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CORPORATE GOVERNANCE AT BAYERISCHE

MORTOREN WERKE(BMW)

SUBMITED BY:-

ADHIP VARMA

ANKI

T BHARDWAJ

CHARU PANT

KUSH

AGRA GOSWAMI

MRIGAS

HIKHA MITRA

PAWAN

SHARMA

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SHOBHIT

RANJAN

AARTI BATRA

Corporate Governance............................................................................................................3

Agency Theory........................................................................................................................5

Why did BMW buy Rover?........................................................................................................6

Acquisition Failure...................................................................................................................7

Cause of Failure Cause of Success.......................................................................................7

Did BMW lose money on Rover?..............................................................................................7

Supervisory Body....................................................................................................................8

Role of Supervisory Body.....................................................................................................8

Corporate Governance-JAPAN..................................................................................................9

A comparison between BMW and General Motors.................................................................10

RECOMMENDATIONS.............................................................................................................17

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Corporate Governance

Corporate Governance is the system by which companies are directed and

controlled.

Cadbury Committee Report

The single over-riding objective shared by all listed companies, whatever their size

or type of business, is the preservation and the greatest practicable enhancement

over time of their shareholders investment. All boards have their responsibility and

their policies, structures, composition and governing processes should reflect this.

The boards task is to approve appropriate policies and to monitor the performance

of management in implementing them.

Kumar Mangalam Birla committee Report

Corporate Governance is not to be measured in terms of stock markets valuation.

For me Corporate Governance is a mindset, a question of value systems. It is a way

of saying that I put public good ahead of private good, of not using the corporate for

personal benefit.

Narayan Murthy

- Chairman, InfosysTechnologies Limited

Corporate governance involves a set of relationships between a companys

management, its board, its shareholders and other stakeholders ..also the

structure through which objectives of the company are set, and the means of

attaining those objectives and monitoring performance are determined.

Preamble to the OECD Principles of Corporate

Governance, 2004

Principles in developing corporate Governance.

Transparency

everything that happens in the company, if it is not shy to share it publicly,

it is transparent

Equanimity

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Rights of all shareholders are equal, of minor or major shareholding.

It involves letting Investors know how the company in which they have

invested is utilizing their money

Accountability

The management is accountable for its decisions

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Agency Theory

The delegation of decision-making authority from principal to agent is problematic

in that;

1. The interests of principal and agent will diverge

2. The principal cannot perfectly and costlessly monitor the actions of the agent

3. The principal cannot perfectly and costlessly monitor and acquire the

information available to or possesed by the agent

These constitute the agency problem - the possibility of opportunistic behaviour

on the part of the agent that works against the welfare of the principal

Agency costs; incur to protect principals interests and to reduce the possibility that

agents will misbehave

Monitoring expenditures by principals

Bonding expenditures by agents

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Residual loss of the principal

Essential sources of agency problems:

Moral hazard; more of the agents actions are hidden from the principal or are

costly to observe

Adverse selection; the agent posseses information that is, for the principal

unobservable or costly to obtain

Risk aversion; as organisations grow managers become risk averse

(they would like to protect their position, managers would like to

max. chance of success by projects that have already brought success,

managers build structures to increase their chances of control)

Principals and agents resolve agency problems through;

Monitoring; observing the behaviour and performance of agents

Bonding; arrangements that penalise agents for acting in ways that violate

the interests of principals or reward them for achieving principals goals

Contracts between agents and principals specify the monitoring and bonding

arrangements

Why did BMW buy Rover?

This is a very interesting question. For a company with the prestige of BMWto have purchased a car company and then dumped Rover after such ashort time, questions must be raised as to why exactly did they buy thecompany in the first place, and did they ever really intend to keep it?

BMW had a highly developed and nurtured image. However, they also had avery limited market into which they sold cars. BMW had been described asa company that 'made only one saloon, but in three different sizes'.Although their market was expanding, global consolidation of the motorindustry threatened either their independence or their ability to continue tomake cars competitively, depending on how you viewed it.

