Month: May 2021

Anglo-American Model

Under the Anglo-American Model of corporate governance, the shareholder rights are recognised and given importance. They have the right to elect all the members of the Board and the Board directs the management of the company. Some of the features of this model are:

• This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate governance being the basis of corporate governance in Britain, Canada, America, Australia and Common Wealth Countries including India
• Directors are rarely independent of management
• Companies are run by professional managers who have negligible ownership stake. There is clear separation of ownership and management.
• Institution investors like banks and mutual funds are portfolio investors. When they are not satisfied with the company’s performance they simple sell their shares in market and quit.
• The disclosure norms are comprehensive and rules against the insider trading are tight
• The small investors are protected and large investors are discouraged to take active role in corporate governance.

German Model

This is also called European Model. It is believed that workers are one of the key stakeholders in the company and they should have the right to participate in the management of the company. The corporate governance is carried out through two boards, therefore it is also known as two-tier board model. These two boards are:

• Supervisory Board: The shareholders elect the members of Supervisory Board. Employees also elect their representative for Supervisory Board which are generally one-third or half of the Board.
• Board of Management or Management Board: The Supervisory Board appoints and monitors the Management Board. The Supervisory Board has the right to dismiss the Management Board and re-constitute the same.

Japanese Model

Japanese companies raise significant part of capital through banking and other financial institutions. Since the banks and other institutions stakes are very high in businesses, they also work closely with the management of the company. The shareholders and main banks together appoint the Board of Directors and the President. In this model, along with the shareholders, the interest of lenders is recognised.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder representation in the board. According to this model, creation of Stakeholders Board over and above the shareholders determined Board of Directors would improve the internal control systems of the corporate governance. The Stakeholders Board consists of representation from shareholders, employees, major consumers, major suppliers, lenders etc.

Indian Model

In India there are mainly three types of companies’ viz. private companies, public companies and public sector undertakings. Each of these companies has distinct kind of shareholding pattern. Thus the corporate governance model in India is a mix of Anglo-American and German Models.

For the first time in the history of corporate governance in India, the Confederation of Indian Industry (CII) framed a voluntary code of corporate governance for the listed companies, which is known as CII Code of desirable corporate governance.

The main recommendations of the Code are summarised as:

(a) Any listed company with a turnover of Rs. 1000 million and above should have professionally competent and acclaimed non-executive directors,

Who should constitute:

• At least 30% of the board, if the chairman of the company is a non-executive director.
• At least 50% of the board if the chairman and managing director is the same person.

(b) For the non-executive directors to play an important role in corporate decision-making and maximising long-term shareholder value,

They need to:

• Become active participants in boards, not passive advisors,
• Have clearly defined responsibilities within the board, and
• Know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios, and have some knowledge of various company laws.

(c) No single person should hold directorships in more than 10 listed companies. This ceiling excludes directorship in subsidiaries (where the group has over 50% equity stake) or associate companies (where the group has over 25% but no more than 50% equity stake).

(d) The full board should meet a minimum of six times a year, preferably at an interval of two months, and each meeting should have agenda items that require at least half-a-days discussion.

(e) As a general rule, one should not re-appoint any non-executive director who has not had the time to attend even one-half of the meetings.

(f) Various key information must be reported to, and placed before the board, viz., annual budgets, quarterly results, internal audit reports, show cause, demand and prosecution notices received, fatal accidents and pollution problem, default in payment of principal and interest to the creditors, inter corporate deposits, joint venture foreign exchange exposures.

(g) Listed companies with either a turnover of over Rs. 1000 million or a paid up capital of Rs. 200 million, whichever is less, should set up audit committees within 2 years. The committee should consist of a least three members, who should have adequate knowledge of finance, accounts, and basic elements of company law. The committees should provide effective supervision of the financial reporting process. The audit committees should periodically interact with statutory auditors and internal auditors to ascertain the quality and veracity of the company’s accounts as well as the capability of the auditors themselves.

(h) Consolidation of group accounts should be optional.

