Chapter 8 - Models of Corporate Governance - Two primary...

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Models of Corporate Governance - Two primary influences: Context and culture Patterns of ownership - Dispersed ownership found in UK and US companies is the exception rather the norm - Ownership fundamentally affects the ability of a board to exercise power over a company - Company that has a wide spread of shareholders board will have more freedom to act on its own initiative than in one whose shares are dominated by a block of investors Markets for Corporate Control - Boards can be faced with: A hostile takeover bid A consequential loss of control - Countries with relatively low proportion of external investors market for corporate control is weaker Financing Corporate Entities - Countries with large equity markets, high liquidity, significant turnover shareholdings are often widely spread The American Rule Based Model - Companies in the US are incorporated in individual states, subject to the states company law - Federal responsibilities Investor protection Auditing requirements Financial disclosure - Company law based on common law - Basic governance model in the US: Unitary board predominated by independent outside directors - Shareholders have little influence on board membership - Chairman and CEO are separated - US model ‘rule based’ - Governance is regulated by legal statute and mandatory rules inflexible - Litigation levels are high - Directors face legal penalties for non-compliance The United Kingdom/Commonwealth Principles Based Model - Company law is based on common law, rooted in legislation extended by case-law - ‘Principles based’ - Codes of corporate governance principles or good practice determine board responsibilities, not the rule of law - ‘Comply or explain’ Companies are required to report that they have followed the governance principles laid down in the codes - Self-regulation is underlying - Compliance is voluntary - Role of regulators: ensure that investors and potential investors have accurate information - Call for: 1
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Independent non-executive or outside directors, audit, remuneration and nomination committees High levels of transparency and accountability - Separation between chairman and CEO - International Accounting Standards The Continental European Two-tier Model - Company law typically rule based - Finance markets tend to be smaller and less liquid - Market for corporate control is weak - Investors tend to be more concentrated - Two-tier model required in Germany, Holland; found in Italy and France - CG practices frequently have a social component (e.g. work councils) - Criticism: Mgmt board is inevitably dominated by top mgmt and lacks the information inputs, advice and wise counselling that can be provided by outside independent non-executive directors in a unitary board Effectiveness of supervisory board is questioned o Lack of real power o Potential for conflicts of interest The Japanese Business Network Model - Keiretsu reflects the social cohesion within Japanese society, emphasizing unity
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Chapter 8 - Models of Corporate Governance - Two primary...

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