BMW therefore needed to expand their market, and thus their product base.However, to do this threatened to destroy their carefully nurtured image. Ifthey were to develop a cheaper range of cars to compete with VW, Ford,Fiat and other mass market players, surely this would devalue the BMW

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brand. Other companies had already seen it become increasingly difficult tohave a brand stretched between the extremes of a small budget car and alarge luxury car. Ford failed to achieve a quality reputation with theirScorpio when they also produced the Fiesta.

Acquisition Failure

Coopers and Lybrand (1993) present the following study into causes of acquisitionfailure.

Cause of Failure Cause of Success

Target Management attitudes and cultural differences

No post-acquisition integration planning

Lack of knowledge of industry or target

Poor management of target

No prior acquisition experience

Causes of acquisition failure (Coopers and Lybrand, 1993)

Did BMW lose money on Rover?

Publicly, yes. Privately, probably not.

BMW did invest in Rover during it's ownership. However, the vast majorityof that investment they either still own or sold at a fair value or a vastprofit.

They purchased the whole Group for 800,000,000, then soldLand Rover alone for 1,800,000,000. That is a 1bn increaseon its own.

The vast majority of the investment in plant went to Cowley(or Rover Oxford as BMW called it). BMW retained this plant.

BMW invested in a new engine facility (Hamms Hall). BMWhave retained this plant.

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BMW retained the Longbridge Engine & Transmissions facility,thereby forcing Rover to buy components from BMW to be ableto make cars. The same goes for the Swindon panel pressingplant. BMW made money out of Rover car sales, even if Roverwere making a loss. Eventually, they sold these facilities toPhoenix, but it was for a fair value, and not included in the 10.

Supervisory Body

The Supervisory Board appoints the members of the Board of Management and, if

there is good cause, can remove them from office at any time. The Board of

Management keeps the Supervisory Board informed and reports to it regularly,

without delay and comprehensively according to the principles of diligent and

accurate accountability in accordance with the law and the reporting duties laid

down by the Supervisory Board. For certain important transactions the Board of

Management requires the consent of the Supervisory Board. However, the

Supervisory Board is not authorized to take any management measures.

Role of Supervisory Body

1. The task of the Supervisory Board is to advise regularly and supervise the

Board of Management in the management of the BMW Group. It is involved in

all decisions of fundamental importance for the BMW Group.

2. The Supervisory Board appoints and dismisses the members of the Board of

Management. When composing the Board of Management the Supervisory

Board shall also have regard for diversity. Together with the Board of

Management, it ensures that long-term successor planning is in place. The

Supervisory Board has delegated the preparation of appointments to the

Board of Management to a committee (Personnel Committee) which also

handles the terms and conditions of employment contracts including

compensation.

3. The Supervisory Board of BMW AG examines the efficiency of its activities on

a regular basis.

Board of Management

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1. The Board of Management develops the enterprise's strategy, coordinates it

with the Supervisory Board and ensures its implementation.

2. The Board of Management manages the enterprise under its own

responsibility with the objective of creating sustainable added value and in

the enterprise's best interests, i.e. taking into account the interests of theshareholders, the employees and other groups associated with the group

(stakeholders).

3. The Board of Management ensures that all provisions of law and internal

regulations are abided by and works to achieve their compliance throughout

the group.

4. The Board of Management ensures that an appropriate risk management and

risk controlling system is in place throughout the group.

Corporate Governance-JAPAN

Corporate governance in Japan is concerned with ensuring that firms are run in

such a way that societys resources are used efficiently by taking into account a

range of stakeholders such as employees, suppliers, and customers, in addition to

shareholders.

The overwhelming majority of directors in Japanese firms are from inside the

company. Their number is such that they include many people in addition to themost senior members of management. The nominations of individuals for positions

as a director are essentially controlled by the company's CEO.

To take the example of TOYOTA,the Company has total 27 Directors on its Board.None of them are elected from outside the Company. The management philosophy

goes as-

With respect to our system regarding directors, we believe that it is important to

elect individuals that comprehend and engage in TMCs strengths, including

commitment to manufacturingTMC will consider the appointment of outside

directors should there be suitable individuals.

