LANDMARKS IN THE EMERGENCE OF CORPORATE GOVERNANCE

Introduction

Emergence of corporate governance->long term shareholder values & benefits to the society Change in peoples mind Corporate scams &frauds ->rewards and punishments Societys response to frauds ->formation of committees & guidelines on corporate governance

Developments in the US

Watergate scandal in the US ->control failures lead to corporations making illegal political contribution and to bribe government officials. This lead to ->Foreign &Corrupt Practices act of 1977->provisions regarding review of internal control 1979 Securities & Exchange Commissions proposal for reporting on internal financial control

Cont

1985 saving and loan collapse ->Treadway Commission formed to identify main causes of misrepresentation in financial reports Ways to reduce incidence thereof. 1987 Treadway report highlighted need for proper control environment ,independent audit committees ,published reports required the sponsoring organization to develop integrated internal control criteria

DEVELOPMENT IN UK

Anshu S

Development in UK

BCCI Scandal : Global bank, founded in 1972,with head office in Karachi and London. Rapid growth in few years alarmed the financial regulators. 5 July 1991, customs and bank regulators in 7 countries raided and locked down BCCI. The international banks made their books of accounts complex, so that they can hide their transactions and commit fraud on massive scale.

Failure of Baring Bank

Baring Bank : oldest bank of Britain, financed Napoleonic wars, Louisiana purchase and Eric Bank. Nick Leeson ,operated back office as well as front office operations and started trading on be half of bank, instead on be half of customers. Committee of Sponsoring Organization was formed to check such failures. Leeson took speculative position in future market

Measures Taken By UK Government

Development in US and scandals in UK made investors and shareholders worried about their money. Polly Peck, British and commonwealth and Robert Maxwells Mirror Group News International and several other companies made huge profits and then collapsed.

Major Changes Done

Series of report were consolidated into Combined Code on Corporate Governance. The corporate governance committees analyzed the problems, highlighting the key practical issues and concerns which helped in the development in corporate governance in last decade.

CADBURY COMMITTEE

Ankita Tripathi & Neha Dhoot

About Cadbury Committee

Set up in May 1991chaired by Adrian Cadbury, with a view to overcome the huge problems of scams and failures occurring in the corporate sector worldwide. Objective was "to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them." Mainly aimed at addressing the financial aspects of Corporate Governance

Cont.
Other objectives include: (i) uplift the low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company's reports sought and expected; (ii) review the structure, rights and roles of board of directors, shareholders and auditors by making them more effective and accountable; (iii) address various aspects of accountancy profession and make appropriate recommendations, wherever necessary; (iv) raise the standard of corporate governance; etc.

Cadbury Code of Best Practices

1.

Recommendations for BODs: Board should meet regularly, effectively control & monitor executive management. Clearly accepted division of responsibilities. If Chairman & CEO are common person, Independent director on the Board is a must. Non Executive Directors should be there on board in sufficient numbers. Formal schedule for matters of significance. Agreed procedure for the directors to perform their duties & take independent professional advice. All directors should have access to advice & services of the company secretary, & removal of CS should be a board decision as a whole.

2. Recommendations for Non-Executive Directors: They should always get an independent judgement. The majority should be independent of the management & free from any other material business relationships. Their fees should reflect the time they commit to work for the company. They should be appointed for a specified terms & their reappointment should not be automatic. They should be appointed through a formal process- should be a matter of board as a whole. 3. Recommendations for Executive Directors: Directors service contracts should not exceed 3 years without stakeholders approval. Full & clear disclosure of their total emoluments & separate figures & measurements for salary & performance. Their pay should be subject to recommendations by Remunerations committee made majorly of non-executive directors.

4. Recommendations on Reporting & Controls:

its the boards duty to present a balanced & understandable assessment of the companys position.

The board should ensure an objective & professional relationship with the auditors.
Board should establish an audit committee of at least 3 non-executive directors with written terms of reference clearly dealing with authority & duties.

PAUL RUTHMAN COMMITTEE

Priyanka V

Developed after the Cadbury committee. It dealt with the said controversial point of the Cadbury Report. It downsized the proposal on the grounds of impracticality. It restricted the reporting requirement to internal financial controls only as against the effectiveness of the companys system of internal control

Ron Hampel chaired the Committee report. Committee on Corporate Governance Some important and progressive elements.
The extension of the directors responsibilities to all relevant control objectives including business risk assessment and minimizing the risk of fraud

THE GREENBURY COMMITTEE, 1995

Manika Misra

THE GREENBURY COMMITTEE, 1995

Set up in January 1995. By Confederation of British Industry, United Kingdom. Set up to identify good practices and to prepare a code

of such practices.

