For this purpose they need bulky investment from public side rather than from any family members who often buys a large proportion of shares and become a prominent member in the equity of the organization. Public as the name says that a number of people of buy shares of the organization they also become legally ownership member of the organization they do not become part of equity they remain as shareholders/ stockholders of the company who wants to earn profits through investing their money in the organization. This purpose have to be fulfilled through a mean known as "corporate governance" which guarantees that the investment of people are in safe hands they wont be let down for their decisions made regarding their investment.
Corporate Governance is accomplished in an organization by the formation of Board of Directors (BODs) in which the members of BODs are nominated members from the major stakeholders of the company and that of shareholders which constitutes up to be major portion among stakeholders. The purpose of the Board of Directors is to oversee and consult the management about the decisions being made regarding the functional operations by senior management which later on furthers the stable and secure operational execution of the company.
20th Century evidenced the awareness of corporate governance practices among the publics who usually buy the share of the listed companies under security exchange commission or council trading publically the offered shares of the company to be sold out. The public who usually be the minority shareholders in an organization deliberately wanted efforts both at governmental level and organizational Level to incorporate best corporate governance practices at all intermediating levels so that their investment would not go to zero end. Corporate governance ensures positive relationship among management, board of directors, stockholders and stakeholders. The issue of corporate governance is of immense importance now while several researches have been conducting in this field to enrich this discipline with reliable and valid guidelines.
The case of bankruptcy occurred at Enron accounting fraud, Lehman Brothers, Tyco International, Xerox, Starbucks and News Corporation; World com broke all the limitations of damage caused by poor corporate governance which almost affect the investment from minority shareholders irrespective of causing damage to the dominant shareholders. The main thing to be noted is that often huge proportions are belonged to the owners of the company who are indeed the part of management side and thus it affects the stock market and successive practices would lead to crash the stock market.
It is not the scene hat management is not capable enough to make operational decisions but the members of the board need to affirm themselves that these decisions are taken in best of organizations followed by accomplishing the overall interests and goals of its stakeholders.
General Overview of Corporate Governance:
Corporate governance was once considered as a part of managing an organizing which is by hook or by crook would have been carried out. But due to increase in its importance and awareness it has now been proceeded to be a crucial liability which has to be accordingly done following the rules and regulation of regulatory body which directly regularize the practices of corporate governance with its legitimate code of corporate governance.
In Pakistan private enterprises have shown a lot of interest to promote and introduce the practices of corporate governance. But family owned businesses have not shown enough participation because they think of it as useless practices and its stock are generally traded among the members of the family or friends they don't even have the code of corporate governance. In the case of state owned corporations there is a Board of Directors (BODs) but all directors are rather the executive or non-executive directors usually include retired generals and bureaucrats. They have no proper implementation code to appoint those directors they are just asked to become the part of Board of Directors having no experiences in working as a part of board of directors they are useless they just fulfill the need to run the large corporation but their working strategy is invalidate. They act as termites accomplish their selfish ends that is hey assimilate a lot of assets of the company through improper means and turn a large organization into high credit debt with low liquidity ratio.
Corporate governance achieves the economic growth of an organization whether having a large or small number of stock holders or few dominant stockholders it is necessary to follow the practices of corporate governance according to the legal framework laid down by Securities Exchange Commission. It involves a duty to be carried by public listed companies which generally offer their stocks to sell so as to increases the amount of money which would be later used for acquiring a new business or crediting the liabilities of the company and assure their status through maintaining proper performance of the company financially so that profits could be increased on the stock investment which would be followed by increased prices of the stocks.
It is the basic aim of corporate governance regulatory agency to create boards of directors (BODs) within an organization which should be especially headed by Chairman but set of best practices demands that Chairman and Chief Executive Officer (CEO) of a business entity should be separate persons but reality seems to crave a different picture unfortunately.
Corporate Governance is challenged by a number of problems including accounting systems, apparently the several systems of internal auditing has been criticized to opaque the genuine interest of the organization and their meaningful financial transactions which act as barrier to generally conclude the presentation of current monetary and industrial status of the respected corporate entity having itself being listed in Stock Exchange. Bribery, Corruption, Favors all sorts of malpractices are in practice through out the world nowadays to sweep away all the money from the minor shareholders and stuck the whole economy in the hands of recession to double the consequences of sequential deception.
The recent recession that gave a major blow to the economy of United States of America had led us to conclude that apart from policies, regulations and certification we need enforcing agencies that thoroughly and at regular interval inspect organizational culture in order to discover about the major corporate governance practices executing within the corporate entity by the crew of senior management. Enforcing agencies are legitimate agencies and they have a right to sue an organization for maintaining ill standards of corporate governance.