As the focus of Japanese Corporate Governance is on satisfying the various

stakeholders,Toyota is a host to several committees that are formed on theapproval of the Board. Ex:

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CSR Committee Labor Management Council Environment Committee International Advisory Board

ISSUES WITH THE JAPANESE SYSTEM:

The Japanese Companies Act does not require the presence of independent

directors on corporate boards to monitor management. Instead, traditionally

governed Japanese corporations rely internally on corporate auditors and externally

on competition in product markets, team production alliances with suppliers, and

main banks to monitor the performance of corporate management.

Japanese corporate governance makes large companies particularly vulnerable tomishandling a crisis . Such firms typically have a rigid system of seniority and

hierarchy in which people are reluctant to pass bad news up the chain, thus

keeping information from those who need to hear it in a misguided effort to protect

them from losing face.

The lack of an outside perspective is particularly striking in the case of Toyotas

board. It is composed of 29 Japanese menall of them Toyota insiders, none of

them independent

A comparison between BMW and General Motors

FORMATION OF THE COMMITTEES

1) BMW

The committees are formed by the Supervisory Board with sufficient

expertise based on the specific requirement of the Group. These committees

are formed to handle all the complex issues of the business. For this there is

a Presiding Board and four committees.

PRESIDING BOARD

The presiding board consists of the Chairman and the deputy chairpersons of

the Supervisory Board. Together, they prepare the meetings of the

Supervisory Board, including the annual declaration of compliance with the

German Corporate Governance code and the annual efficiency check.

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PERSONNEL COMMITTEE

The Personnel Committee prepares the decisions of the Supervisory Board

with regard to the appointment and revocation of appointment of members of

the Board of Management and with regard to the Board of Managements

compensation and the Supervisory Boards regular review of thecompensation system. The Personnel Committee is responsible for drawing

up, amending and revoking service/employment contracts or, when

necessary, other relevant contracts with members of the Board of

Management. Personnel Committee also has the authority to give the

necessary approval for a particular transaction (instead of the Supervisory

Board). This includes loans to members of the Board of Management or

Supervisory Board, specified contracts with members of the Supervisory

Board (in each case taking account of the consequences of related party

transactions), as well as other activities of members of the Board of

Management, including the acceptance of non-BMW Group supervisory

mandates.

AUDIT COMMITTEE

The Audit Committee deals in particular with issues relating to the

supervision of the financial reporting process, the effectiveness of the

internal control system, the risk management system, internal audit

arrangements, compliance, auditor independence, the compliance of the

audit engagement, the determination of specific areas of audit emphasis and

the fee agreement with the auditor. The audit committee preparesSupervisory Boards resolution relating to the company and group financial

statements and discusses the interim reports with the Board of Management

before publication.

NOMINATION COMMITTEE

The Nomination Committee is responsible for seeking suitable shareholder-

side candidates for the election to the Supervisory Board and proposes

suitable candidates to the Supervisory Board for its election proposals at the

Annual General Meeting. Following the recommendation of the German

Corporate Governance Code the Nomination Committee comprises solely

representatives of the shareholders.

MEDIATION COMMITTEE

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The formation of a Mediation Committee is required under German Co-

Determination Law. The Mediation Committee is responsible for submitting a

proposal to the Supervisory Board, should a resolution of the Supervisory

Board on the appointment of a member of the Board of Management fail to

reach a majority of 2/3. The Mediation Committee is composed of the

Chairman and Deputy Chairperson of the Supervisory Board and one memberof the Supervisory Board elected by the shareholder representatives and one

member elected by the employee representatives.

2) GENERAL MOTORS (United States)

The board of directors may, by resolution passed by a majority of the total

number of directors then in office (and not by a committee thereof),

designate one or more committees, consisting of one or more of the directors

of the Corporation, to be committees of the board. To the extent provided inany resolution of the board, these bylaws, or any charter adopted by such

committee and approved by the board, and to the extent permissible under

Delaware law and the certificate of incorporation, any such committee shall

have and may exercise all the powers and authority of the board in the

management of the business and affairs of the Corporation.

The members and the chairman of each committee shall be elected annually

by the board at its first meeting after each annual meeting of stockholders or

at any other time the board shall determine. The members of other

committees of the board may be designated at such time as the board may

determine. Vacancies in any committee may be filled at such time and in

such manner as the board shall determine. Except to the extent otherwise

provided in these bylaws or any resolution of the board of directors, each

committee of the board may fix its own rules and procedures.

