Models of Corporate Governance

&
Corporate Governance Reforms
Session 3
Prof. Supriti Mishra
 MODELS OF CORPORATE GOVERNANCE
• Traditional models focused on family-owned corporate governance
approach
• Advances in economy, management and technology paved the way for
professional managers and professional run organisations
• Corporate governance models are largely influenced by the socio-
economic, political, and cultural conditions in a nation
• Influenced by country-specific factors and conditions such as the legal and
regulatory framework outlining the roles and responsibilities of all parties
involved in CG
• Governance in one nation cannot be measured against the parameters set for
another nation.
• Governance models succeed where there is a clear division between the
roles of the markets, the civil society, and entrepreneurs.
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 MODELS OF CORPORATE GOVERNANCE
• The various subsets of corporate governance models

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 MODELS OF CORPORATE GOVERNANCE
• Anglo-Saxon Model
• The Anglo-Saxon model is characterised by the dominance of the shareholders
vs other players.
• The manager is responsible to the board of directors and shareholders.
• The model is developed in the context of free market economy, the creation of
wealth, and profit maximisation and assumes the separation of ownership and
control.
• The board of directors may include the following
• Insiders/executive director (ED)
• Generally employees, executives or managers - primary objective is to increase
shareholders’ wealth
• Outsider/non-executive director (NED)
• Persons/institutions with no direct relationship with the corporate management
responsible for monitoring and balancing the interests of shareholders and Eds
• The role of NEDs and EDs are defined in the articles of the company

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 MODELS OF CORPORATE GOVERNANCE
• Anglo-Saxon Model

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 MODELS OF CORPORATE GOVERNANCE
• Continental Model
• The Continental European model is characterised by a high concentration of capital
• Shareholders have the same interest as that of the organization and participate in management and
control
• Managers are responsible to a wider group of stakeholders, besides shareholders, such as
unions, business partners etc.
• Within the broad contour of the continental model, there may be variations across
countries pursuing the model
• Italian board – ownership and control of listed companies are concentrated and shareholders can
intervene in the management process
• German board - enterprise is seen as a combination of various interest groups aimed to coordinate
the national interest objectives
• The model envisages a two-tiered board structure
• Management board (Vorstand)
• Comprises of insiders e.g. company executives
• A supervisory board (Aufsichsrat)
• Comprises of outsiders i.e. labour/employee representatives and shareholder representatives
• The former is responsible for taking key decisions and the later ratifies it.

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 MODELS OF CORPORATE GOVERNANCE
• Japanese Model
• In the Japanese model the four key players are
• The main bank (a major inside shareholder),
• The affiliated company or keiretsu (a major inside shareholder),
• The management, and
• The government.
• The other stakeholders, i.e., non-affiliated shareholders such as IDs have little or
no say in the governance of the organisation
• The pattern of governance is dominated by two types of legal relationships:
• One of co-determination between shareholders and unions, customers, suppliers, creditors, and
the government and
• Another is ratio between administrators and those stakeholders, including managers.
• Focuses on internal control as against external control such as capital markets
• Effective control is exercised by majority shareholders e.g. banks
• Government having a stake in all companies (Japan), appoints BOD, managers and
other corporate functionaries
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 MODELS OF CORPORATE GOVERNANCE
• Japanese Model

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 MODELS OF CORPORATE GOVERNANCE
• Comparative Approaches Across Different Models of Corporate Governance

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 MODELS OF CORPORATE GOVERNANCE
• Comparative Approaches Across Different Models of Corporate
Governance

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INDIAN FRAMEWORK ON CORPORATE GOVERNANCE

• The model of corporate governance found in India comprises a mixture of the

Anglo-Saxon and German models.
• There are some laws and provisions that govern all companies while others focus
on certain kinds of companies.
• Various laws have been framed to ensure checks and balances required for
different and various kinds of situations.