GREENBURY CODE OF BEST PRACTICE

Divided in four sections:

Remuneration committee Disclosures

Remuneration policy
Service contracts and compensation

GREENBURY COMMITTEE RECOMENDATION

UK companies should implement the code. Should make annual compliance statements. Investor institution should use their power to ensure best

practice.

THE HAMPEL COMMITTEE, 1995

Lydia Joy

THE HAMPEL COMMITTEE,1995

-set up in November, 1995 to promote high standards of corporate governance. Both to protect investors and

-preserve and enhance the standing of companies listed on the London Stock Exchange.
-This Committee was established by the Financial Reporting Council to review matters arising from the Cadbury and Greenbury Committees and evaluate implementation of their recommendations.

The committee -developed further the Cadbury Report. -recommended that: 1] the auditors should report on internal control privately to the directors. 2] the directors maintain and review all controls. 3] companies that do not have an internal audit function, should from time to time review their need for one and 4] introduced the Combined Code that consolidated the recommendations of earlier corporate governance reports [ Cadbury and Greenbury]

COMBINED CODE

Akash Parikh

Combined code, 1998

Derived from Ron Hampel committee's report Cadbury report Greenbury report. Appended to the listing rules of LSE. Compliance of d code is mandatory for listed companies Code should maintain a good internal control to safeguard shareholders investment and the company's assets. Director should annually reviewed the effectiveness of the internal control includes financial, operational, compliance and risk management and share it with shareholders. Why code came?

In past corporate world was lacking effective risk management. Therefore, directors need guidance on effectiveness of the internal control . Furthermore, assurance was reqd that d risks are managed and an embedded risk management process was in place.

Set up by the Institute of Chartered Accountants in England & Whales (ICAEW) in 1999

Kuldeep Singh & Karan Makhija

To provide guidance to assist companies in implementing the requirements of the combined code relating to internal control Recommended that where company do not have an internal audit function, the board should consider the need for carrying out an internal audit annually Recommended that the board of directors confirm the existence of procedures for evaluating & managing key risks

Corporate governance is constantly evolving to reflect the current corporate, economic & legal environment. To be effective, corporate governance practices need to be tailored to the particular needs, objectives and risk management structure of an organisation. Corporate governance is not a static concept, in fact it is dynamic, & thus needs to be altered with the changes that occur in the business environment.

OECD PRINCIPLES

Arun Jain, Kunal Chapia & Arjun Jain

Overview of Presentation

The OECD Principles of Corporate Governance

Core elements of the OECD Principles

What is corporate governance?

A set of relationships between a companys management, its board, its shareholders and other stakeholders A structure through which the companys objectives are set A means for determining how to achieve those objectives and monitor performance Should provide incentives for the board and management to pursue objectives that are in the interests of the company Should facilitate monitoring (e.g. by shareholders, stakeholders and regulators)

The OECDs Corporate Governance Principles

First issued in 1999 Revised Principles issued in 2004 OECD Methodology for Assessing Implementation of the OECD Principles released in December 2006

Core Elements of the OECD Principles

Chapter I: Ensuring the basis for an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities

Chapter II: Basic rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of shareholders rights

Chapter III: Equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

The OECD Principles (continued)

Chapter IV: Role of stakeholders in corporate governance

The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Chapter V: Disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

Chapter VI: Board responsibilities

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.

MCKINSEY SURVEY ON CORPORATE GOVERNANCE

Ashish Nagpal

Correlation between Good Corporate Governance & Market Valuation

Sample size of 188 companies from six emerging markets Results reveal that there is a positive correlation between the two. Corporate Governance increase market valuation in three following ways:
Increasing Financial Performance Increasing Investor confidence Transparency in dealings

Parameters Used for Rating

Accountability: Transparent Ownership, Board Size, Board Accountability Disclosure & Transparency of the Board Shareholder equality

Outcomes of the Survey

Companies with good corporate governance practices have high price to book values. It also revealed that investors are willing to pay a premium of as much as 28% for shares of such companies.

Corporate Governance is concerned with holding balance between economic and social goals.

SARBANES-OXLEY ACT

Anoop Periwal

Sarbanes-Oxley Act Section 301

Requires the Audit Committee to:

Directly oversee the Companys external audit firm. Be independent. Establish procedures for handling complaints about accounting or auditing matters. Have authority to hire advisors. Be adequately funded.

Specific issues to be defined in Audit Committee Charter

Purpose Authority Financial Statements External Audit

- Internal Control - Reporting - Composition - Compliance

Sarbanes-Oxley Act Section 302

Requires CEOs and CFOs to personally certify in Quarterly Financial Reports that they:

Know of no material financial misstatements. Designed internal controls to discover misstatements. Evaluated internal controls within last 90 days. Presented their conclusions about effectiveness of internal controls. Disclosed to external auditors and Audit Committee:

Any significant deficiencies or material weaknesses in design or operation of internal controls. Any fraud involving people who have a significant role in internal controls.