FINANCE AND RISK COMMITTEE

The finance and risk committee shall be responsible for assisting the board of

directors in its oversight of the Corporations financial policies and strategies,including its capital structure. The committee shall also be responsible for

assisting the board of directors in its oversight of the Corporations risk

management strategies and policies, including overseeing management of

market, credit, liquidity and funding risks. In addition, the committee shall

periodically receive reports regarding U.S. employee benefit plans for the

purpose of reviewing the administration, financing, investment performance,

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risk and liability profile, and funding of such plans, in each case including with

respect to regulatory compliance.

AUDIT COMMITTEE

The audit committee shall have and may exercise the powers, authority, and

responsibilities that are normally appropriate for the functions of an audit

committee. The committee shall also annually select the independent

accountants for the following calendar year, and that selection shall be

submitted to the board of directors for their concurrence and to the

stockholders for their ratification or rejection at the annual meeting of

stockholders.

EXECUTIVE COMPENSATION COMMITTEE

The executive compensation committee shall be responsible for matters

related to executive compensation and all other equity-based incentive

compensation plans of the Corporation. The committee shall determine the

compensation of: (a) employees of the Corporation who are directors of the

Corporation; and (b) upon the recommendation of the chief executive officer,

all senior officers of the Corporation and any other employee of the

Corporation who occupies such other position as may be designated by the

committee from time to time.

The committee shall review the compensation of any director, officer or

other employee of any direct or indirect subsidiary of the Corporation as may

be designated by the committee from time to time to determine if it has any

objection to such compensation. The committee shall have and may exercise

the powers and authority granted to it by any incentive compensation plan

for employees of the Corporation.

In the case of any employee benefit or incentive compensation plan that

affects employees of the Corporation or its subsidiaries if the compensation

of such employees is determined or subject to review by the committee, such

plan shall be submitted to the committee for its review before adoption by

the Corporation or its subsidiary. Any such plan or amendment or

modification shall be made effective with respect to employees of the

Corporation only if and to the extent approved by the committee.

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PUBLIC POLICY COMMITTEE

The public policy committee shall, upon its own initiative or otherwise, inquire

into all phases of the Corporations business activities that relate to matters

of public policy. The committee may make recommendations to the board of

directors to assist it in formulating and adopting basic policies calculated to

promote the best interests of the Corporation and the community.

DIRECTORS AND CORPORATE GOVERNANCE COMMITTEE

The directors and corporate governance committee shall be responsible for

matters related to service on the board of directors of the Corporation, and

associated issues of corporate governance. The committee from time to time

shall conduct studies of the size and composition of the board. Prior to eachannual meeting of stockholders, the committee shall recommend to the

board (in accordance with the terms of the Stockholders Agreement) the

individuals to constitute the nominees of the board, so that the board may

solicit proxies for their election. The committee shall review the qualifications

of individuals for consideration as director candidates and shall recommend

to the board, for its consideration, the names of individuals for election by the

board. In addition, the committee shall from time to time conduct studies and

make recommendations to the board regarding compensation of directors.

COMPOSITION OF COMPENSATION

1) BMW

The compensation affairs are being handled by the Personnel Committee

of the Supervisory Board. Upon proposal by the Personnel Committee, the

plenary Supervisory Board fixes the total compensation of the individual

members of the Board of Management and resolves and regularly reviews

the compensation system applicable to the Board of Management. The

total compensation of the members of the Board of Management is fixed

by the plenary Supervisory Board based on performance criteria andtaking into account any remuneration from group companies. The

principal criteria for determining the appropriateness of compensation are

the nature of the tasks allocated to each member of the Board of

Management, an assessment of the performance of those tasks as well as

the economic situation, performance and outlook of the BMW Group as

well as the customariness of the compensation taking into account the

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comparable environment and the compensation structure that otherwise

applies in the Company.