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MODELS OF CORPORATE GOVERNANCE
• Indian companies can be Type of Ownership No. of
Groups
No. of
Companies
divided into four categories Indian Business Groups 728 10957
for studying corporate MNCs 43 249
governance practices (Varma, State-Owned Enterprises 1018
1997) Others 28216

• Companies controlled by Total 40440

Indian Business Groups
• Companies controlled by No. of
MNCs No. of Firms in a Group Groups
• Companies controlled by 1–3 231
4–5 135
Central and State 6 – 10 172
Governments 11 - 30 151
• Others (not affiliated to any 31 - 50 33
51 - 100 32
business group) More than 100 17
Total 771
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Prof. Supriti Mishra, IMIB
Background of Corporate Governance Scenario in India
• After SEBI’s Substantial Acquisition of
Average Average Shares and Takeovers Regulations in 1997,
Promoter Fin.Inst. Average and substantial amendment in 2002, the
Year Stake Stake FII Stake stake of promoters in India has increased in
2002 47.40% 15.46% 2.60%
most of the group companies.
2003 49.95% 11.73% 3.14%
2004 51.86% 8.27% 2.19% • Promoters in India control majority of the
2005 51.85% 9.02% 3.74% shares in the group companies which
2006 50.12% 9.95% 3.99%
makes the ‘market for corporate control’
2007 50.40% 9.99% 4.90%
2008 52.32% 9.23% 4.53%
an ineffective tool to regulate corporate
2009 52.13% 8.38% 3.95% governance in India
2010 52.75% 8.15% 4.06% • Companies Act 2013 and Clause 49 of the
2011 54.31% 7.77% 3.62%
2012 53.41% 7.79% 4.10%
Listing Agreements of SEBI, control
2013 53.76% 9.46% 5.66% corporate governance practices of Indian
2014 54.91% 8.64% 4.87% companies (listed companies). These rules
2015 53.68% 8.90% 4.57% are expected to enforce some of the best
governance practices in India.
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Source: Prowessdx.
EXISTING CODES AND STRUCTURES OF CORPORATE GOVERNANCE
ACROSS JURISDICTIONS—USA, ASIA, EUROPE
• There are a number of reports that have been published internationally.

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EXISTING CODES AND STRUCTURES OF CORPORATE
GOVERNANCE ACROSS JURISDICTIONS—USA, ASIA, EUROPE

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REFORMS & DEVELOPMENT OF CORPORATE
GOVERNANCE IN INDIA
• The early 1990s in India brought a new model of economic reforms by
introducing the concept of liberalisation, globalisation, and privatisation
• The first corporate governance initiative was by the CII, which came up with the first
voluntary code of corporate governance in the year 1998
• One of the very first recommendations proposed by the CII, which reflected the idea of the Cadbury
Committee UK, was based on the objective ‘to raise the standards of corporate governance and the level
of confidence in financial reporting and auditing by setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is expected of them’.
• The second initiative was by the SEBI which introduced the first formal mandatory
corporate governance code in India in the form of Clause 49 of the Listing Agreement.
• The third initiative was the Naresh Chandra Committee, which focused mostly on
accountancy issues in corporate governance and submitted its report in 2002.
• Followed by the Narayana Murthy Committee, which also submitted its report in 2002.

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DEVELOPMENT OF CORPORATE GOVERNANCE IN INDIA

• CII Taskforce on Corporate Governance

• In 1996, CII took a special initiative on corporate governance – the first
institutional initiative in Indian industry.
• The objective was to develop and promote a code for corporate governance to be
adopted and followed by Indian companies, be it those in the
• private sector,
• the public sector,
• banks or financial institutions, all of which are corporate entities

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DEVELOPMENT OF CORPORATE GOVERNANCE IN
INDIA
• CII Taskforce on Corporate Governance
• This initiative by the CII flowed from public concerns regarding the
following:
• The protection of the interests of the investors, especially the small investor;
• The promotion of transparency within business and industry;
• The need to move towards international standards in terms of disclosure of
information by the corporate sector and,
• Through all of this, to develop a high level of public confidence in business
and industry.