Due to increase in globalization processes, foreign investments through multinational projects, large corporate businesses, mutual ventures, development of industrial sector, availability of large stocks and a number of diverse stockholders made a corporate government a fundamental ingredient to be include in the recipe of managing an organization. It strengthens the relationship between stakeholders and shareholders through its positive performance and continuous improvement to safeguard the interest of shareholders.
The growing awareness of using Public Relations (PR) tools and techniques to make goodwill among the members of the organization and other stakeholders it also fueled the significance to incorporate corporate governance practices so as to make sure that organization does not have close approach towards its goals but it has integrative approach to attain its goal by having attain the greater good package for all. So it means that the organization played its part in a socially and ethically responsible manner.
There exist a number of approaches to help us in explaining the relationship role between shareholders and the management. Corporate governance does not meant to just preserve the interest of shareholders but to achieve high economic stability of the country through cooperative and collective efforts of all organizations in corporate governance. More money will be circulated in the economy of the country by increasing the equity of the corporate organizations.
Those organizations which practice corporate governance rules and regulations they add to the economic value of the country, they are not sensitive to financial crisis which emerged in the economic cycle of the cycle simply they wont opt for downsizing strategy during recession period they remain stable and they have sustained graph of productivity through out their life which could be inclined upward during development phase or increased profitability phase that is period when sales touches the peak of height.
The total value of shares got increased lead to market capitalization. In others it has high investment opportunities. People eagerly want to invest in the organization by buying its shares at high prices in order to gain monetary benefits in form of payment of profits.
There is a lot of debate surrounding around to determine which model of corporate governance is exactly the one, which norm is most dedicated to affirm the excellent corporate governance. Some researchers say that one-tier board is efficient while other demands for the two-tier board. But still across the globe the phenomenon of corporate governance are not being properly treated by the organizations this is the point where different material status start off to become resistively a true reality in a society it is fundamental cause to induce unequal distribution of wealth among the members of the society where rich become richer and the poor become poorer.
The era has begun to launch universal code of corporate governance to be applied across the borders so that economic stability could be achieved around the globe through standardized and regularized practices. It will lead to International Investment projects which definitely yield greater prospective results. Among other issues is about the concerned problem of having a unitary board or dual board. Proponents of these models support their own model but majority investors like to have a unitary board system in which directors are easily chosen through Annual Grant Meeting (AGM) of stockholders. Let us have a look at different definitions proposed by different theorists:
Definitions of Corporate Governance:
Several definitions off corporate governance are defined here in this section:
"Corporate Governance is the system by which companies are directed and controlled." (Adrian Cadbury, 1992)
"The structures, processes, cultures and systems that engender the successful operation of the organization are known as Corporate Governance." (K Keasey and M Wright, 1993)
"The process of supervision and control intended to ensure that the company's management acts in accordance with the interests of shareholders." (J Parkinson, 1994)
"Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment." (Andrei Shleifer and Robert W. Vishny, 1997)
"The governance role is not concerned with the running of the business of the company, but with giving overall direction to the enterprises, with overseeing and controlling the executives' actions of management and with satisfying legitimate expectations of accountability and regulation by interests beyond d the corporate boundaries." (R Tricker, 1984)
"The system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all the areas and sub areas of their business activity." (J Solomon and A Solomon, 2004)
Prospects of Significant Corporate Governance:
The movement of corporate governance urges to have good corporate governance perspective which would definitely contribute to add in several underlying issues like ensuring high ethical responsibility towards making business decisions, applying management principles well, overall strategic management while considering the interests of all stakeholders, financial accountability and auditing process which elaborate the economic position of the organization and future business opportunities to be availed soon and disclosure of information to every investor whether he/ she is dominant or small investor.
The establishment of Board of Director attempts to induce the practices of good corporate governance through generating benefit and profits for all stakeholders and stockholders and they could be achieved through proper coordination and collaboration between board of directors and the top level management. .
Theories of Corporate Governance:
Agency theory:
The agency theory with reference corporate governance is defining the relationship between the management and owners of the corporations it identifies management as the agents which is selected by the shareholders who usually are the owners of the organization and identify themselves as principals to he corporations. The principals grant responsibility and authority to the management of the corporation to do regular and strategic business management of the corporate entity. In return, the executives of the corporations received compensation from the organization. Here the point which needs attention is that conflicts between principal and agents are occurred by conflicts of interest usually management has been criticized to earn profits on the stance of the corporations regardless of the performance of the management in the prosperity and profitability of the organization.
