Case 11- Corporate Governance at Bayerische Motoren Werke

Akhil Aggarwal-11DCP060Chandan Kumar Singh-11DCP071

Mayank Gaur-11DCP081Rishabh Chaudhary-11DCP092

Yudhvir Singh-11DCP103

Case Overview• About BMW• Corporate Governance• The Board of Management• Supervisory Board• The success of BMW

History of BMW

The systems/mechanisms that alleviate the problem of the conflict of interests between management and shareholders.

Corporate Governance

Corporate Governance of BMW

Board of Management

(BOM)

Supervisory Board (SB)

Annual General Meeting

Corporate Governance at BMW

Two Tier–Corporate GovernanceThe Board of Management• Manages the group’s operations,

co-ordinates the group’s strategies.• The BOM is responsible for

independently managing the enterprise.

• The BOM attempts to ensure that all provisions of law are abided by throughout the group

• The BOM also ensures appropriate risk management and risk control throughout the group.

• The BOM also reports the deviations from previously formulated plan and targets.

Supervisory Board• The SB advises regularly and

supervises the BOM.• Its involved in all major strategic

decisions• The SB appoints the members of the

BOM and facilitates long-term succession planning.

• The SB sets up committees with sufficient expertise based on the specific requirements of the group.

• Appoints auditing committee and ensure fair accounting practices.

Question?

• Critically analyze the Corporate Governance system of BMW using comparative evaluation of corporate governance systems in the US, Germany and Japan.

One Tier- (US System)

Board of Directors ShareholdersElect

ManagementCEO

Elect Report Shareholders elect the board of directors.The board, then elects the CEO and other officers.

The board acts as a monitoring system.If the elected officials do not act on behalf of shareholders, the board has the right to replace the management .

Thus, the board of director system can potentially alleviates the conflict of interests.

Differences between the UK/US• Inside the firm: – CEO and Chair of Board are split in 90% of UK

companies .– CEO and Chair are split in only 19% of US

companies .– CEO compensation design in US (higher absolute

levels and greater incentive proportion) may indicate greater power

Two Tier System-Germany

Two Tier Corporate Governance• The two-tier system, found in all German and Austrian companies, is also

widespread in Denmark, Finland, Netherlands, Norway, Poland and Switzerland. This system consists of a supervisory board of non-executive directors and a separate management board of executive directors.

Advantages of Two Tier Boards• Separation of control and management.• CEO is not the Chairman.

Disadvantages of Two Tier Boards• Influence of share holders.• Inadequate independence of Supervisory Board

Members.• Inadequate Transparency.

Corporate Governance in JapanBoard of directors system in Japan

The board of directors (Torishimari Yaku kai)

One of the member of the board is elected as the president

of the company.

ShareholdersElect

•In Japan, there is no separation between the monitoring system and management. In fact, the board has the function of both monitoring system and management. •Thus, the board of director cannot function as an effective monitor of the management: In fact, this system is a ‘self-monitoring’ system.

• Many Japanese companies have close ties with their “main banks”. The relationship between a company and its main bank is not only through lending, but also through cross shareholding or receiving a person from the main bank as a member of the board of directors.

• Many have argued that main banks monitor and discipline the management of borrowing firms, thus acting as an ‘alternative’ corporate governance system.

• The main bank system become more effective.

Extended- One Tier System“The main bank system-Japan”

• There is built-in problem in the board system in Japan.

• Some companies began to reform the board system in the late 1990s.

• Several companies began to introduce US style Chief-Officer System (Shikkou Yakuin Seido), where management is separated from the Board of directors.

Problems-Japanese System

Our Analysis

Fundamental Problem• A fundamental problem that corporate form

of an organization faces is that, the ownership and management are separated.

Owners: Shareholders Management: Elected officials

The conflict• Thus, manager's interest do not necessarily

reflect the owners’ interest– For example, Managers may focus on maximizing

their personal gains .“While”

– Neglecting shareholders’ interest, which is to maximize the firm value.

• Corporate governance: – The systems/mechanisms that alleviate the

problem of the conflict of interests between management and shareholders.

Corporate Governance

We recommendWe believe that the corporate Governance structure of BMW is

Effective Efficient Robust

BMW can attain an added advantage by cross shareholding with a bank and have a person from that bank on board. This will help BMW in its expansion plan in emerging markets.

BMW can have a major Non Profit Organization representation in the Supervisory Board to improve scores on CSR.

Thanks