(i) Major Indian stock exchanges should generally insist on a compliance certificate, signed by the CEO and the CFO.

K.M. Birla Committee was set up by SEBI in the year 2000. In fact, this Committee’s recommendation culminated in the introduction of Clause 49 of the Listing Agreement to be complied with by all listed companies. Practically most of the recommendations were accepted and included by SEBI in its new Clause 49 of the Listing Agreement in 2000.

The main recommendations of the Committee are:

(a) The board of a company should have an optimum combination of executive and non­executive directors with not less than 50% of the board comprising the non-executive directors. In case, a company has a non-executive chairman, at least one-third of board should be comprised of independent directors and in case, a company has an executive chairman, at least half of the board should be independent.

(b) Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, management or subsidiaries, which in the judgement of the board may affect their independence of judgement.

(c) A director should not be a member in more than ten committees or act as chairman of more than five committees across all companies in which he is a director. It should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

(d) The disclosures should be made in the section on corporate governance of the annual report:

• All elements of remuneration package of all the directors, i.e., salary, benefits, bonus, stock options, pension etc.
• Details of fixed component and performance linked incentives along with the performance criteria,
• Service contracts, notice and period, severance fees,
• Stock option details, if any, and whether issued at a discount as well as the period over which accrued and exercisable.

(e) In case of appointment of a new director or re-appointment of a director, the shareholders must be provided with the information:

• A brief resume of the director,
• Nature of his experience in specific functional areas, and
• Names of companies in which the person also holds the directorship and the membership of committees of the board.

(f) Board meetings should be held at least four times in a year, with a maximum times gap of 4 months between any two meetings. The minimum information (specified by the committee) should be available to the board.

(g) A qualified and independent audit committee should be set up by the board of the company in order to enhance the credibility of the financial disclosures of a company and promote transparency. The committee should have minimum three members, all being non-executive directors, with majority being independent, and with at least one director having financial and accounting knowledge. The chairman of the committee should be an independent director and he should be present at AGM to answer shareholder queries.

Finance director and head of internal audit and when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee. The committee should meet at least thrice a year. One meeting should be held before finalization of annual accounts and one necessarily every six months. The quorum of the meeting should be either two members or one-third of the members of the committee, whichever is higher and there should be a minimum of two independent directors.

(h) The board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration package for executive directors including pension rights and any compensation payment. The committee should comprise of at least three directors, all of who should be non-executive directors, the chairman of the committee being an independent director.

(i) A board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressal of shareholder complaints like transfer of shares, non-receipt of balance sheet, declared dividends etc., The committee should focus the attention of the company on shareholders’ grievances and sensitize the management of redressal of their grievances,

(j) The companies should be required to give consolidated accounts in respect of all their subsidiaries in which they hold 51% or more of the share capital.

(k) Disclosures must be made by the management to the board relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large. All pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report.

(l) As part of the Directors’ Report or as an additional thereto, a management discussion and analysis report should form part of the annual report to the shareholders.

(m) The half-yearly declaration of financial performance including summary of the significant events in last six months should be sent to each household of shareholders,

(n) The company should arrange to obtain a certificate from the auditors of a company regarding compliance of mandatory recommendations and annex the certificate with the Directors’ Report, which is sent annually to all the shareholders of the company,

(o) There should be a separate section on corporate governance in the annual reports of companies, with a detailed compliance report on corporate governance.

The King Report on Corporate Governance is a booklet of guidelines for the governance structures and operation of companies in South Africa. It is issued by the King Committee on Corporate Governance. Three reports were issued in 1994 (King I), 2002 (King II), and 2009 (King III) and a fourth revision (King IV) in 2016. The Institute of Directors in Southern Africa (IoDSA) owns the copyright of the King Report on Corporate Governance and the King Code of Corporate Governance. Compliance with the King Reports is a requirement for companies listed on the Johannesburg Stock Exchange. The King Report on Corporate Governance has been cited as “the most effective summary of the best international practices in corporate governance”.