Basically the management first involved itself in riskier projects by doing improper risk management of the projects the venture or strategy first show upward movement of profits earn by the corporation but it then eventually lead to decrease in profits earned by the corporation. At first, executives were awarded for their work on the projects in the earlier phase of the projects but later the situation changes both for the corporation and the shareholders so such practices lead to forward the conception of mistrust in this theory.
The problem of mistrust is constituted by the relationships among banks (creditors) which usually lend money, management (agent) and shareholders (principals/owners). The last thing to discuss is that theorists have argued that the agency theory will work well with proper code and regulations imposed on the corporations by the government but it involves cost issue in every decision thus proponents of the theory are looking forward to achieve best practices in the country where corporations worked with underlying foundations of agency theory.
Stakeholders Theory:
The corporation which runs on the stakeholder theory of the corporate governance has to work for the combined interests for all participants who are included in the broad category of stakeholder. It has been assumed that corporate organizations in socialistic economy could work well by choosing this theory as guiding principle to corporate governance. The theory has been acclaimed to have participatory approach towards performing different operations of the corporate entity, it usually keep intact the overall combined interest of stakeholders of the corporation before making any final corporate decisions on the problem raised. It has broad normative aspects because the theory needs to be checked for its proper consequences so that other amendments could be made by the corporations who largely apply the theory to their corporations. The main problem lies with implementing it is that it is not an easier task for the corporations to take in consideration all the related interest towards the performance of the corporations.
Stewardship Theory:
The theory is said to assume a system of corporate governance in which management executives are trustworthy and they have been delegated the responsibility to cater the organization because they have been considered as altruistic who just don't think of attaining monetary interests by the business of corporations but they aim at maintaining their positions, career and economic sustainability of the organizations. They theory encourages to have such reforms through which credibility of the good executives could be honored by the shareholders and relation of trust would be increased in between them. It is against to agentory cost relationship between executives working in the management and shareholders who are called as principals to the corporations. This theory looks forward to achieve better and comparable ends with both the principal and agents of the corporation. If corporations apply this strategy they would have to be patient about better consequences. The mangers in the corporations are entrusted to take the organizations into the new era of economic prosperity and technological innovations.
History of Corporate Governance:
We now look at the history of corporate governance. We can't trace historical roots of corporate governance to their exact place where it started its functions. Corporate Governance is with us with the start of having a corporate style business entity in which private enterprises started to sell off of their stocks to the investors and investors show their insecurities while rendering credit to the organizations and they demand security provisions through sellers who let the stocks to be sold out at affordable rates and by the state in which private organizations used to ask credit from the investors through proper policy making aims at securing the investment of the investors.
The word "Corporate Governance" is an American born. After World War II United states of America was followed by economic development and it evidenced the growth of corporate entities. It was the time when no one knew about what is corporate governance? There was less pressure to have any kind of management practices it was up to management to make out decisions for the organizations. Although Board of Directors was there to protect the interests of the investor but the decade of 70s' from 1970 to 1980 many corporate malpractices have been reported which hung up the investment of several millions of people in waste and there were laws to file a case against the management. It was era when management controls over the decisions of the board of directors and shareholders. The reported cases were of bribery in which meaningful gifts had been traded off between top executives of the management and the independent directors of the board second one, corruption in which whole of the management was involved to influence the decisions of Board of directors in favor of management by supplying false information about the credit profile of the organization and it went off to buy costlier projects which were at least be able to be management efficiently by their organization third one management discriminatory accountability to the board of Directors (BODs) which kept it away from the real collapse of information and fourth one to have unethical conduct for business activities. In 1974, Securities Exchange Commission filed a case against its three directors who were involved in the bankruptcy of Penn Central in 1970. Before the emergence of term "corporate governance" it came into the folds of shareholders rights, board composition and accountability procedures.
The word of corporate governance came to be known in state affairs paper of United States of America in 1976. The issue gained a lot importance at state level and Federal Securities Exchange Commission had extended the number of rules to be implemented on other organizations who wanted to become the part of the Securities Exchange Commission. It added the following inclusions in the prerequisite list to become a public listed company to have an audit committee to be consisted up of non-executive and independent directors and have increased proportion of independent directors at board level set up. The New York Stock Exchange (NYSE) was also asked to act according to these regulations and make sure that every public listed company was obeying these norms or not. A lot of debate was held at state level to stretch out the controls of the government on the performance of the corporations but nothing was settled after six wks of debate at federal and state level and remained at the minimum point to bring in information disclosure reform in the corporate governance code. But everyone was showing that they wanted to have strict laws for corporate governance.
