1. What is corporate governance? Why corporate governance is needed?

Corporate governance is the system by which companies are directed and controlled. The term
encompasses the internal and external factors that affect the interests of a
company’s stakeholders, including shareholders, customers, suppliers, government
regulators and management.
Specific processes that can be outlined in corporate governance include action plans,
performance measurement, disclosure practices, executive compensation decisions, dividend
policies, procedures for reconciling conflicts of interest and explicit or implicit contracts
between the company and stakeholders.
Boards of directors are responsible for the governance of their companies. The shareholders’
role in governance is to appoint the directors and the auditors and to satisfy themselves that an
appropriate governance structure is in place.
The responsibilities of the board include setting the company’s strategic aims, providing the
leadership to put them into effect, supervising the management of the business and reporting
to shareholders on their stewardship.
An example of good corporate governance is a well-defined and enforced structure that works
for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted
ethical standards, best practices and formal laws. Alternatively, bad corporate governance is
seen as poorly-structured, ambiguous and noncompliant, which could damage the image or
financial health of a business.

Why corporate governance is needed

 Corporate governance important because of the following reasons:.

a. Firstly, it helps prevent corporate scandals,

b. Secondly, it helps prevents fraud and loss of finances
c. Thirdly, it helps identify potential civil and criminal liability of the organization
d. Fourthly, it enhances the reputation of the organization and makes it more attractive to
customers, investors, suppliers.
Corporate governance is needed -

 To avoid mismanagement, to enable companies operate more efficiently,

 To improve access to capital and encourages new investments
 To mitigate risk and safeguard stakeholders.
 To limit risk and eliminate corrosive elements within an organization.
 To respond to legitimate stakeholder concerns such as sustainable environmental and
social development. 
  To boosts economic growth, and provides employment opportunities
 It also makes companies more accountable and transparent to investors so as to
minimize expropriation and unfairness for shareholders.
One principle of corporate governance is shareholder recognition, which is a policy that ensures
that all shareholders have a say in the inner workings of a company. Shareholder recognition
also secures the value of a company’s stock.

A lack of corporate governance can lead to profit loss, corruption and a tarnished image, not
only to the corporation, but to the society.

2. What are the various model of corporate governance? Critically examine

and similarities and difference?

Corporate Governance Models

Anglo-American Model
Under the Anglo-American Model of corporate governance, the shareholder rights are
recognised and given importance. They have the right to elect all the members of the Board
and the Board directs the management of the company.
Managers derive their authority from the board, which is (theoretically) beholden to voting
shareholders' approval; however, most companies with Anglo-US corporate governance
systems have legislative controls over shareholders' ability to assert practical, day-to-day
control over the company.

German Model
This is also called European Model. It is believed that workers are one of the key stakeholders in
the company and they should have the right to participate in the management of the company.
The corporate governance is carried out through two boards, The supervisory council and the
executive board.
The executive board is in charge of corporate management; the supervisory council controls the
executive board. The supervisory council is chosen by employees and shareholders.

Japanese Model
Japanese companies raise significant part of capital through banking and other financial
institutions. Since the banks and other institutions stakes are very high in businesses, they also
work closely with the management of the company. The shareholders and main banks together
appoint the Board of Directors and the President. In this model, along with the shareholders,
the interest of lenders is recognised.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder
representation in the board. According to this model, creation of Stakeholders Board over and
above the shareholders determined Board of Directors would improve the internal control
systems of the corporate governance. The Stakeholders Board consists of representation from
shareholders, employees, major consumers, major suppliers, lenders etc.
Comparison between Corporate Governance Models
Anglo American Continental Japanese
European
Objective Maximize the Maximize Ensuring firms are
shareholders’ profit shareholders’ profit run by using
society’s resources
efficiently and taking
into account a range
of stakeholders.
Oriented towards Stock Market Banking Market Banking Market
Interest party Shareholder Shareholders Shareholders,
employees, suppliers
and customers.
Shareholder Low, shareholders High, shareholders High, majority of the
Concentration group hold small group hold large companies are
percentage of total percentages of total founded and ran by
shares number of shares families
Shareholder Identity Most are agents of Most are private Mostly are private
financial institutions companies (20%- persons who
40%), followed by founded and ran the
financial institutions company and
(10%-30%) and then financial institutions
private persons
(15%-35%)
Liquidity of Market Many companies are Fewer companies Fewer companies
listed and their are publicly traded. are publicly traded.
shares publicly People mostly invest People mostly invest
traded. Pension plan on an individual on an individual
provides financial basis. basis.
resources for the
stock market
Discipline External discipline Internal discipline Internal discipline
Mechanism mechanism. mechanisms mechanisms
Management Executive directors Supervisor Board Board of Directors
 Anglo American Continental Japanese
European
and non-executive and Board of and revision
directors Directors commission
Control Control is Control is Control is
concentrated in the concentrated in large concentrated in
hands of a small number of majority
number of investors anonymous investors shareholders
with a variety of
interests
Agency Problem Interest between Interest between Interest between
managers and controlling managers and firm
dispersed shareholders and
shareholders powerless minority
shareholders.
Insider/Outsider Outsider system Insider system Insider system
System
Decision Making Management Shareholders with Subject to the
large percentages of influence of
shares employees and
owners
Long term/ short Short term Long term Long term
term oriented
Corporate Control Hostile Takeover Cross-shareholdings
Financial resources Over investments, Limited, ownership is Limited, ownership is
decision making will concentrated, only concentrated
be the few owners are
management’s equity suppliers
interest.
Dual structure of Authority pressures Separate function of Separate function of
CEO to separate function CEO and Chairman. CEO and Chairman
of CEO and
Chairman. However,
most of the CEOs in
US companies are
also the chairman of
the board in 1991.
Majority of the board External directors Internal directors Internal directors
Compensation Wages based on the Wages and Wages based on the
nature of job done, allowance for stock prices and
no personal allowance for
circumstances. personal
circumstances.
Accounting System GAAP IFRS GAAP and IFRS
Employees Mobility High Low Low
Influences Foreign influences Government or Government or
familial control and familial control and
local control local control
Focus Role of free market Produces richness Business network
based on it to and being the engine acting in an
 Anglo American Continental Japanese
European
exercise a control of national wealth interdependent way
over the companies’ and on the own
owners interests of all
involved parties.
Evaluation of Financial Return on social Return on human
governance performance capital capital
efficiency
Issues covered by Capital market Transactions Corporations network
governance
Ethical Principal Utilitarianism Deontological Deontological

Additional info:
Anglo-American Model
 Some of the features of this model are:
This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate
governance being the basis of corporate governance in Britain, Canada, America, Australia and
Common Wealth Countries including India
Directors are rarely independent of management
Companies are run by professional managers who have negligible ownership stake. There is
clear separation of ownership and management.
Institution investors like banks and mutual funds are portfolio investors. When they are not
satisfied with the company’s performance they simple sell their shares in market and quit.
The disclosure norms are comprehensive and rules against the insider trading are tight
The small investors are protected and large investors are discouraged to take active role in
corporate governance