Literature on CG

To understand the characteristic features of CG system this reserch basically focuses on USA, UK, and Japanese company’s CG structure. According to Holden, Fish, and Smith (1941) there are four levels of management namely, a) trusteeship management, b) general management, c) departmental management, and d) field management. Trusteeship management and general management are considered as top management. Top management includes board of directors, management committee, top managers and among others and takes responsibility to run CG of the business enterprises and consider the stakeholders demands. Top management put emphasis on making decision in terms of product-market strategy and also takes responsibilities to define the relationship between the company and the environment. In addition, seting up of organizational structure and selecting the key personnel are also the responsibility of top management. Therefore, it is found that in most of the successful business cases top management greatly impacts on business strategy, structure, and performance through the company’s CG

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system (Katz and Kahn, 1966). It is found that top management take the responsibilities to run company’s CG through the following issues:

a) Board members

Koontz and Weihrich (1988) confirms that USA and UK board of directors consist of external (40 percent) and internal (60 percent) members. Thus, US board performs legal functions as their additional activities which include giving advice on financing, monitoring the decisions of officers, and authorizing long-range plans. On the other hand, Kono (1984) confirms that Japanese companies allow very few out side members on the board. Moreover, the board is just a formality and not the actual governing body in the Japanese companies due to separation of management from ownership. Generally directors are the full time company employees. Ohtsu and Imanari (2002) state that in Japanese companies when there is any dissatisfaction interms of profit or share, company owners sell their share rather than bring any changes in the top management.

Kono (1984) makes sure that there are pros and cons to decline board powers in Japan. Firstly, the advantage of the board of directors who have been promoted from within the company is that they belong to the position of the highest authority and are able to ignore outside pressure in particular from the owners. The board focus on long-term growth in order to earn profit in the long run and avoid short-term profit for the benefit of the shareholders. Secondly, the disadvantage is that nobody can monitor the power of the president, the chief executive officers, in this CG practice system.

b) Management committee as adjunct to the board

Holden, Fish, and Smith (1941) divided general management level into four: i) chief executive, ii) management committee (council of general executives), iii) assembly of department heads (chief executive and council of divitional executives) and iv) the board of directors work as general management. In Japan management committee works as a decision making body. In the USA and UK management committee is popular like Japan.

There are some differences in the management committee between Japanese companies and USA or UK companies. Fristly, Japanese companies have broader responsibilities, and mostly are not related to heads of department. However, in the USA or UK each board member clearly knows their responsibilities as a board of director. Secondly, USA management committee runs

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with less members than Japan. Thirdly, decetralization of the management committee is wider in Japan than USA or UK. Group decission is very popular in Japan and practices at every level of management. The oral communication (nemawashi) or lobbying is highly practiced before the meeting of the management committe in Japan and well known as the process of group decision making.

In Japan, most of the directors on the board are full time inside members known as top management namely the chairman, the president, and the chief executive officer, senior executive directors, and executive directors in charge of several departments, and ordinary directors who are usually the heads of important departments. It is also found that all department heads are not directors as well. On the other hand, the USA introduces chairman, president, executive vice presidents and selected key vice presidents as companies top management.

c) Legal statutory

Legal statutory is also crucial issue to run CG in the business enterprise. Legal entities clearly mention the industrial property rights and basically, property rights focus on the theoretical and legal ownership of resources and show the method of using resources. Demsetz (1967) mentioned that a primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities. For example, externalities could be internalized through government measures namely, taxes, subsidies, minimum or maximum prices and among others. However, it is evident that government initiative is not the most ideal choice to internalize externalities. Rather it is essential to clearly defined and allocated property and usage rights in a particular way. It is government’s responsibility to provide the framework for negotiations between the actors in order to allocating distinctly the property and usage rights for all stakeholders related to industrial property rights (Coase 1960).

Kaufman (1994) states that in the USA the Revised Model Business Corporation Act, is known as a nonbinding corporation code which updates continuously to serve as a model for state law. According to the Revised Model Business Corporation Act (1985) “all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation. This law gives following directions to the board nominees i) composition of the board and key board committees, ii) whether the chairman also serves as

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CEO, iii) the director’s investment in the company, iv) the number of other board seats held by the director, v) interlocking directorships involving the director, vi) the director’s attendance at meetings, vii) whether a retired CEO sits on the board, viii) the board’s decisions regarding executive pay, ix) director compensation, and x) corporate governance provisions and takeover activity (Kaufman, 1994).

