating it, the alliance becomes an own new organization itself with members from the origin companies with the aim of meeting all previously set objectives and improving the overall performance of the alliance which requires effective structures and processes and a good, strong and reliable leadership. Budges have to be linked, as well as resources which are strategically most important and the performance of the alliance has to be measured and assessed. End/ DevelopmentThere are several ways how a Strategic Alliance can come to an end: Natural End: When the objectives, the Strategic Alliance was founded for have been achieved, and no further cooperation is necessary or beneficial for the involved enterprises the alliance can come to a natural end. An example for such a natural end is the alliance between Dassault and British Aerospace which was founded to manufacture the Jaguar fighter aircraft. After the end of the program no further jets were ordered so the involved companies ended their cooperation. Extension: After the end of the actual reason for the alliance, the cooperating enterprises decide to extend the cooperation for following generations of a respective product or expand the alliance to new products or projects. Renault for example worked together with Matra on three successive generations of their Espace minivan, whereas Airbus expanded its cooperation to include a complete family of airplanes. Premature Termination: In this case the Strategic Alliance is ended before the actual objectives of its existence have been achieved. In 1987 Matra-Harris and Intel broke up their Cimatel partnership before one of the planned VLSI chips was manufactured. Exclusive Continuation: If one partner decides to get out of the alliance before the common goals have been achieved, the other partner can decide to continue the project on its own. This happened when Saab decided to continue with the designing of a commuter aircraft (SF-340), after the partner Fairchild had to cancel the alliance because of internal problems. After Fairchild left the project it was named Saab 340. Takeover of Partner: Strong companies sometimes have the opportunity to take over smaller partners. If one firm acquires another the Strategic Alliance comes to an end. After almost ten years of cooperation in the field of mainframe computers a British computer manufacturer, named ICL, was taken over by Fujitsu in 1990.

CORPORATE GOVERNANCE

Corporate governancebroadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.[1]Governance structures identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and otherstakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents. Corporate governance practices are affected by attempts to align the interests of stakeholders. There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 20012002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008.Corporate scandalsof various forms have maintained public and political interest in theregulationof corporate governance. In the U.S., these includeEnronandMCI Inc.(formerly WorldCom). Their demise is associated with theU.S. federal governmentpassing theSarbanes-Oxley Actin 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH,One.Tel) are associated with the eventual passage of theCLERP 9reforms.Similar corporate failures in other countries stimulated increased regulatory interest (e.g.,Parmalatin Italy).

Other definitionsCorporate governance has also been defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers. In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, tradecreditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are theboard of directors,executives, and other employees.Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled. An important theme of governance is the nature and extent ofcorporate accountability.A related but separate thread of discussions focuses on the impact of a corporate governance system oneconomic efficiency, with a strong emphasis on shareholders' welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, theprincipalagent issuearises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management. This aspect is particularly present in contemporary public debates and developments in regulatorypolicy. Economic analysis has resulted in a literature on the subject.[ One source defines corporate governance as "the set of conditions that shapes theex postbargaining over thequasi-rentsgenerated by a firm.The firm itself is modelled as a governance structure acting through the mechanisms of contract. Here corporate governance may include its relation tocorporate finance.

PrinciplesContemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: TheCadbury Report(UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), theSarbanes-Oxley Actof 2002 (US, 2002). The Cadbury andOrganisation for Economic Co-operation and Development(OECD) reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports. Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment. Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.ModelsDifferent models of corporate governance 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 orMultistakeholder Modelassociated 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.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.IndiaTheSecurities and Exchange Board of IndiaCommittee 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. United States, United KingdomThe 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 areex officiomembers of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. In the United Kingdom, theCEOgenerally 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.[33]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 theModel Business Corporation Act, but the dominant state law for publicly traded corporations isDelaware, which continues to be the place of incorporation for the majority of publicly traded corporations.Individual rules for corporations are based upon thecorporate charterand, less authoritatively, the corporatebylaws.[34]Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws. RegulationCorporate law

Company Business

Business entities

Sole proprietorship Partnership Corporation Cooperative Joint-stock company Private limited company

European Union /EEA

EEIG SCE SE SPE

UK / Ireland / Commonwealth

CIO Community interest company Limited company by guarantee by shares Proprietary Public Unlimited company

United States

Benefit corporation C corporation LLC Series LLC LLLP S corporation Delaware corporation Delaware statutory trust Massachusetts business trust Nevada corporation

Additional entities

AB AG ANS A/S AS GmbH K.K. N.V. Oy S.A. SARL more

Doctrines

Business judgment rule Corporate governance De facto corporation and corporation by estoppel Internal affairs doctrine Limited liability Piercing the corporate veil Rochdale Principles Ultra vires

Corporate laws

United States Canada United Kingdom Germany France South Africa Australia Vietnam