Senator Howard Metzenbaum, Chairman of committee on "Citizen and Shareholders Rights and Remedies" which is a subcommittee of Judiciary Committee he made an advisory committee which was asked to make corporate governance legislations, it was consisted up of different stakeholders. But it failed to form any document which includes legislative bills for corporate governance which should be forwarded to Congress for approval. The event dates back to 1978. In 1980 "Shareholders' Rights Act of 1980" a bill was passed in the Congress for discussion and to hold a debate session at Congress Platform, it has following inclusions:
To have majority of independent directors on board level
To establish audit, compensation and nomination committees which are consisted up of independent directors.
Shareholders have the right to nominate the directors during elections of the directors to the board.
The Act was delayed in the Congress to be passed and implemented on. "Taming the Giant Corporation" a book which was pointed out to be the pioneer it gives us theoretic elaboration of corporate governance trend it was written by R. Nader, M. Green and Seligman J. But they have also mentioned that the scenario of reality is far different room the scripted one. They said that while corporate governance has been positioned as an accountable deed but still there is no way out to say that corporate governance is practiced in a strict way. They concluded that book by saying that we need to incorporate corporate governance laws as federal laws where board of Directors works as an internal auditor so that it would keep an eye on management decision and its decision making strategies.
Melvin Eisenberg also asked for a board which has a also a role of monitoring other then being internal auditor consisting up of mostly independent directors and it should make management accountable to the inform board of directors (BOD) about party related transactions.
In 1978, a Business Roundtable Group which was founded in 1974 became the supporter of the view that large proportion of board members should be consisted up of independent directors and the board's committees should be headed by independent directors. It publishes it consensus generated statement from reviewing the comments and views of Chief Executive Officers (CEO) of large publicly corporations who were asked to share their view points. With the end of the decade the paradigms of debate on corporate governance has been moved to 180 degrees. Ronald Reagan's government further postponed corporate governance reforms' to be implemented soon. But the end of 80s' decade marked off with no remarkable achievement but it gave rises to the debate that what are the rights of shareholders and what is measurement of the return to the shareholders from the organization? It was the period when different suppositions were being laid down by the theorists who saw the problem of corporate governance from different angles of persuasions. The subsequent years follows the same pattern.
The start of 21st Century sparked off research work in the field of corporate governance because America had been stricken off by the recession period which indeed showed accountability lapse from the management which ended up in various corporate bankruptcy scandals. In order to avoid such corporate mishaps the Congress issued "The Sarbanes-Oxley Act", which strictly addresses the issues of management accountability through internal and external modes and the concept of "comply or explain" as laid down in Adrian Cadbury's report published in Britain in1992. In Britain, the roots of corporate governance dates back to the period of 1985 where corporate governance was coined first time in "Times" newspaper and London Stock Exchange formed Committee on Corporate Governance which is the joint project of Financial reporting Council which used to deal with the issues of setting accounting standards for the auditing being done internally and external to the organization. The Cadbury Report was put forwarded by Adrian Cadbury who used to be the Chairman of the Committee. The phase of recession had been took off to effect united Kingdom's in far more worst way highlighting the collapse of accounting principles to be carried out by the top level management of the organization in the internal auditing.
At first, the work of Adrian Cadbury had been severely criticized around the world. But after 1995, it had gained a large plausible response from around the world and it was known to be the "milestone" in the history of corporate governance. The report demanded "Comply or explain" strategy to be implemented in large corporations its aim was to ask an organization for not following the code of corporate governance in the organization premises. Many developing countries found this report to be a worthy one to be considered. Internationally it is accepted as a reality that extended outreach to capital market was on of the factor that gave rise to the concept of corporate governance.
The Asian Stock Market crash of 1997 was the main factor which helps in the emergence of corporate governance. Most businesses are family owned businesses they have no idea about market capitalization and corporate governance but with the increase in time they have raised their awareness about the best practices of corporate governance and how eventually it leads to the growth of the economy and market capitalization. The Organization for Economic Co-operation and Development had issued its report in 1999 about "Corporate governance principles" and laid down the fact that organizations which willingly practice the norms of corporate governance have more access to the financial opportunities which are needed by every corporate entity. So in order to maximize the financial growth of the organization the management must practice the code of corporate governance.
