In our last blog, we saw what corporate governance is, why we need it and its principles that are generally followed by corporations. To further go into corporate governance, let us first look at the various models that are followed.
The Continental Europe or the Two-tier board system/model
European countries, such as Germany, Austria, and the Netherlands, follow a two-tiered Board of Directors system for governing the corporations. The two boards- the executive and the supervisory board, have different functions. The Executive Board is made up of company executives and is generally responsible for the day-to-day operations while the supervisory board is made up entirely of non-executive directors and they are basically the ones representing the shareholders and employees; they may hire and fire the members of the executive board. The supervisory board is also responsible for determining the compensations for the executive board members and reviews business decisions that have a large impact on the corporation. The two boards are completely separate, and the size of the supervisory board is priest by law and cannot be changed at will by the shareholders. Also in this model, there are voting right restrictions on the shareholders. They can only vote a certain share percentage regardless of their share ownership.
The Indian model
According to the Securities and Exchange Board of India Committee, corporate governance is defined 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.” Especially since India is a growing economy it is quite important to safeguard the interests of investors and also ensure that the responsibility of management is fixed.
The United States, United Kingdom model/ Anglo-American model
This model emphasises on and highlights the interests of shareholders. Unlike the two-tiered system, it relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders and is therefore also known as “the unitary system”. Many boards in this system include some executives, however, non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role has been the norm, despite major misgivings regarding the effect on corporate governance.The number of US firms combining both roles is declining, however.
In the United States, corporations are directly governed by state laws, while the exchange of securities in corporations is under the governance of the federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware General Corporation Law, which continues to be the place of incorporation for the majority of publicly traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws. Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.
The Anglo-US model is based on a system of individual or institutional shareholders that are outsiders of the corporation. The other key players that make up the three sides of the corporate governance triangle in the Anglo-US model are management and the board of directors. This model is designed to separate the control and ownership of any corporation.
Recent scholarship from the University of Oxford outlines a new theory of corporate governance, founder centrism, which is premised upon a narrowing in the separation between ownership and control. Through the lens of concentrated equity ownership theory, a new theory of the firm, the traditional checklist of best practices is inapplicable, as evidenced by the significant outperformance of technology companies with dual-class share structures and integrated CEO/Chairman positions
As we have seen above, various models of corporate governance are followed all around the world, each suiting the demographic are- its economic status, its society, culture, etc.
Corporate governance doesn’t seem so formidable anymore, what with numerous software tools such as VComply taking over and keeping a track of how the organization is performing.
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