Related areas

Civil procedure Contract

v t e

Corporations are created aslegal personsby the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century.In addition to the statutory laws of the relevant jurisdiction, corporations are subject tocommon lawin some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.The U.S. passed theForeign Corrupt Practices Act(FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery. The UK passed theBribery Actin 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to establish controls to prevent bribery.Sarbanes-Oxley ActTheSarbanes-Oxley Actof 2002 was enacted in the wake of a series of high profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements, that: ThePublic Company Accounting Oversight Board(PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their defense. Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee. External audit firms cannot provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services. Codes and guidelinesCorporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchangelisting requirementsmay have a coercive effect.Organisation for Economic Co-operation and Development principlesOne of the most influential guidelines has been the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governancepublished in 1999 and revised in 2004.The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed theUnited NationsIntergovernmental Working Group of Experts on International Standards of Accounting and Reporting(ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure. This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing Board and management structure and process Corporate responsibility and compliance in organization Financial transparency and information disclosure Ownership structure and exercise of control rightsStock exchange listing standardsCompanies listed on theNew York Stock Exchange(NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements: Independent directors: "Listed companies must have a majority of independent directors...Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company. Board meetings that exclude management: "To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management." (Section 303A.03) Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations. (Section 303A.04 and others)Other guidelinesThe investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.TheWorld Business Council for Sustainable Development(WBCSD) has done work on corporate governance, particularly onAccounting and Reporting, and in 2004 releasedIssue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda.In 2009, the International Finance Corporation and the UN Global Compact released a report,Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability.Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.HistoryRobert E. Wrightargues inCorporation Nationthat the governance of early U.S. corporations, of which there were over 20,000 by the Civil War, was superior to that of corporations in the late 19th and early 20th centuries because early corporations were run like "republics" replete with numerous "checks and balances" against fraud and usurpation of power of managers or large shareholders. In the 20th century in the immediate aftermath of theWall Street Crash of 1929legal scholars such asAdolf Augustus Berle, Edwin Dodd, andGardiner C. Meanspondered on the changing role of the modern corporation in society. From theChicago school of economics,Ronald Coase[44]introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. US expansion afterWorld War IIthrough the emergence of multinational corporations saw the establishment of the managerial class. Studying and writing about the new class were severalHarvard Business Schoolmanagement professors:Myles Mace(entrepreneurship),Alfred D. Chandler, Jr.(business history),Jay Lorsch(organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors.In the 1980s,Eugene FamaandMichael Jensen established theprincipalagent problemas a way of understanding corporate governance: the firm is seen as a series of contracts. Over the past three decades, corporate directors duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.:IBM,Kodak,Honeywell) by their boards. TheCalifornia Public Employees' Retirement System (CalPERS)led a wave ofinstitutionalshareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequentlyback dated).In the early 2000s, the massive bankruptcies (and criminal malfeasance) ofEnronandWorldcom, as well as lessercorporate scandals, such as Adelphia Communications,AOL,Arthur Andersen,Global Crossing,Tyco, led to increased political interest in corporate governance. This is reflected in the passage of theSarbanes-Oxley Actof 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008/9 and the level of CEO payEast AsiaIn 1997, theEast Asian Financial Crisisseverely affected the economies ofThailand,Indonesia,South Korea,Malaysia, and thePhilippinesthrough the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.

IranThe Tehran Stock Exchange introduced a corporate governance code in 2007 that reformed "board compensation polices, improved internal and external audits, ownership concentration and risk management. However, the code limits the directors independence and provides no guidance on external control, shareholder rights protection, and the role of stakeholder rights."[50]A 2013 study found that most of the companies are not in an appropriate situation regarding accounting standards and that managers in most companies conceal their real performance implying little transparency and trustworthiness regarding operational information published by them. Examination of 110 companies' performance found that companies with better corporate governance had better performance. StakeholdersKey parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for acontrolling shareholder.