If corporations practice these codes there is no guarantee that conflict will not arise again between the interest of management and that of shareholders. Although the context of corporate governance has been extended but still the questions remain same that whether these practices promises a better future or does it still need a change which is legislative and institutional. Or will the debate be stopped here with the formulation of policy framework? It seems difficult to answer al these questions at once but they can't be denied as they would become evolutionary factors in corporate governance. Because many observant have emphasized on the issue that organization must have their code of corporate governance so that they could find easier to keep themselves abide by it.
The time has arrived definitely to concentrate upon having feasible, accountable and realistic practices of corporate governance like United States of America, Japan and Germany they have developed form of corporate governance.
Exemplary Models of Corporate Governance:
In this section, three models of exemplary models have been discussed which have been applied across the globe and they develop the fragile economies into developed economies of the world. The models that are being discussed later are as follows:
The Anglo-US Model
The Japanese Model
The German Model
We would explain how these models are working according to the given parameters of economic situation of the country. What pattern of regulatory framework has been followed regarding to the ownership and distribution of equity among the shareholders of the organizations. What is legislative process for the creation of board of Directors? How they ensure decision management and decision control functions of board of Directors? What are the differences present in between applying One -tier Board and Two-tier Boards Modes of corporate governance?
The Anglo-US Model:
The system was invented in United States of America (USA) and it was successfully applied to the United Kingdom (UK), Australia, and Canada, developing countries like Pakistan and to other countries as well. In this model shareholders are considered to be among the important stakeholders of the organization. Their interests have been safeguarded through legal framework which distinguishes between the authorities and responsibilities among management, board of directors and shareholders. It encourages shareholders to nominate the directors in the Annual General Meeting (AGM).
The key players that are involved in this system are directors, shareholders, management, government agencies, Stock Exchange and self-regulatory organization and organizational consultants. But the major players are only three in number the management, shareholders and board of directors (BODs). The relationship is defined diagrammatically like this:
Management Shareholders
Board of Directors
The Anglo-US Model was started to operate in a free market economy. The model perhaps distinguishes between ownership and control of the organization. It describes investors as one who are genuinely interested in the organization, contribute it through buying its shares and want it to be capable enough economically to yield surplus profits gradually with the period of time they are usually called as "shareholders" and have a certain proportion or major proportion in the ownership oft the organization. The shareholders appoint managers to manage functional business affairs of the organization and the managers are legally accountable for the responsibilities they have been sought after while at the same time have prime authority to undertake any decisions regarding the problems and then they being compensated by the company for their work/ services. So management acts as "agents "on the behalf of principals (owners/ shareholders) and the cost involved in the process is regarded as "agent costs".
The model claims that board of Directors are usually assigned to watch over managerial decisions regarding organizations. Conflicts may arise while managerial proceeding but proper laws and execution system has been laid down to assure that this wont be going to happen again at exert level.
The practice of the model expand the economy of USA after second World War 2, the "stock market" where shares are traded off, began to extend its outreach vastly with the inclusions like trading of bonds, financial instruments etc. The stock market changes into "capital market" where diverse financial ownership products are arranged to be sold out to different organizations which particular want to buy the shares of other organization. The target market shifted from individual investors to institutional investors who want to buy several other financial derivatives of the organization other than shares and publically offered stocks. The last decade of 20th century reported a peak increase in institutional investors rather than individual investors both in UK and USA.
The corporations which follow the Anglo-US Model they have both "insiders" and "outsiders" on the table of board of Directors. The employees, executives or the persons who have some relationship with the organization and who were asked to sit on the board and they accepted to do so are "insiders" to the board of Directors. The insiders are called executive directors while outsiders are called as non-executive and independent directors. According to the usage of practices the Chairman of the Board of Directors and CEO are the same person which generated a favorable environment for the insiders to the board to have their say first irrespective of what outsiders were saying was given stance to the board.
This practice is still in use today however a lot of norms have been made regarding the inclusion of independent directors as compared to executive directors. As stated above that in the middle of the decade of 1980's marked off for special movements in America to communicate the growing significance related corporate governance practices and to involve institutional investors to vote at Annual General Meeting (AGM) to nominate and elect the outsiders to the organizations. Several researches have been carried out to invent the formulations which protect the interest of the organization but they reported major pitfalls of board of directors set at the top of hierarchy of the organization that is independent directors were kept uninformed about the information of the organization and executive directors have failed to give proper decisions to the board because thy are being kept in pressure from the management to act on the behalf of organizational personal objectives. The problem leads to the stage of having regularization agencies to help protect shareholders from any losses caused to heir investment with intentional bluffing of management to the organization.