The monetary compensation of members of the Board of Management

comprises fixed and variable components. The Supervisory Board ensures

that in principle the variable compensation components are assessed on a

multi-year basis and that its composition takes into account positive as

well as negative developments. The variable compensation components

are based on exacting, relevant comparators. Performance targets and

comparators are not amended retrospectively. Moreover, upper limits are

agreed for all members of the Board of Management. Furthermore, the

Supervisory Board ensures that all compensation components are

reasonable individually and altogether and do not give rise to any

inducement to enter into any unreasonable risks. The total compensation

of each individual member of the Board of Management will be disclosedin a Compensation Report, broken down into fixed and variable

compensation components.

2) GENERAL MOTORS

Review executive officer compensation for compliance with Section 16 ofthe Securities and Exchange Act and Section 162(m) of the Internal

Revenue Code, as each may be amended from time to time, and otherapplicable laws, rules, and regulations.

Set the CEOs compensation level based on the Committees evaluation ofthe CEOs performance versus goals and objectives set by the Board andreview its determinations with the Board in executive session.

In the exercise of its responsibilities, the Committee shall approve:a. The desired mix of compensation elements, eligibility, aggregate levelsof equity compensation, and annual run rate and dilutionb. With respect to the various incentive plans

i. Performance measures

ii. Applicable threshold, target, and maximum award performanceand payout levels

iii. Maximum aggregate funding levels for employees who are notexecutive officers of the Companyc. Any benefit plans and perquisites limited to the executive population ora subset thereof. Any executive severance policy, benefit, or arrangement

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TRANSPARENCY1) BMW

The Board of Management is expected to disclose without delay anynew facts which arise within the company and are not known publicly.

BMW treats all its shareholders equally when it comes to providing

information. The company uses suitable media to communicate theinformation such as the internet, to shareholders and investorspromptly.

Purchase and sale of shares or derivative instruments related to BMWby the members of BOM and SB have to be reported to BMW withoutany delay where the value of transaction with BMW stock exceed25000 Euros in 30 days in an appropriate electronic informationsystem or in a journal.

The essential publications such as the annual reports, interim andquarterly reports are published sufficiently in advance in a financial

calendar. The information should also be available on the Internet Siteof BMW.

The Consolidated financial statements are made publicly availablewithin 90 days of the end of the financial year.

2) GENERAL MOTORSThey believe transparency.

CONFLICT OF INTERESTS

1) BMWEach member of the Supervisory Board has to act in the interest of thecompany. The members of SB cannot pursue personal interests whiletaking decisions or taking advantage of business opportunitiesintended for the enterprise.

Each member of SB is expected to inform the SB about any conflict ofinterest and those that may result from a consultant or directrelationship with the clients, suppliers, lenders and other businesspartners.

Material conflict of interests and those that are not temporary in natureresult in the termination of the mandate of the relevant SB member.

2) GENERAL MOTORSA conflict of interest arises when an individuals personal interests, orthose of an Immediate Family Member (defined below), improperlyinterfere, or appear to interfere, with the interests of the Company.

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GMs code of ethics and business conduct, Winning With Integrity: OurValues and Guidelines for Employee Conduct (the Code), whichapplies to all employees and directors when engaged in the Companysbusiness, provides that all conflicts of interest should be avoided.

It is the Companys policy that all Related Party Transactions will be

approved or ratified in accordance with this policy by the Committee orby the President and Chief Executive Officer (the CEO) and the VicePresident and General Counsel. Executive officers and directors of theCompany must seek approval in accordance with the procedures setforth below prior to entering into any transaction or establishing anyrelationship that they reasonably believe may possibly constitute aRelated Party Transaction.

RECOMMENDATIONS

We recommend to go for 2 tier corporate governance as in the case of BMW

Opening the Board to independent directors - making management more agile,

improving management transparency and strengthening group management

According to the McKinseys Global investor opinion survey on Corporate

Governance, 2002 we have the corporate governance of Japan rated much over

than that of U.S and Germany.

References

http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html

http://www.docstoc.com/docs/23288382/BMW-%E2%80%93-A-Case-Study

http://www.economist.com/node/15498249

http://www.itbusinessedge.com/cm/blogs/all/governance-was-missing-link-at-

toyota/?cs=39610

ICFAI knowledge center case Corporate governance at BMW

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http://www.toyota-

global.com/sustainability/csr_initiatives/corporate_governance.html

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