Case 11- Corporate Governance at Bayerische Motoren Werke

Akhil Aggarwal-11DCP060 Chandan Kumar Singh-11DCP071 Mayank Gaur-11DCP081 Rishabh Chaudhary-11DCP092 Yudhvir Singh-11DCP103

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

History of BMW

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

Corporate Governance at BMW

Corporate Governance of BMW

Annual General Meeting

Board of Management (BOM)

Supervisory Board (SB)

Two Tier Corporate Governance

The 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
Elect

Shareholders

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.

Management CEO

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 Japan Board of directors system in Japan

The board of directors (Torishimari Yaku kai)
Elect One of the member of the board is elected as the president of the company.

Shareholders

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 selfmonitoring system.

Extended- One Tier System The main bank system-Japan

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.

Problems-Japanese System
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.

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

We recommend
We 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