Ethics & Code of Conduct for the Corporate Board Members

A Comparative Study of Select Public Sector and Private Sector Companies in India By

Dr. V.V.S.K. Prasad

Professor in MBA The Hindu College Machilipatnam

BACKGROUND Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world. OBJECTIVES OF THE STUDY Counterbalancing the very strong recent public interest in the corporate governance of private sector companies has been a vigorous interest in the governance of public sector organisations. While there are similarities between the two sectors in governance terms, there are also significant differences that shape the way government departments, authorities, corporations and even government business enterprises are organised and governed. If the public sector is looked at even more closely, there is a wide variety of forms, structures, processes and practices that can be discerned from agency to agency. The present study has multifold objectives : 1. To compare and contrast Ethics & Code of Conduct practices in Public sector and private sector companies in India. 2. To examine whether there is any correlation between corporate governance practices and the performance of the company. 3. To Study the investors perception on the company having good governance practices. 4. To understand common governance practices if any , in both public sector and private sector companies. I. CORPORATE GOVERNANCE IN INDIAN PRIVATE SECTOR COMPANIES 1. GRASIM

Code of Conduct (hereinafter referred to as "the Code") has been framed and adopted by Grasim Industries Limited (hereinafter referred to as "the Company") in compliance with the provisions of Clause 49 of the Listing Agreements entered into by the Company with the Stock Exchanges. Applicability The Code applies to the Members of Board of Directors (hereinafter referred to as "Board Members) and Members of the Senior Management Team of the Company one level below the Executive Directors, viz. Business Heads, Unit Heads, Presidents, Joint Presidents and all other executives having similar or equivalent rank in the Company and the Company Secretary of the Company (hereinafter referred to as "Senior Managers"). The Company Secretary shall be the Compliance Officer for the purpose of this Code. The Code shall come into force with effect from 1 January 2006 and future amendments / modifications shall take effect from the date stated therein. 2. ITC ITC's Corporate Governance initiative is based on two core principles. These are : i. Management must have the executive freedom to drive the enterprise forward without undue restraints; and ii. This freedom of management should be exercised within a framework of effective accountability. ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations. Cornerstones From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfls the purpose of Corporate Governance. 3. Bajaj Code of Conduct for Directors and Members of Senior Management This code of conduct shall apply to the directors and members of the senior management of Bajaj Auto Limited (referred to hereinafter as BAL or the Company). For this code, members of the senior management (hereinafter referred to as `senior managers') shall mean those personnel of the company, who are members of the core management team, but shall exclude the whole-time directors. Directors and senior managers shall observe the highest standards of ethical conduct and integrity and

shall work to the best of their ability and judgment. Directors and senior managers shall be governed by the rules and regulations of the company as are made applicable to them from time to time. Directors and senior managers shall affirm compliance with this code on an annual basis as at the end of each financial year. 4. Cipla As required under revised Clause 49 of the Listing Agreement the following code of conduct has been approved by the Board of Directors and is applicable to the Directors and Senior Management of the Company. 1. Ethical conduct 2. Conflict of interest 3. Transparency 4. Legal compliance 5. Rightful use of company's assets 6. Cost consciousness 7. Confidential information 8. Relationships with Suppliers and Customers 9. Interaction with Media 10. Safety and Environment 5. HINDUSTAN UNILEVER: Hindustan Unilever Limited believes that for a Company to be successful, it must maintain global standards of Corporate Conduct towards all its stakeholders. The Company's foundation has therefore been rooted to stringent Corporate Governance principles. At Hindustan Unilever, we believe that the principles of fairness, transparency and accountability are the cornerstones for good governance. The HUL Code of Business Principles reflects the Company's commitment to these principles. It is the Company's endeavour to continue to achieve highest governance levels. As regards the compliance with the requirements of Clause 49 of the Listing Agreement with the Stock Exchanges, the Company is in full compliance with the norms and disclosures. BOARD OF DIRECTORS The Board of Directors of the Company represents an optimum mix of professionalism, knowledge and experience. The total strength of the Board of Directors of the Company is 10 Directors comprising a NonExecutive Chairman, four Executive Directors and five Non-Executive Independent Directors. 6. HDFC BANK: Introduction This Code of Ethics / Conduct intends to ensure adherence to highest business and ethical standards while conducting the business of the Bank and compliance with the legal and regulatory requirements, including compliance of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and regulations framed thereunder by the Securities and Exchange Commission of USA and other statutory and regulatory authorities in India and USA. The Bank values the ethical business standards very highly and intends