The laws relating to corporate governance are hence produce by United States of America Securities Exchange Commission, it is a government agency to rule and implement enclosures of the laws to assure that requirements for being the public listed companies have been met or not. The laws or act are federal provisions passed by Congress or suggested by Securities Exchange Commission to be implemented on Public Listed Companies. But in United Kingdom there is no agency like Securities exchange Commission of England instead laws are passed and gained the nuance of parliamentary acts or laws. There has been a body called Securities and Investment but it does not have any regulatory power to impose on public listed companies under London Stock Exchange (LSE). Stock Exchanges play tremendous part like that of USA Securities Exchange Commission (US SEC).
The Anglo-US Model of corporate governance as applied in United States of America demands to disclose a wide range of comprehensive and financial information In Annual General Meeting (AGM). The system has been applied well to United Kingdom and other countries with no changes in it at all.
The Annual General Meeting of the board of Directors includes following information: Financial transactions report, capital status information data, nominations to the board and their bio data and chronological information, payment details of executive and non-executive directors, name of appointed auditors, names and information of shareholders who made 5% or more ownership in the organization.
The system has been characterized by another feature that shareholders have to endorse both big and small decisions made by the board of directors. The decisions are for example about the auditing and nomination to the board of directors others includes day to day business decisions like mergers and acquisitions and joint ventures etc.
But in UK, the shareholders can't have their say on the issue of dividends paid to the shareholders. Shareholders can also determine the agenda of Annual General Meeting by submitting shareholders proposals before the meeting date. There is special provision in this model for the 10% or more shareholders of the company to hold Extraordinary General Meeting based on a proposed issue to the board of Directors. This model of corporate governance guarantees proper correspondence and interaction between shareholders and the corporation. The shareholders who won't attend or who are absent for a cause and excused the board for have not attending Annual General Meeting cast their vote to elect the directors through mailing the Chairmen Of the Board their positive support for the candidate parallel that they have been kept informed about the nominations to the Board and their information.
The Japanese Model:
The Japanese model of corporate governance has limited number of shareholders usually the banks and other companies holds majority of stock ownerships of the organization. Usually in Anglo model of corporate governance only a minor proportions of shares was offered to be sold out publically but in the Japanese one thing was clearly emphasis and that is Equity Financing it encourages the deal to have owners and institutional investors as equal parts in equity of the business. The model has been characterized by having large number of directors sitting on the level of the board nominated by the stockholders; all these are insiders to the board of Directors, corporations have long term relationships with the bank as it does not act institutional investors but also provide multi lateral financial services like insurance and commercial crediting etc. Corporations in the same or different industry do not just have trade relations but there are shareholders relations between themselves as well called as "keiretsu". Outsiders are seated on board level but in a very small percent as compared to seating of insiders in the board of Directors.
Eventually, interest of dominant shareholders are kept central at the board of meeting but interests of minority shareholders are kept separately from discussing they have no say in companies' decisions. Foreign investors could not become minority shareholders because if they would become in large quantities then this would suggest to alter the regulations of the model and to bring in their representatives to board level in large proportions. But the situation regarding this has been stable now.
The US industrial has discourage monopolistic revolution in the banking sector so it is not allowed in USA that one is providing all of financial products to the people or corporations but in Japan the situation has been opposite and every bank is capable enough to provide all theses services at equally cheaper rates. The key players in the model are corporations, banks, keiretsu and the government which become equal partners in the equity with little or no adjustments at all. The government is made as the part of key players for the reasons that it has been playing strong role regarding industrial transactions and inter-industrial relations matters.
The model signifies it's important that it claimed to have strong relationship among the key shareholders of the corporations because they share a number of responsibilities and authorities among themselves. The board according to this model number have large number of executive directors and they eventually replaced if the corporation has not achieved targeted goals as per given time period. Sometimes, old bureaucrats have been nominated to be seated on the board of Directors with the endorsement form the institutions involved in the governance of the organization whether of bank, keiretsu or corporation itself.
None of the government agencies are capable enough to affect the operational decisions of corporations regarding their regulations and transactions made to their securities by it but their industrial policies remained profitable with contrast to Anglo-US Model. The public institutions have lack of enforcement power to the corporations but they just emphasis on the compliance of code of corporate governance. The model does not apply agent-principal theory to the corporations but due to its closer integrative relationship among the key players it has stand out to be credible model of corporate governance.