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA
• CII Taskforce on Corporate Governance recommendations
• A single board, if it performs well, could maximise long-term shareholder
value.
• Board should meet at least 6 times a year, preferably at intervals of 2
months.
• On the lines of the Cadbury Committee recommendations, the CII too
recommended that a listed company with a turnover of rupees 100 crore and
above should have
• professionally competent and recognised independent non-executive directors who
should constitute at least 30 per cent of the board if the chairman of the company is a
non-executive director,
• or at least 50 per cent of the board if the chairman and managing director are the same
people.

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DEVELOPMENT OF CORPORATE GOVERNANCE IN
INDIA
• Kumar Mangalam Birla Committee Report on Corporate Governance
• The SEBI appointed a committee on corporate governance on 7 May 1999,
with 18 members under the chairmanship of Mr Kumar Mangalam Birla with
a view of promoting and raising the standards of corporate governance.
• Their opinion was asked with respect to
• Terms of the Listing Agreement to be executed by stock exchanges with the
companies and any other measures to improve the standards of corporate
governance in the listed companies.
• The content of disclosure of material information, both financial and non-
financial; manner and frequency of such disclosures; and the responsibilities of
independent and outside directors
• To draft a code of corporate best practices and suggest safeguards to be instituted
within companies to deal with insider information and insider trading

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA

• The Kumar Mangalam Birla Committee’s report gave a detailed

recommendation that comprised of both
• Mandatory as well as non-mandatory recommendations.
• Mandatory recommendations were given in the following areas of
governance:
• 1. Applicability 2. Board of Directors 3. Audit Committee 4. Remuneration
Committee 5. Board Procedures 6. Management 7. Shareholders

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DEVELOPMENT OF CORPORATE GOVERNANCE IN
INDIA
• Narayana Murthy Committee Report
• The Second Committee on Corporate Governance was constituted by SEBI under the chairmanship of
Mr Narayana Murthy in 2002.
• The key mandatory recommendations of the Committee focused on the following:
• 1. Strengthening the responsibilities of audit committees;
• 2. Improving the quality of financial disclosures, including those pertaining to related party
transactions and proceeds from initial public offerings;
• 3. Requiring corporate executive boards to assess and disclose business risks in the annual report
• 4.Introducing responsibilities for boards to adopt formal codes of conduct;
• 5. The position of nominee directors; and
• 6. Stockholder approval and improved disclosures relating to compensation paid to non- executive
directors.
• Non-mandatory recommendations included the following
• 1.Moving to a regime where corporate financial statements are not qualified;
• 2. Instituting a system of training of board members; and
• 3. The evaluation of the performance of board members

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA

• Naresh Chandra Committee Report

• The Naresh Chandra Committee set up in 2002 by the Department of Company
Affairs under the Ministry of Finance
• It made mandatory recommendations related to the duties of the management
• The spirit of this Task Force Report was to encourage better practices through
voluntary adoption based on a firm conviction that good corporate governance
not only comes from within but also generates significantly greater reputational
and stakeholder value when perceived to go beyond the rubric of law.

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA
• Corporate Governance Voluntary • The guidelines were divided into six
Guidelines 2009 parts
• In December 2009, the Ministry of
Corporate Affairs (MCA) published a
new set of ‘Corporate Governance
Voluntary Guidelines 2009,’ designed
to encourage companies to adopt
better practices in the running of
boards and board committees, the
appointment and rotation of external
auditors, and in creating a
whistleblowing mechanism.