adherence thereto in every segment of its business. Applicability This Code of Ethics/Conduct is applicable to the following persons. The Board Members Officials of the Bank one level below the Board

II . Corporate Governance in Public sector Companies Keeping in view the importance and role of independent directors in the good governance of companies, a review was undertaken in respect of all listed government companies with the objective of assessing the compliance with the provisions of Clause 49 of the Listing Agreement relating to independent directors on the Board. This review was primarily based on the information and documents obtained from the Management of the companies concerned. The review of composition of the Board as on 30 June 2007 of all the 44 Listed government companies (excluding five deemed government companies covered by Section 619B of the Companies Act, 1956) revealed the following: (i) There were no independent directors on the Board of nine listed government companies given below:. S. No 1 2 3 4 5 6 7 8 9 Name of the company Minerals and Metals Trading Corporation Ltd. State Trading Corporation Ltd. Container Corporation of India Ltd. Hindustan Copper Ltd. National Aluminum Co. Ltd. Balmer Lawrie Co. Ltd. Hindustan Cables Ltd. Madras Fertilizers Ltd. The Fertilizers and Chemicals Travancore Ltd.

(ii) In 21 listed government companies, the Board did not have the required number of independent directors. Thus, out of 44 listed government companies, the Board of 30 companies had not been constituted as per clause 49 of the Listing Agreement. Constitution and composition of Audit Committee in listed government companies Audit Committee is by far the most important working committee of the Board in the case of a government company with an extensive role in ensuring proper financial reporting and adequacy of internal controls over such reporting. The role of Audit Committees in government companies is closely aligned to C&AG's constitutional and statutory role in promoting fairness and transparency in financial reporting. A limited review was accordingly undertaken in respect of listed government companies with the objective of assessing the compliance by these companies with various provisions of clause 49 of the Listing Agreement relating to constitution and composition of the Audit Committee. This review was primarily based on the information and documents obtained from the Management of the companies concerned.

As required by Clause 49 of the Listing agreement, the Audit Committee should have minimum three directors as member and two thirds of which should be independent directors. As on 30 June 2007, in listed government companies revealed that an Audit Committee existed in all listed government companies. However, the following non-compliances were noticed with respect to composition of Audit Committee: (a) In the following seven government companies , the Audit Committee did not consist of required number of independent directors: Status of independent directors on Audit Committee Total number of Actual directors in number of Audit independent Committee directors .5 4 3 3 3 3 4 1 1 1 1 1 1 1 Percentage of independent directors 20 per cent 25 per cent 33 per cent 33 per cent 33 per cent 33 per cent 25 per cent

S. No Name of the company India Tourism Development Corporation Ltd National Fertilizers Ltd. Mangalore Refinery and Petrochemicals Ltd. Hindustan Photo Films Mfg. Co. Ltd. Dredging Corporation of India Ltd. Hindustan Fluorocarbons Ltd. Mahanagar Telephone Nigam Ltd.