There is significant difference between Anglo-US Model and Japanese model about information disclosure at Annual General Meting of the Board. The board discloses information about financial performance which has been occurred during last six months, the compensation of executives, pronounced accounting principles that have been implemented during internal auditing and the names dominant institutional investors to the corporations The Japanese model undergoes strategic movement towards attaining sustainable goals for diverse stakeholders through having a more close approach to corporate governance mechanism. There are no nomination, auditing and compensation committees in Japanese model. The Anglo-US Model has more open approach towards accomplishing enough good for all.
In order to have aggregate and integrative decisions towards every operation of the corporation it has been mentioned as the pre-requisite to have all shareholders (institutional investors/ equity partners) approval before coming to the end of the decision making procedure. The work can be done at routine general meetings of the corporation for both important and for les important shareholders endorsement is necessary to carry out invented decisions. From, 1981 it has been a legislative act to lay down proposal for the Annual General Meeting (AGM) and Extraordinary General Meeting (EGM).
The regular correspondences among key players have been recognized as a fundamental factor to denote the popularity of the model. And it has been ensured through technological means of communications.
The German Model:
The German Model of corporate governance is being used by the corporations of the following countries Germany, Austria, Netherlands, Denmark, Hungary, Poland and Scandinavia.
The German model differs in various ways form the Anglo-US model and the Japanese models of corporate governance but few features of it are similar to the Japanese models.
The banks are long term dominant shareholders or long term equity owners like in Japanese model but their representation on board of directors is constant unlike Japanese model because the representation of bank representatives changes with the needs of time. There are three major banks in Germany which are used to deal with all types of pensions funding, commercial funding, insurance procedural work etc.
The three distinctions of German form of corporate governance are as follows: The board structure in this system is two-tier board system one is management board it is formed from insiders of the corporation hat is executives of the corporations and another board is called supervisory board which is composed up of members who speak on the behalf of some other stakeholders including shareholders representatives. No person can act simultaneously as member of management or supervisory board. The composition of supervisory board is decided by the law and shareholders can't propose any amendments to it. The third distinction is that shareholders have regulated voting rights that they can cast their votes in equal proportions with other equity owners irrespective of the fact that the equity of the corporations is unequally distributed among the corporation, banks and small shareholders. The framework of German Model is tilted towards financing more from the state banks. The market capitalization of Germany is far more less because of the fact that it discourages the selling of large or small stocks to individual rather they would prefer to sell large proportions to banks, the system is generally called upon to have closer relationships between banks and the corporations.
So, for now the three banks in Germany are the main players other than corporations which are also the part of this corporate governance system prevailed in Germany. The Deutsche Bank, the Dresdner bank and the Commerz Bank are the banks are which are seated in large proportions to the supervisory board of the corporations. A point can be noted and that is corporations can also become long term equity holders for other corporations but practice has been suppressed from the start and it not necessary that both the corporations do not any contract other than contract of ownership of equity in a particular corporations.
The elegancy of the model lies in the formation of two tier boards in the corporate governance system of the organization. The management board is called "Vorstand" and the supervisory board is called "Aufsichtsrat" in German language. The procedure is that management board is appointed by the supervisory board and can be suspended by it and can be appointed as new one by the supervisory board it endorsed all the major decisions taken by the management board and provide consultation on behalf of dominant shareholders. The management board has been appointed so far is in-charge for the day to day activities of the corporations. If management wants to have a merger or contract with other organizations then it has to seek the approval form the supervisory board as it is legally stated and pronounced.
Employee Co-determination Law and the Industrial Democracy Act basically they both provide supervision regarding the membership of the supervisory board. They determine separately that how many members should be elected by the stakeholders of the organization for example labor part of the organization has been granted permission to elect their representatives to be seated on the board for defending the interest of laborers of the organization.
The total composition of supervisory board is decided by theses laws, in small corporations having mall number of shareholders and less than 500 employees then only shareholders have the right to select the entire membership to the board. But while working with large corporations it has been decided that equal representation should be given to all stakeholders on the supervisory board.
These facts about the characteristics of German Model stated in above paragraph are more different when it is compared with other models the Anglo-US model and the Japanese model because the membership in the board is not decided by the law in both the models and stakeholders representation on board in neither granted in USA and Japan model. These characteristics are known as distinctive features of the German Model of corporate governance.
The supervisory board of the corporation is not composed of insiders but it does not mean that it is totally consisting up of outsiders; it is formed by "affiliated outsider" because it has stakeholders' representations.