Responsibilities of the board of directorsFormer Chairman of the Board ofGeneral MotorsJohn G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management. Aboard of directorsis expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g., Compensation, Nominating and Audit) to perform their work. The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below: Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets. Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key executives and oversee succession planning. Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders. Ensure a formal and transparent board member nomination and election process. Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications. Where committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed.Stakeholder interestsAll parties to corporate governance have an interest, whether direct or indirect, in thefinancial performanceof the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned withcorporate social performance.A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance.Control and ownership structuresControl and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most of Continental Europe, ownership is not necessarily equivalent to control due to the existence of e.g.dual-class shares,ownership pyramids,voting coalitions,proxy votesandclauses in the articles of association that confer additional voting rights to long-term shareholders. Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights.[53]Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership. Some features or types of control and ownership structure involvingcorporate groupsinclude pyramids,cross-shareholdings, rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures. Japanesekeiretsu() and South Koreanchaebol(which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups[4]. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures.Family controlFamily interests dominate ownership and control structures of some corporations, and it has been suggested the oversight of family controlled corporation is superior to that of corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year. Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have is blood ties," according to aBusiness Weekstudy.Diffuse shareholdersThe significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group.The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations,State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficientliquidity. The idea is this strategy will largely eliminate individual firmfinancialor other risk and. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for will likely be costly because of "golden handshakes" or the effort required, they will simply sell out their interest.Mechanisms and controlsCorporate governance mechanisms and controls are designed to reduce the inefficiencies that arise frommoral hazardandadverse selection. There are both internal monitoring systems and external monitoring systems.[57]Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to abusiness group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior, occurs when an independent third party (e.g. theexternal auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providingincentive alignmenttoward corporate goals and objectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up. Internal corporate governance controlsInternal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include: Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes,ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such assharesandshare options,superannuationor other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behaviour. Monitoring by large shareholdersand/ormonitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management. In publicly traded U.S. corporations, boards of directors are largelychosenby the President/CEO and the President/CEO often takes the Chair of the Board position for him/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is fairly common in large American corporations.While this practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of best practice have recommended against duality.External corporate governance controlsExternal corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: competition debt covenants demand for and assessment of performance information (especiallyfinancial statements) government regulations managerial labour market media pressure takeovers

Financial reporting and the independent auditorThe board of directors has primary responsibility for the corporation's internal and externalfinancial reportingfunctions. TheChief Executive OfficerandChief Financial Officerare crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation'saccountantsandinternal auditors.Current accounting rules underInternational Accounting Standardsand U.S.GAAPallow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance increases theinformation riskfor users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independentexternal auditorwho issues a report that accompanies the financial statements.One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of theSarbanes-Oxley Act(following numerous corporate scandals, culminating with theEnron scandal) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.

Systemic problems Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is theefficient-market hypothesis(in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors. Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process. Issues

Executive payIncreasing attention and regulation (as under theSwiss referendum "against corporate Rip-offs" of 2013) has been brought to executive pay levels since thefinancial crisis of 20072008. Research on the relationship between firm performance andexecutive compensationdoes not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders. Some argue that firm performance is positively associated with shareoptionplans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of theWall Street Journal. Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the studyScandalby authorM. Gumportissued in 2006.A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing ashare repurchaseplan.Separation of Chief Executive Officer and Chairman of the Board rolesShareholders elect a board of directors, who in turn hire aChief Executive Officer(CEO) to lead management. The primary responsibility of the board relates to the selection and retention of the CEO. However, in many U.S. corporations the CEO and Chairman of the Board roles are held by the same person. This creates an inherent conflict of interest between management and the board.Critics of combined roles argue the two roles should be separated to avoid the conflict of interest. Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it should be up to shareholders to determine what corporate governance model is appropriate for the firm. In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have generally split the roles in nearly 100% of listed companies. Empirical evidence does not indicate one model is superior to the other in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEO's more frequently than when the CEO/Chair roles are combined

References1. Jump up^Shailer, Greg.An Introduction to Corporate Governance in Australia, Pearson Education Australia, Sydney, 20042. ^Jump up to:abcd"OECD Principles of Corporate Governance, 2004".OECD. Retrieved2013-05-18.3. Jump up^Tricker, Adrian,Essentials for Board Directors: An AZ Guide, Bloomberg Press, New York, 2009,ISBN 978-1-57660-354-34. Jump up^Rezaee, Zabihollah (2002).Financial Statement Fraud. John Wiley & Sons.ISBN0-471-09216-9.5. Jump up^Lee, Janet & Shailer, Greg. The Effect of Board-Related Reforms on Investors Confidence.Australian Accounting Review, 18(45) 2008: 123-134.6. Jump up^Sifuna, Anazett Pacy (2012). "Disclose or Abstain: The Prohibition of Insider Trading on Trial".Journal of International Banking Law and Regulation27(9).7. Jump up^Goergen, Marc, International Corporate Governance, (Prentice Hall 2012)ISBN 978-0-273-75125-08. Jump up^"The Financial Times Lexicon".The Financial Times. Retrieved2011-07-20.9. Jump up^Cadbury, Adrian,Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992, p. 1510. Jump up^Bowen, William G.,Inside the Boardroom: Governance by Directors and Trustees, John Wiley & Sons, 1994,ISBN 0-471-02501-111. ^Jump up to:abDaines, Robert, andMichael Klausner, 2008 "corporate law, economic analysis of,"The New Palgrave Dictionary of Economics, 2nd Edition.Abstract.12. Jump up^Pay Without Performance the Unfulfilled Promise of Executive Compensation by Lucian Bebchuk and Jesse Fried, Harvard University Press 2004, 1517

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