Models of Corporate Governance around the World

Corporate governance systems vary around the world. This is

because in some cases, corporate governance focuses on link between
a shareholder and company, some on formal board structures and
board practices yet others on social responsibilities of corporation.
However, corporate governance is seen as the process by which
organizations are run. There is no one model of corporate governance
which is universally accepted as each model has its advantages and
disadvantages. The liberal model that is common in Anglo-American
countries tends to give priority to the interests of shareholders. The
coordinated model that one finds in Continental Europe and Japan
recognizes the interests of workers, managers, suppliers, customers,
and the community. Both models have distinct competitive
advantages, but in different ways. The liberal model encourages radical
innovation and cost competition while the coordinated model
facilitates incremental innovation and quality competition. However,
there are important differences between the US recent approach to
governance issues and what has happened to the UK.

1. Anglo- American Model

This model is also known as Anglo-Saxon Model and is used as

basis of corporate governance in Anglo-American countries.
It tends to give priority to the interests of shareholders.
(Maximizing shareholder returns/dividends and capital growth)
It encourages radical innovation and cost competition.

In the United States, shareholders, who are the owners of

the corporation, elects the board of directors. The board of
directors then has the power to choose an executive officer
known as the Chief Executive Officer or the CEO. The CEO has
broad power to manage the corporation on a daily basis, but
needs to get board approval for certain major actions, such as:
(1) hiring his or her immediate subordinates, (2) raising money,
(3) acquiring another company, (4) major capital expansions, and
other expensive projects. The duties of the BOD also include
policy setting, decision making, monitoring managements
performance, or corporate control.
The BOD is nominally selected by and responsible to the
shareholders. The individual shareholders are not offered a
choice of board nominees among which to choose, but are
merely asked to rubberstamp the nominees of the sitting board.
Frequently, members of the BOD are CEOs of other corporations,
which some see as a conflict of interest.
In United Kingdom, they had pioneered a flexible model of
regulation of corporate governance, known as the Comply or Explain
code of governance. This is a principle based code that lists a dozen of
recommended practices, such as:

Separation of CEO and the Chairman of the Board

i. There are two key tasks at the top of every public company --- the running
of the board and the executive responsibility for the running of the
companys business.
ii. There should be a clear division of responsibilities at the head of the
company which will ensure a balance of power and authority, such that no
one has unfettered powers of decision.

Introduction of a time limit for CEOs contracts

i. There should be a strong case for setting notice or contract periods at,
or reducing them to, one year or less.
 Designation of a senior non-executive director and independent
directors

i. Whether the posts (Chairman and CEO) are held by different people or
by the same person, there should be a strong and independent non-
executive element on the board, with a recognized senior member
other than the chairman to whom concerns can be conveyed.
ii. The majority of non-executive directors should be independent of
management and free from any business or other relationship, which
could materially interfere with the exercise of the independent
judgment.

Formation and composition of remuneration, audit, and nomination

committees.

i. Remuneration Committee companies should establish a formal and

transparent procedure for developing policy on executive remuneration
and for fixing the remuneration packages of individual directors. No
director should be involved in deciding his or her own remuneration.
This committee should consist exclusively of independent non-
executive directors.
ii. Audit Committee the board should establish an audit committee of at
least three directors, all non-executive, a majority of whom should be
independent, with written terms of reference which deal clearly with
its authority and values.
iii. Nomination Committee unless the board is small, a nomination
committee should be established to make recommendations to the
board on all new board appointments. A majority of the members of
this committee should be non-executive directors.

Publicly listed companies in UK have to either apply those principles or, if

they choose not to, to explain in a designated part of their annual reports why they
decided not to do so. The monitoring of those explanations is left to shareholders
themselves. The tenet of the Code is that one size does not fit all in matters of
corporate governance and that instead of a statuary regime like the Sarbanes-Oxley
Act in the US, it is best to leave some flexibility to companies. If they have good
reasons to deviate from the sound rule, they should be able to convincingly explain
those to their shareholders.