Germany's corporate governance is run by the several federal and state laws and they regulate the processes and structures of the corporate governance. The states' stock exchanges are controlled through state laws of corporate governance. A regulatory body has also been formed to fill its blank space in the corporate governance structures and processes. Stock Exchange Law and Stock Corporation Law and Commercial Law are the three examples of federal laws which are laid down to confirm, corporate governance at all subsequent levels.
One thing which seems to you to be arguable is that Germanys' large corporations keep themselves refrain from indicating enough financial information to the supervisory board, at the meeting of the supervisory board only stated information is disseminated which are as follows: financial transactions of last six months, compensation review of directors who are responsible for their duties at management or at supervisory board, shares' ownership information is not disclosed to the supervisory boards it is unlike the case of US -Model where pattern of ownerships should be disclosed at Annual General Meeting (AGM) necessarily at all times. German accounting principles far more different from the United States of America's general accounting principles. First it was granted to mention the name of owners who hold more than 25% ownership of the organization but the reform was gradually degraded and discouraged and then it was asked by the corporations to mention the name of every shareholder who own 5 percent or more than 5 percent shares of the corporation.
In German model, shareholders' endorsement is required for the following purposes: in deciding payments of dividends to shareholders, the shareholders are also asked to look upon the performance of the management board and of supervisory board in former fiscal year of the organization, for conducting plebiscite of supervisory board and selection of auditors on the management board. The major point of difference to be noted is that Anglo-US model has one renowned advantage to both the models of Japan and Germany because it ensures corporate governance by the means of both external and internal auditing. If shareholders found that their representatives and management representatives have decreased the level of performance of the organization then they would not cast their confidence vote to both the boards of the corporation and nominate new representatives to both the boards.
The shareholders are also asked for their consent on major business transactional and transformational activities like acquisitions and mergers and to increase the salaries of the directors seating on the supervisory boards. There are two types of proposals in this model which are counter proposal and proposal. The proceedings regarded to set the agenda of the meting are required to meet the set of needs to alter the agenda of the meeting that is shareholder proposal they are made and submitted according to federal laws of corporate governance. The mandate of proposal requires providing of legal documentations to the corporations.
The interaction between key players is strong but when individual shareholders are mentioned here there is typical low flow of correspondence between corporation and individual investors. But still they are playing constructive part by proposing proposals and counter proposals at Extraordinary General Meeting and the Annual General Meeting at the corporation because individual investment is growing day by day because of foreign individual investment and market liberalization by the government of Germany. But shareholders can't vote through mail they have to attend the meting for casting their vote.
Unitary Board or Dual Board Structure:
There has been constantly growing debate on the structure of the board whether corporations should opt for one tier board or two tier board but explanations to two practices clearly produced the facts that dual board are sustainable in the countries which produces favorable environment to them. One-tier board is recommended popularly by large majority of proponents of the model. It is highly recommendable because powers have been separated between Chairman of the Board and Chief Executive Officers of the management. There are committees formed on independent directors for the purpose to settle down the affairs of compensation, auditing and nomination made to the board of Directors. Chairman to the board and committees should be independent directors. The concept of external auditing strictly strengthens the sense financial disclosure to the shareholders through the independent directors acting on the board. But in two tier board structure there is no concept of external auditing and they have strict voting rights. The unitary board affirms the penetration of shareholders to the least possible mater of corporations while in dual boards they just have to ratify the decisions taken by the management as opposed to unitary board in which board is side by side with the management while undertaking many decisions in order to keep a check on management performance. In unitary board, both management and the board are seated together while in case of dual they have been placed apart which leads to the certain lapse of disclosure of information. Hence unitary board has many advantages as compare to dual board.
Conclusion:
Every model that has been discussed deliberately is best according to the need and conditions of the country in which it is being carried out by the corporations the system comprehend the regulatory structures and bodies to ensure that corporate governance is prevailed in the organization by the assigned management of the corporation which has been delegated to control over the managerial affairs of the business entity. In Pakistan, Anglo US-Model is applied, the situation in Pakistan is quite stable and nurturing as number of corporations on the scale is rising which determines their institutional awareness to implement corporate governance models to their corporations. Securities Exchange Commission has become stronger regulatory organ of the government to protect corporate institutional framework which demands impositions of corporate governance practices.
Globally awareness of corporate governance has been successfully achieved through reforming various strategies and code of corporate governance in various countries. Although the market capitalization and liberalization seeks to have a greater economic stability by bringing more money into the economy but the concept of corporate governance has accelerated the process of transformational change in various aspects of the developing nation like social, economical and political aspects majority of the time.