Approach

Unlike other corporate governance codes such as Sarbanes-Oxley, the code is non-legislative and is based on principles and practices. It also espouses an apply or explain approach, unique to the Netherlands until King and now also found in the 2010 Combined Code from the United Kingdom.

The philosophy of the code consists of the three key elements of leadership, sustainability and good corporate citizenship. It views good governance as essentially being effective, ethical leadership. King believes that leaders should direct the company to achieve sustainable economic, social and environmental performance. It views sustainability as the primary moral and economic imperative of this century; the code’s view on corporate citizenship flows from a company’s standing as a juristic person under the South African constitution and should operate in a sustainable manner.

The purpose of King is to:

• Create an Ethical Culture in Organisations,
• Improve Their Performance and Increase the Value They Create,
• Ensure There Are Adequate and Effective Controls in Place,
• Build Trust Between All Stakeholders,
• Ensure the Organisation Has A Good Reputation,
• Ensure Legitimacy.

The key principles from the first King report covered:

• Board of directors’ makeup and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors
• Appointments to the board and guidance on the maximum term for executive directors
• Determination and disclosure of executive and non-executive director’s remuneration
• Board meeting frequency
• Balanced annual reporting
• The requirement for effective auditing
• Affirmative action programs
• The company’s code of ethics

In the United States, a blue-ribbon committee (or panel or commission) is a group of exceptional people appointed to investigate, study or analyze a given question. Blue-ribbon committees generally have a degree of independence from political influence or other authority, and such committees usually have no direct authority of their own. Their value comes from their ability to use their expertise to issue findings or recommendations which can then be used by those with decision-making power to act.

A blue-ribbon committee is often appointed by a government body or executive to report on a matter of controversy. It might be composed of independent scientific experts or academics with no direct government ties to study a particular issue or question, or it might be composed of citizens well known for their general intelligence, experience and non-partisan interests to study a matter of political reform. The “blue-ribbon” aspect comes from the presentation of the committee as the “best and brightest” for the task, and the appointment of such a committee, ad hoc, is meant to signal its perspective as outsiders of the usual process for study and decisions.

The designation “blue-ribbon” is often made by the appointing authority, and may be disputed by others who might see the committee as less independent, or as a way for an authority to dodge responsibility.

Examples of high-level blue-ribbon committees in the United States would be the Warren Commission investigating the Kennedy Assassination, the 9/11 Commission investigating the September 11, 2001 terrorist attacks, the Iraq Study Group assessing the Iraq War and the Clinton Administration’s White House Task Force on National Health Care Reform. In each case, the committee did not have authority to indict or legislate, and their brief was to investigate and issue a report on the facts as they found them with recommendations for changes for government policy in the future. The current Blue Ribbon Panel on “sustaining America’s diverse fish & wildlife resources” emphasizes incentives of industries, businesses and landowners to aid in conservation funding to prevent species from being added to the endangered species list.

The term has leaked into official usage. From January 29, 2010 to January 2012, the U.S. had a Blue Ribbon Commission on America’s Nuclear Future. There are other government and private commissions with “Blue Ribbon Commission” in their names. These and others are often referred to simply as “the Blue Ribbon Commission” or “the blue ribbon commission”, creating the potential for confusion.

Greenbury Committee

The Greenbury Report released in 1995 was the product of a committee established by the United Kingdom Confederation of British Industry on corporate governance. It followed in the tradition of the Cadbury Report and addressed a growing concern about the level of director remuneration. The modern result of the report is found in the UK Corporate Governance Code at section D.

The Greenbury Committee was established in 1994 by the Confederation of British Industry in response to growing concern at the level of salaries and bonuses being paid to senior executives.

Its key findings were that Remuneration Committees made up of non-executive directors should be responsible for determining the level of executive directors’ compensation packages, that there should be full disclosure of each executive’s pay package and that shareholders be required to approve them. Remuneration should be linked more explicitly to performance, and set at a level necessary to ‘attract, retain and motivate’ the top talent without being excessive. It also proposed that more restraint be shown in awarding compensation to outgoing Chief Executives, especially that their performance and reasons for departing be taken into account.