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA
• CLAUSE 49 OF THE LISTING AGREEMENT
• ‘Listing’ signifies an admission of securities to dealings on a recognised stock exchange.
• The SEBI provides for a model listing agreement that all the stock exchanges in India follow.
• On 29 October 2004 SEBI announced the revised Clause 49, which was implemented by the
end of the financial years 2004–2005.
• The Listing Agreement has 54 clauses in total and Clause 49 of the Agreement is considered
as the code for corporate governance for listed companies in India.
• Clause 49 makes the companies’ affairs transparent and helps investors make informed
decisions.
• The development of corporate governance in India primarily revolves around the
development of Clause 49.
• It was first introduced in the financial years 2000–2001 and was premised on
recommendations of the Kumar Mangalam Birla Committee

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DEVELOPMENT OF CORPORATE GOVERNANCE
IN INDIA
• THE COMPANIES ACT, 2013 AND CORPORATE GOVERNANCE

• The Companies Act, 2013, has undoubtedly raised the bar of

corporate governance in India by incorporating provisions aimed at
strengthening the corporate governance structure.

• The new Companies Act, 2013, has made it mandatory for the
following categories of companies to have Independent Directors:
• Listed public company
• Public companies having paid up share capital of 10 crore rupees or more
• Public companies having a turnover of 100 crore rupees or more
• Public companies which have, in aggregate, outstanding loans, debentures, and
deposits, exceeding 50 crore rupees.
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REGULATORY FRAMEWORK ON CORPORATE
GOVERNANCE IN INDIA
• The Companies Act, 2013
• The Companies Act, 2013 contains provisions relating to the constitution of the
board of directors, board meetings and its processes, qualifications, and appointment
of independent directors, general meetings, audit committees, rules relating to
related party transactions, disclosure requirements in financial statements, etc.
• SEBI Guidelines
• The SEBI is a regulatory authority having jurisdiction over listed companies and
which issues regulations, rules, and guidelines to companies to ensure the protection
of investors.

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REGULATORY FRAMEWORK ON CORPORATE
GOVERNANCE IN INDIA
• Standard Listing Agreement of Stock Exchanges
• For companies whose shares are listed on the stock exchanges, the stock exchange
too lays down governance guidelines under its listing agreements that the companies
raising securities enter into.

• Accounting Standards Issued by the Institute of Chartered Accountants of India

• The Institute of Chartered Accountants in India (ICAI) is an autonomous body, which
issues accounting standards providing guidelines for disclosures of financial
information.

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REGULATORY FRAMEWORK ON CORPORATE
GOVERNANCE IN INDIA
• Secretarial Standards Issued by the Institute of Company Secretaries of
India
• The Institute of Company Secretaries of India (ICSI) is an autonomous
body, which issues secretarial standards in terms of the provisions of the
new Companies Act.
• SEBI (Insider Trading) Regulation, 1992
• The SEBI has been mandated to prohibit insider trading in securities.
• Insider Trading Regulations were formulated and notified in November
1992 after approval of the Government of India.
• The regulations define an ‘insider’ as a person who has access to price
positive non-public information with regard to a company.

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REGULATORY FRAMEWORK ON CORPORATE
GOVERNANCE IN INDIA
• New Takeover Code and SEBI (Substantial Acquisition of Shares and
Takeovers) Regulation, 1997
• The current economic scenario and liberalisation have been ensuring increased
activities in the marketplace, thereby requiring regulation to be in place to protect
the legitimate concerns of the various market players, particularly the investors
who should not lose anything out of takeovers.
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995
• In view of the fact that the success of the regulator in promoting integrity, fairness,
and transparency in the market depends on its effectiveness in investigating market
abuses and in imposing deterrent penalties, SEBI has issued regulations
prohibiting fraudulent and unfair trade practices relating to the securities markets.

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REGULATORY FRAMEWORK ON CORPORATE
GOVERNANCE IN INDIA

• The Depositories Act, 1996

• The Depositories Act, 1996 providing for regulation of
depositories in securities came into force on 10 August 1996.
• The Act provides for a legal framework for setting-up of
single or multiple depositories to record ownership details in
book-entry form.

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 THANK YOU

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