DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION

Human Resource Management Program

Contact: +63995587040/+639107045559

Big Picture B

Big Picture in Focus: ULOb. Recognize the different models of Corporate Governance

Metalanguage

In this section, the essential terms relevant to the study of compensation

administration and to demonstrate ULOb was operationally defined and discussed in
the essential knowledge to establish a standard frame of reference as to how the
texts work in your chosen field or career. You will encounter these terms as we go
through the study of compensation administration. Specific discussion per topic shall
be provided in the later part to help you understand more about the scope in
studying this course.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for the first
three weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to refer to these resources exclusively. Thus, you are expected to utilize
other books, research articles, and other resources that are available in the
university’s library, e.g., ebrary, search.proquest.com, etc.

1. THREE MODELS OF CORPORATE GOVERNANCE FROM

DEVELOPED CAPITAL MARKETS
• Corporate governance structure differs from one
company to another, many custom-based or law-based
structures affects corporations in a similar way. It is
possible to label a ‘model’ of corporate governance for a
given country that has certain characteristics which
differs the structure in other countries. There are three
models in corporate governance, as per record and which
will be discussed on by one.
2. ANGLO-US MODEL – it is characterized by share ownership of
individual and institutional investors not affiliated with the corporation
known as ‘outside’ shareholders. This model has a well-developed
legal framework defining the rights and responsibilities of key players
and a process for interaction between shareholders and the

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

corporation itself. Equity financing is the very common way of getting

investments in UK and US that makes them the largest capital
market. The US is also known for being the home of world’s most
developed system for proxy voting and shareholder activism. The
Anglo-US model is used in US, New Zealand, UK, Australia, Canada
and several other countries.

• Key players – is known as the corporate governance

triangle with three key players – Management,
Shareholders and Board of Directors. Developed in the
context of the free market, there is a separation of
ownership and control in most publicly-held corporations.
Investors contributes to capital and remain the ownership
in the ownership while avoiding legal liability for acts of
the corporation by giving the management the
operations. This separation of ownership and control is
called ‘agency costs’.
• Share ownership pattern – institutional investors held
approximately 61% of shares in and individuals held 21%
approximately during year 1990 in UK. While in US,
53.3% is held by institutional investors that resulted to
increase in their influence among decision making.
• Composition of Board of Directors – In Anglo-US model,
the board of directors compromises two groups called
‘insiders’ and ‘outsiders’. The insiders are those who are
employed as executive, manager or an employee and
contribute to corporate management. Meanwhile, the
outsiders are the board of directors with no direct
relationship with the corporation. In Anglo-US, it is
common that the CEO is also the chairman of the BOD
which could lead to various abuses. This leads to
increase in number of outsiders.
• Regulatory framework – there are various laws and
regulations that protects the relationship between
management, shareholders and board of directors. They

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

have the most strict and comprehensive laws regarding

transparency and disclosure requirements to ensure that
shareholders are well-informed. Although it is vast, some
claim that self-regulations are inadequate and the
government agencies like US Securities and Exchange
Commission must be more effective.
• Disclosure requirements – US corporations are required
by law to be transparent on wide scope of information.
The following are example of which that is known as the
‘proxy statements’:
i. Quarterly reports of financial data
ii. Breakdown of corporation’s capital structure
iii. Background information of nominees for BOD
iv. Compensation of named executive officers
v. List of names of shareholders with 5% or
more total capital share of the corporation
vi. Vital information if there is a proposed
merging and restructuring
vii. Proposed amendments on articles of
incorporation
viii. Names of individuals/companies who serves
as auditors
• Corporate actions requiring shareholders approval –
Anglo-US model permits proposals sent by shareholders
to be included on agenda during AGM and should relate
to corporation’s business operations. Shareholders with
atleast 10% of shares can also held their own
extraordinary general meeting (EGM). The SEC regulates
the communication among shareholders. Under Anglo-
US model also, the two routine corporate actions
requiring shareholder approval are as follows:
i. Elections of directors
ii. Appointment of auditors
Non-routine corporate actions that also requires
shareholder approval:

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

i. Establishment or amendment of stock option

plans
ii. Mergers and takeovers
iii. Restructuring
iv. Amendment of the articles of incorporation
• Interaction among players – As mentioned above, the
Anglo-US model has comprehensive, well-regulated
system for communication. A shareholder has the right to
vote without attending the AGM in person and receives
emails and reports of the proxy statements. They can
also vote by proxy. In the Anglo-US model, the investors
and financial specialists monitors the corporation’s
performance:
i. Specialized investments funds
ii. Venture-capital funds
iii. Rating agencies
iv. Auditors
v. Funds that targets investment in bankrupt
corporations

