A poorly conceived corporate governance system can wreak havoc on the economy by misallocating resources or failing to check opportunistic behaviors, states Wharton management professor (Mauro Guillen). Corporate Governance has existed for years, but due to the increasing corruption, scandals and crises it has evolved and become extremely important for every country to have a strict governance for development of a country. Globalization has also increased the importance of corporate governance
Governance has various definitions, according to Sir Adrian Cadbury ""Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" ('GLOBAL CORPORATE GOVERNANCE FORUM', WORLD BANK 2000). The worldwide governance indicators(WGI) provides a check on the governance and institutions in countries classifying them into six major categories(Kaufmann, Kraay, Mastruzzi 2009)
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Voice and accountability
Political Stability and Lack of Violence
Rule of Law
Control of Corruption
These indicators can provide a cross-country comparison of corporate governance with a margin of error taken into account based on country specific data. There are various models that are adopted by different nations depending on the geographic location, varities of capitalism etc, The basic model know as the Anglo-American Model is in Anglo- American countries and it tends to give priority to the shareholders. The Multi-stakeholder-model being the Continental-European Model is found in Continental Europe and Japan that also recognizes the interests of workers, managers, suppliers, customers, and the community (Zou Ping, Cheng Wui Wing, Andy 2011). The other countries derive from these basic models but with its own set of rules based on values and culture. Eg India has deriverd its model from the Anglo-American Model with the influence of Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution(Wikipedia). This essay will put forth a difference in theories of corporate governance between a developed country like USA and a developing country like India. First explaining the separate approaches, second providing a comparison and finally provide a conclusion.
Corporate Governance in United States of America
USA has had corporate laws since the 19th century and has been evolving ever since. In the 1990's and 2000's corporate governance received enormous media attention as there where sudden CEO dismissals at IBM, Kodak, Honeywell by their boards and also huge bankcrupties and scandals of companies like Enron, Worldcom, AOL, Arthur Andersen, tyco and Global crossing. These scandals led to the legislative change "Sarbanes-Oxley Act(2002)" and the regulatory change "new governance guidelines from the NYC and NASDAQ. As mentioned USA is a one-tier system with board of directors elected by shareholders and also the CEO serves as the chairman of the board aswell.
The above figure gives a summary of the evolution of corporate governance over 4 decades. As of today US has seen tremendous success and benefited from the overall development of corporate governance and shareholder power (Marc S. Gerber 2012).
Corporate Governance in India
The Companies act 1956 and other laws that were formed in order to protect the investors were the basis to the start of Indian corporate governance. It gained importance post liberalization introduced by india's leading industry association CII follwiong which the SEBI (market regulator) made it a necessity in the Clause 49 of listing agreement. These were inturn backed up with various other committees like the Naresh Chandra committee, Narayan Murthy committee formed stressing on better corporate governance.
According to Chakrabarti, et al(200), the country's legal system framework has the best investor protection in the world but enforcement is a major problem due to slow functioning of courts and widespread prevalence of corruption. Even though india had decent attempts to improve governance, 2009 scandal of satyam computer system was a major proof of the failure. This scandal made it necessary for re-assessment of corporate governace in the country. This led better governance with the major involment of the listed companies following the rules and agreeing the term and conditions formed by the government. Now the corporate governance reforms stands at an interesting crossroads with future development reforms and their implementation. (Santosh Pande, Kshama V Kaushik 2012).
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Differences of Governance between USA and India
USA as mentioned above follows the Anglo-american model of governance, India on the other hand has its roots from the Anglo_American Model but with its own set of rules and principles. A few of the differences in framework are discussed below
The regulations of companies and stock exchanges
Unlike U.S where there are different laws for across the 50 states in terms of company law, In India according to the companies act (1956) the company law remains the same for all the states in india. Another difference is that in India there is no provision for shareholder class action and lawsuits against auditors are rare( Naryanswamy et al 2012) .
Family ownership and control
One of the most significant difference is the ownership model of Us and India, most of the listed companies in India including the largest companies are majority-owned or controlled by founding families known as promoters, they take actions that hurt minority shareholders, which is distinct compared to the U.S model of widespread equity ownership. (Naryanswamy et al 2012).
Directors and audit committees
In comparison to U.S which has distinction with 2 types of directors namely independent and non-independent, India has 3 types of directors namely executive, non-executive and independent directors. The U.S has an independent audit committee with at-least 3 members all of whom must be independent. India also has a audit committee with 3 members but only with the requirement of two-thirds of the committee to be independent director.
Financial Reporting and Auditing
In the U.S the SEC has delegated accounting standard-setting in private sector and as far as India the companines must comply with standards issued by the government (Naryanswamy et al 2012). The internal controls and financial statements are the responsibility of the management in the U.S whereas according to the Companies act it is the responsibility of the directors in India.
The above figure provides a brief summary of differences.
Apart the differences in the framework there are differences in the corporate governance practices as well, like in the legal environment and market-based disciplinary mechanisms in which India has no-strong private-sector disciplinary mechanism like in the U.S. Also with the different types of agency costs i.e Unlike in the U.S India has problems related to the cash-flow rights, voting rights and tunneling. Satyam-case (2008) is a classical case of separation between cash-flow rights, control rights and tunneling. Role of independent directors are closer to that of the management in India, unlike in the U.S. Last but not the least the major difference of the rules versus implementation, Even though there are a definite set rules in both the countries the implementation in the U.S is more efficient as compared to that of India due to the over burdened court cases and the high corruption rate.
This paper provides an overview of the differences in corporate governance between U.S and India.