CG in UK follows the statutory entity known as the Companies Act revised in 2006 which focuses on the following issues i) duties of the board of directors, ii) annual disclosure policy, iii) appointment and removal of the board of directors, iv) remuneration, and v) other terms of employment of directors (International Comparative Legal Guides, 2018). In addition, European Union Company Law puts emphasis on the following issues i) legal formation of the board, ii) capital and disclosure requirements, iii) operation (mergers, divisions) of companies (European Commission, 2017).

It is found that Japanese companies CG practices are different from the USA or European CG pattern though the USA CG practices play the leading role to set up CG code in Japan (Kaufman, 1994). The legal foundation of CG in Japan derives from the Commercial Code (Act No. 48 of 1899, amended by Act No. 57 of 2008). Most of the provisions of this law for public limited companies were revised and incorporated in the Companies Act, 2005. In Japan shareholders elect the board of directors in order to achieve company’s goal and protect shareholders interests.

The board elects the chairperson who looks after the entire business. In general, a retired or former president become company chairman and take the responsibility to distribute duties of the board members (Khondaker and Bremer, 2015).

d) Audit and financial report

In spite of USA company’s priority to quality of audits many financial scandals occur and shake their confidence in the corporate auditing system. In order to protect financial fraudulent in the USA companies a presidential commission chaired by James C. Treadway, Jr. (The Treadway Commission, 1989), published a report. The report of the National Commission on fraudulent financial reporting made several key recommendations, including i) codes of conduct, ii) strong independent audit committees, iii) effective internal audit functions, iv) inclusion of management letters on internal control in annual reports, v) disclosures of requests for second

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opinions, vi) disclosures of requests for changes in auditors, and vii) audit committee oversights of quarterly reporting (Kaufman, 1994).

Financial reporting and the auditor function in the United States emphasize the following three issues: i) independence of auditor and audit committee, ii) effectiveness of audit committee, and iii) auditor’s report.

On the other hand, Japanese companies have a board of statutory auditors which separate from the board of directors and are elected at the shareholder’s meeting. According to the Companies Act, the responsibilities of the auditors are (Article 381): i) auditing the execution of duties by directors, b) preparing reports in response to the instructions of government ministries, (the Ministry of Justice (MOJ) in particular), c) requesting reports on the business at any time from the directors, accounting advisors, managers, and other employees, d) investigating the status of the operations and the financial status of the company, and e) requesting reports on the business form of a subsidiary and investigating the status of its operations and financial status (Khondaker and Bremer, 2015).

e) Others (meeting, proxy vote, disclosure policy, etc.)

CG practices in the USA, UK , or Japan strongly focus on the issues such as board meeting, disclosure information, proxy voting and voting mechanism and among others. For example in the case of Japan the management committee generally meets once a week. There are many adjunct committee in the board namely, management committee, senior executive committee, planning committee and among others. It is found that Hitachi arranges a policy committee meeting once a month where as Sumitomo Electrics arrange twice a month. The clerical office of the management committee selects the topics of the meetings and provides meeting materials.

The primary influence of shareholders on CG is exercised through the annual general meeting (AGM). This influence has its legal basis in Articles 295-319 of the Companies Act (Ohtsu and Imanari, 2002).

The USA public companies give emphasis on disclosure information than any other market in the world. Section 14 of the Securities Exchange Act of 1934, administered by the U.S.

Securities and Exchange Commission, governs disclosure requirements as follows: i) background information on all director nominees, including information related to potential conflicts of interest, board meeting attendance figures, and stock ownership levels, ii)

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compensation data for all officers and directors, iii) information on merger and restructuring proposals, charter and by law amendments, certain takeover defenses, executive and director compensation proposals, selection of auditors, and other significant business items and iv) proposals and alternative director nominees from shareholders not satisfied with management’s proposals or nominees (Kaufman, 1994).