Again this code of conduct was to be voluntary in the hope that self-regulation would be sufficient to correct things. It was judged that shareholders were not so much concerned with exorbitant amounts being paid out to executives than that the payouts be more closely tied to performance.

This Committee was established in November 1995 by the Financial Reporting Council (and sponsored in part by the London Stock Exchange, Confederation of British Industry, and Institute of Directors) to review matters arising from the Cadbury and Greenbury Committees and evaluate implementation of their recommendations.

Hampel Committee

The Committee declared at the outset that it would remain mindful of ‘the need to restrict the regulatory burden on companies and to substitute principles for detail wherever possible’, and disdained ‘prescriptive box-ticking’ in favour of highlighting positive examples of good practice. Finding that the balance between ‘business prosperity and accountability’ had shifted too far in favour of the latter, they decided that corporate governance was ultimately a matter for the board. If boards felt it was in the interests of enhancing ‘prosperity over time’ to have a unitary CEO and Chair, or not to put remuneration policy before the AGM for approval then that was their concern. Transparency was more important than adhering to any particular set of guidelines, and any shareholders unhappy with the board’s management had the option of using their votes accordingly.

The Hampel Report (January 1998) was designed to be a revision of the corporate governance system in the UK. The remit of the committee was to review the Code laid down by the Cadbury Report (now found in the Combined Code). It asked whether the code’s original purpose was being achieved. Hampel found that there was no need for a revolution in the UK corporate governance system. The Report aimed to combine, harmonise and clarify the Cadbury and Greenbury recommendations.

On the question of in whose interests companies should be run, its answer came with clarity.

The single overriding objective shared by all listed companies, whatever their size or type of business is the preservation and the greatest practical enhancement over time of their shareholders’ investment.

The Hampel Report relied more on broad principles and a ‘common sense’ approach which was necessary to apply to different situations rather than Cadbury and Greenbury’s ‘box-ticking’ approach.

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

Corporate Governance Structure

The Company has established the Audit & Supervisory Board to ensure that the Board of Directors carries out appropriate decision-making and supervisory functions, as well as ensure that Audit & Supervisory Board members, who are appointed on an individual basis, appropriately carry out their audit functions. Through the strengthening of the functions of both the Board of Directors and the Audit & Supervisory Board, the Company is working to enhance corporate governance. The Company has established a system of executive officers, thereby clarifying the division of roles in the execution of operations, delegating authority, and ensuring expeditious execution of operations. Furthermore, the Company aims to realize effective and transparent corporate governance. Specifically, it has established the Nominations Advisory Committee and the Remuneration Advisory Committee as advisory bodies to the Board of Directors, and the Corporate Governance Committee as a body reporting directly to the Board of Directors.

Executive officers hold responsibility and authority for the execution of operations. Executive officers comprise the CEO, COO, CFO, executive officers responsible for supervising specific functions, and executive officers. Executive officers are appointed through resolution of the Board of Directors.

Board of Directors

The Board of Directors determines the Company’s basic management policies, and makes decisions regarding important operational matters and other matters delegated by resolution of the General Meeting of Shareholders. The Board of Directors also makes decisions on matters stipulated by law and the Company’s Articles of Incorporation, and receives reports regarding the status of significant operational matters. Based on this structure, the Board of Directors oversees the operational execution of the Company’s management.

The Board of Directors shall comprise at least three but no more than 13 members. Of those, at least two members shall be independent outside directors.

Audit & Supervisory Board Members and the Audit & Supervisory Board

As independent officers functioning under a mandate from the General Meeting of Shareholders, the Audit & Supervisory Board Members audit the directors’ execution of duties and have the role of carrying out a supervisory function over the Company in cooperation with the Board of Directors. The Audit & Supervisory Board is a body that holds discussions and makes decisions regarding the audits undertaken by the Audit & Supervisory Board Members for the purpose of formulating opinions. Each Audit & Supervisory Board Member utilizes the Audit & Supervisory Board as a means of ensuring effectiveness. As a body to support the Audit & Supervisory Board Members’ execution of duties, the Company has established the Audit & Supervisory Board Members’ Secretariat and has appointed dedicated staff to this body.