Indicated in their report whether any significant changes in internal controls have occurred since their evaluation.

Sarbanes-Oxley Act Section 404

PCAOB: Auditing Standard No. 2

Paragraph
Controls

24

related to the prevention and detection of fraud often have a pervasive effect on the risk of fraud controls include the adequacy of the internal audit activity and whether the internal audit function reports directly to the audit committee, as well as the extent of the audit committee's involvement and interaction with internal audit

Such

Sarbanes-Oxley Act Section 404

PCAOB: Auditing Standard No. 2, continued

Paragraph 121

Internal auditors normally are expected to have greater competence with regard to internal control over financial reporting and objectivity than other company personnel The external auditor may be able to use their work to a greater extent than the work of other company personnel -this is particularly true in the case of internal auditors who follow the International Standards for the Professional Practice of Internal Auditing issued by the IIA

Sarbanes-Oxley Act Section 404

Implementation Steps

Assign responsibility for process design and oversight. Integrate section 302 and 404 evaluation process. Coordinate with external auditor. Select a control model. Decide on scope of Internal control evaluation. Utilize Self-Assessment. Build on existing controls. Identify gaps. Conduct the evaluations.

Internal Audit should be CEO and CFOs best source of assurance about internal control

Other Provisions

Conflict of Interest Audit Partner Rotation Improper influence on conduct of audit Prohibition of non-audit services by external auditors CEOs & CFOs require to affirm Financials Loans to Directors prohibited Role of Attorneys Penalties

INDIAN COMMITTEE & GUIDELINES

Anumeha Gupta & Bhumika Satwani

Single Person Company Introduced the concept of OPC(One Person Company) Self Regulation Stringent Penalties Publication of information relating to criminal breaches of Companies Act in the annual report Accounts & Audits Reports

Indian committees & guidelines

Introduction

Development in the UK had tremendous influence in India. Interest generated in the Corporate sector by the Cadbury committees report.

WORKING GROUP OF THE COMPANYS ACT, 1996

1) 2) 3) 4)

Recommended a no. of changes & prepared a a working draft of companys bill 1997. A tabular form containing Directors remuneration & commission. Disclosure of companys Financial Statement. Key Information of the listed company: The share in total turnover A review of operations. Market conditions. Future prospects (cut of 10% of total turnover)

a) b)

Raised funds from the public by issuing shares, debentures & securities. Disclosure of foreign exchange earning & outflow & containing separate data on foreign currency & transactions. Foreign holding in the share capital. Loans debentures & other securities raised by the company in foreign exchange. Difference between financial statements pertaining to fixed assets & long term liabilities. Inappropriate item in B/S and P&L account should not be allowed to explained.

Non-financial disclosures

Comprehensive report on the relatives of directors- integral part of the directors report. A register which discloses interests of directors in any contract or arrangement of the company should be stated in the notice of AGM. Details of loans to directors should be disclosed. (Shareholders approval in AGM). Appointment of sole selling agents in India. It is related to any director , separate item in the directors report. It should be stated in special resolution.

There should be a separate compliance certificate. The prescribed format of SCC should be adhered to secretarial requirements.

DEFICIENCIES OF THE COMPANIES 1956 ACT

Abhishek Anand

The Act does not have clarity of role for the non executive directors The Act allows non executive directors to be on the board of as many as 20 companies which instigates lack of commitment The provisions of the act make financial reporting more rule based than being transparent

The Act does not prescribe any formal qualification for a director of a company. Though the Act formally provides for the appointment of auditors by the shareholders, in practice this is a rarity as the control is in managements hands Many companies lack in providing any services to investors mainly with regard to redressal of grievances, delay in share transfers etc.

CONFEDERATION OF INDIAN INDUSTRYS INITIATIVE

C.VARUN

Introduction

CII is a non-government, non-profit, industrymanaged organization, seeking to play a proactive role in Indias development process. The organization works to create and sustain an environment conducive to the growth of industry in India. The confederation is headquartered in New Delhi. Adi Godrej is the President.

Introduction

In 1996, CII took a special initiative on corporate governance by setting National Task Force. The objective was to promote a code of corporate governance. The initiative was regarding the protection of investors interest and promotion of transparency. Due to globalization, there was a need to adopt international disclosure standards to attract investment. The corporate governance in India has been recognized as one of the best in the world.