1. JAPANESE MODEL – differs from other models since they focus

their connection and stock ownerships with affiliated banks and
companies. They build long-term, strong links between corporations
and banks.
• Key players – many-sided in nature, the Japanese
model focuses on bank and financial/industrial network
or more known as ‘keiretsu’. Although the main banking
system is separate from the keiretsu from the Japanese
model. Banks serves as the provider of loans of
corporate clients, provider of services related to bonds,
settlement of accounts, equity issues and other
consulting services. They are also a major shareholder
in the corporation. Japanese model also have
connections between affiliated companies characterized
by crossholdings of debt and equity, informal business

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

contracts and trading of goods and services. The key

players are:
i. Main Bank
ii. Affiliated company
iii. Management
iv. Government
• Share ownership pattern – In 1990, the Japanese
market share ownership is composed of 3% foreigners,
43% banks and insurance companies and 25%
corporations. Since as mentioned above, banks are key
players in Japanese model.
• Composition of Board of Directors – The board of
directors in the Japanese model comprises only of
insiders – executive managers or heads of departments.
However, if the profit falls over, the banks and keiretsu
members can appoint and remove directors. The
Japanese model also allows retiring officials of the
government to become a member of the BOD.
• Regulatory framework – Government ministries have
been traditionally extremely influential in imposing
regulations and policies however, their influenced
weakened due to the following reasons:
i. Due to influence of numerous ministries
like the Ministry of France and Ministry of
International Trade.

ii. The increase in globalization of

Japanese corporation made them
dependent on their domestic market
iii. Growth of Japanese companies leads to
liberalization and an opening, though
small, to global standards.
• Disclosure requirements – The Japanese model are
strict and required corporation to disclose the following
important information:

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

i. Semi-annual basis report on financial

data
ii. Capital structure data of the corporation
iii. Background information of each
nominee vying for being the member of
the board of directors
iv. Compensation of executives
v. Information if there is proposed merging
and restructuring
vi. Names of proposed institution/individual
as auditors
• Corporate actions requiring shareholders approval – In
the Japanese model, the following actions requires
shareholders approval:
i. Payment of dividends and allocation of
reserves
ii. Election of directors and appointment of
auditors
iii. Capital authorizations
iv. Amendment of articles of incorporation
v. Payment of retirement bonuses to
directors and auditors
vi. Increase of aggregate compensation
ceilings for directors and auditors
• Interaction among players – Japanese corporations
prefer that a majority of its shareholders be long-term,
preferably insiders.

2. GERMAN MODEL – The German model significantly differs from the

two models introduced on the previous discussion. Although it has a
similarity with Japanese model in a sense that, they give emphasis
on relationship among banks as member of the boards. In German
model, banks hold position as board of director even without financial
distress. There are three things that distinguish German model to
Japanese and Anglo-US models:

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

i. They prescribed two board of directors with separate

members. Management board who comprises of
insiders like executives of the corporation and the
Supervisory board who comprises the employees
and shareholders.
ii. It is set by law in German model, the numbers of the
members of the board of directors
iii. Voting right restrictions is legal that would limit
shareholders percentage of ownership of shares.
• Key players – The key players in the German model are
the banks and corporate shareholders.
• Share ownership pattern – During 1990, German banks
held 41% of share ownership, 27% are from institutional
owners, 3% are from institutional agents and 4% are
from individual owners.
• Disclosure requirements – The German model is also
stringent in disclosure of wide information to protect
shareholder’s right:
i. They require corporations to provide
semi-annual reports on corporate
financial status
ii. Reports on capital structure
iii. Information on each supervisory board
nominee, although limited to name,
hometown, occupation or affiliation
iv. Compensation of both management and
supervisory board
v. List of names of shareholders with 5% or
more shares
vi. Data on proposed merging and
restructuring
vii. Reports in case there is proposed
amendment of article of incorporation
viii. Names of individuals or companies who
are suggested as auditors

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 DEPARTMENT OFBUSINESS ADMINISTRATION EDUCATION
Human Resource Management Program
Contact: +63995587040/+639107045559

• Corporate actions requiring shareholders approval –

these are the following actions that requires the
shareholder’s approval:
i. Allocation of net income
ii. Ratification of acts of the management
board for the previous year
iii. Ratification of acts of the supervisory
board for the previous year
iv. Election of supervisory board
v. Appointment of auditors
vi. Capital authorization
vii. Affiliation agreements of subsidiaries
viii. Amendment of articles of incorporation
ix. Increase of the aggregate compensation
of supervisory board
• Interaction among players – the German legal and
public-policy framework is designed to include the
interest of corporations, labor, banks and shareholders
in the corporate governance. The German model is
geared towards the interest of the key players.