Management Committee

As an advisory body to the COO, the Management Committee comprises mainly executive officers responsible for supervising each function of the Company’s business organization. In principle, the Management Committee convenes three times per month and broadly considers and debates matters delegated by the Board of Directors, important operational matters, and various issues.

Audit Office

The Company has established an Audit Office, which reports directly to the CEO, as an independent internal audit unit. The Audit Office considers and evaluates the effectiveness of business risk management control and governance processes for the overall operations of each JACCS Group business site. The Audit Office carries out internal audit operations based on the “Fundamental Policy relating to the Internal Control System,” etc.

Accounting Auditor

The Company appoints an auditor based on the selection criteria of the Audit and Supervisory Board.

Committees

(i) Nominations Advisory Committee

The Company has voluntarily established the Nominations Advisory Committee as an advisory body to the Board of Directors. This committee considers and debates nomination and dismissal proposals for directors and executive officers responsible for supervising specific functions. The committee reports its findings to the Board of Directors. The committee also considers and debates the content of the “Standards for the Independence of outside Officers,” and reports its findings to the Board of Directors. The committee includes outside directors as members, and ensures objectivity and transparency is maintained.

(ii) Remuneration Advisory Committee

The Company has voluntarily established the Remuneration Advisory Committee as an advisory body to the Board of Directors. The committee considers and debates the performance of directors and executive officers responsible for supervising specific functions and the content of their remuneration, and reports its findings to the Board of Directors. The committee includes outside directors as members, and ensures objectivity and transparency is maintained.

(iii) Corporate Governance Committee

The Company has established the Corporate Governance Committee as a body reporting directly to the Board of Directors. The Committee considers and debates matters relating to the following, and reports its findings to the Board of Directors.

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked.

Some of the benefits of good corporate governance include:

1. Builds morale, reputation, and a legacy

Implementing procedures that support good governance enhances a company’s identity where stakeholders and potential investors are confident to place increased levels of trust in you, which in turn allows you to develop stronger, longstanding relationships.

2. Increases success rate for financial performance and enhances sustainability

Implementing protocol for good governance is intended to assist with being able to quickly identify issues as well as to quickly make decisions to resolve these potential issues thus reducing the eventuality of a crisis and the cost it bears.

3. Creates a greater ability to attract and retain talent

A significant focus has been placed on culture being a key contributing factor to the success of a company. Maintaining transparency surrounding fairness, accountability and operations, gives your employees a greater sense of responsibility and awareness as to where they are positioned to create value within an organization. 

4. Creates an effective framework aimed at meeting business objectives

Decision-making that takes into consideration major stakeholders such as employees, suppliers and the community alike has created a wider vision for successful results. Providing each stakeholder with a percentage of valuable involvement creates a more accountable culture, generating a higher potential to reach objectives within an organization.

5. Creates more opportunities to gain a competitive advantage

Every industry is either constantly evolving or has the potential to evolve at a certain point; adopting good governance and creating an environment where its practices can be sustained is vital to ensuring that your organization is adaptable to change, thus providing a greater competitive advantage and chance at survival.

6. Creates opportunities for investment

An organization that represents stability and reliability increases its chances of attracting premium investors, as well as increasing their opportunity to borrow funds at a better rate.

7. Provides a practical way to guide decision-making at all levels

The ability to make informed decisions can quickly improve performance and reduce the effects of potential failures. One way to promote this kind of decision-making ability is to ensure that information is readily available to key stakeholders, i.e. a culture of transparency.

Strong corporate governance practices can increase the effectiveness and efficiency of business operations through instilled values that emanate from leadership throughout and has the potential to yield major benefits for an organization.