1 2 3 4 5 6 7

(b)There was no independent director in the Audit Committee of nine listed government companies as mentioned in para 3.5.2(i) and also in case of IRCON International Ltd. (c) Though the Board of Bharat Immunological Biologicals Corporation Ltd. consisted of required number of independent directors, the Audit Committee did not consist of two thirds independent directors as there was only one independent director out of three directors. (d) In case of Neyveli Lignite Corporation Limited, there was only one independent director, as on 31 March 2007, on the Audit Committee of four members. The compliance with Clause 49 of the Listing Agreement was made only on 1 June 2007 by induction of three independent directors on the Audit Committee. (e) There was no Audit Committee during 2006-07 in case of Hindustan Organics Chemicals Ltd. However, the Committee was constituted by the Company on 28 May 2007. Thus, the Audit Committee of 18 Central Government listed company had not been constituted as per Clause 49 of the Listing Agreement. Non-official Directors on the Board of unlisted government companies The DPE's guideline on composition of Board of Directors of CPSEs issued in March, 1992 require that at least one-third of the Directors on the Board of a CPSE should consist of non official directors. A limited review was undertaken by Audit in respect of all unlisted government companies in operation with the objective of assessing the compliance by these companies with the DPE's guideline relating to non-official

directors on the Board. This review was primarily based on the information and documents obtained from the Management of the companies concerned. The review of composition of the Board of unlisted companies as on 30 June 2007 revealed the following: (i) There was no non-official director on the Board of 48 government companies did not have one-third non-official directors as on 30 June 2007. Thus, the Board of 64 unlisted government companies had not been constituted as per the Department of Public Enterprises guideline. Constitution and Composition of Audit Committee in unlisted government companies As required by Section 292A of the Companies Act, 1956, every public limited company having paid up capital of not less than Rs. five crore shall constitute an Audit Committee at the Board level consisting of minimum of three directors and two thirds of which shall be directors other than Managing or whole time Directors. A limited review was undertaken with respect to constitution and composition of Audit Committee, as on 30 June 2007, in unlisted government companies in operation covered by Section 292A based on the information and documents obtained from the Management of the companies concerned, and the following instances of non-compliance were noticed: (a) No Audit Committee was formed by the following companies: S. No 1 2 3 4 5 Name of the company Richardson & Cruddas (1972) Ltd. HMT Machines Tools Ltd. HMT Watches Ltd. Spices Trading Corporation Ltd. Bharat Heavy Plates & Vessels Ltd.

(b) Audit Committee formed by Indian Renewable Energy Development Agency Ltd. consisted of two directors as against the requirement of minimum three. Further, the Committee did not consist of two thirds of directors as directors other than Managing or whole-time directors as there was only one such director. Constitution of Audit Committee by unlisted government companies not covered by Section 292A of the Companies Act, 1956 Thirty unlisted government companies had formed Audit Committees as good governance practice, though these were not required to do so as per Section 292A of the Companies Act, 1956 CONCLUSION The corporate governance practices of both public sector and private sector companies are almost similar. We found that the corporate governance practices exert great influence on the performance of the company. Companies which are having good governance practices will have good image among the investors and public as a whole. Though a lion's share of the focus in the Satyam episode was on the role of the independent directors,

experts believe the role of auditors is now in spotlight. Experts believe that it is the institutional investors who have the tools, bandwidth and clout to extract information and play an activist role (as had happened in Satyam's case) in ensuring that managements don't go off-track. If institutional investors act collectively, they can demand the required changes at companies they have invested in. While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in 'letter as well as spirit'. Additionally, shareholders should ensure that the composition of Board of Directors is a balanced mix of independent directors and management appointees. This would help keep a check on the internal processes of the company. With shareholder activism on the rise, the proactive role of institutional investors will also make the company management more accountable. While things have improved substantially over the last five years, experts believe that more needs to be done, which will further improve disclosure levels and make managements accountable. At the retail shareholder level, one could look at a company's past track record (including significant events that reflect management excesses), qualitative and quantitative disclosures (vis-a-vis peers) and consistency in delivering on promises. Experts believe that more rigorous vetting is needed when small and medium companies are considered for investment. Good public sector governance relies on keeping pace with best practice in private sector corporate governance. That is, of harnessing the potential that corporate governance principles and practices can offer. Importantly, however, it also requires an understanding of the tensions and gaps that arise in the transposition of corporate governance from the private to public sector, so that public sector corporate governance can be modified accordingly.

Dr. V.V.S.K. Prasad

Professor in MBA The Hindu College Machilipatnam Source: E-mail July 26, 2009

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