Recommendations

The board should meet at least six times a year, at intervals of 2 months. A person should not hold directorship in more than 10 listed companies. Non-executive directors should be active participant with clearly defined responsibilities. Company must disclose information regarding operating plans, budgets, internal audit reports etc. One should not appoint a director who has not attended even 50 % of the meetings.

SEBIs Initiative

a)

b)

c)

SEBI on 7th May 1999, appointed a committee under the chairmanship of Kumar Mangalam Birla. The committees references were: To raise the standards of corporate governance To draft a code of corporate best practices Safeguards to deal with insider information and trading.

KUMAR MANGLAM BIRLA COMMITTEE,1999 MANDATORY RECOMMENDATIONS.

Gaurav Arora

WHY WAS THE COMMITTEE FORMED?

Primary objective was to view corporategovernance from perspective of investors& shareholders. To promote and raise the standards of corporate governance. To improve corporate governancestandards in listed companies in areassuch as Disclosure of material information(financial & nonfinancial) Responsibilities of independent & nonindependent directors

Mandatory Recommendations
Applicability. -Share capital of 3 crore and above.

-

Board of Directors
Number of independent directors should be atleast 1/3rd in case the company has a non-executive chairman. Atleast half of the board members in case of an excutive chairman.

Audit Committee Qualified and independent audit committee. With 3 independent directors,with 1 having financial and accounting knowledge Following stipulation to be met are-

Company will continue business in the course Accounting policies and principals confirm to standard practises. Management is responsible for the preparation, integrity and fair presentations of financial statements and other information contained in the annual report. -Others recommendations-Should meet atleast thrice a year with gap not more than 6 months and others.

Remuneration committee of the boardFull disclosure of the remuneration package of all the directors is to be made in the section on corporate governance of the annual report.

Board procedures- At least 4 meetings in a year, to review operational plans, capital budgets & quarterly results. - Minimum information on annual operating plans ,capital budgets etc should be placed before the board.

Shareholders Information sharing with shareholders.

Management Disclosure of Management discussion analysis report covering industry structure, opportunities, threats, internal control system

Manner of implementations- A separate section on corporate governance in the annual report is to be introduced.

NON MANDATORY RECOMMENDATIONS IN KUMAR MANGALAM BIRLA COMMITEE Manojkannan V s

Non Mandatory recommendations

Chairman of the board

Chainman

roles should in principle be different from chief executive, Non executive chairman should maintain chairman's office at companies expense and also allow reimbursement

Remuneration committee
Company

should have credible and transparency policy in determining and accounting of the directors Should set up remuneration committee Should at least consists of 3 independent directors

Share holders rights

Basic

rights Right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes (Beyond Companies Act)
*

RTI through company/exchange website

Half-yearly

declaration of financial performance to be sent to each household of shareholders

Postal ballot
Matters relating to alteration in the memorandum of association of the company like changes in name, objects, address of registered office etc. Sale of whole or substantially the whole of the undertaking. Sale of investments in the companies, where the shareholding or the voting rights of the company exceeds 25%. Making a further issue of shares through preferential allotment or private placement basis. Corporate restructuring. Entering a new business area not germane to the existing business of the company. Variation in the rights attached to class of securities.

SEBI'S RESPONSE

Akash Parikh

SEBI's Response Akash Parikh

Meeting held on 25th jan'00 and adopted all the recommendations of the Kumar managalam birla's committee report of corporate governance. Incorporated into a new clause - Clause 49 All this amendments to the listing agreement were to be implemented by all the entities who are for the first time at the time of listing Code of corporate governance should be placed by the co before the board of directors periodically Separate section on corporate governance in annual reports should be introduced. Non compliance of any of the mandatory recommendations which is a part of listing agreement with reasons thereof, and to what extent are they adopted needs to be specifically highlighted.

NARESH CHANDRA COMMITTEE REPORT, 2002

Kunal Chaudhary

High level committee to examine Corporate Governance issues Issues as:

The auditor company relationships List of prohibited non audit services Auditors annual certificate of Independence

Report on Corporate Audit & Governance with recommendations of Kumar Mangalam Birla Committee No distinction between Executive and Non Executive Chairman Boards Half members as Independent Directors in all Boards All Audit members should be Independent Directors

Certain Guidelines

Audit firm should not derive more than 25% of its business from single corporate client 50% of audit team working on accounts need to be rotated once every five years

Company further recommended :

Auditors should make array of disclosures Calling CEOs and CFOs of all listed companies to certify their companies annual accounts Setting up of quality review boards by ICAI, Institute of CS of India, instead of a Public Oversight Board

Unlisted public companies with not more than 50 shareholders are exempted for these recommendations

NARAYAN MURTHY COMMITTEE REPORT,2003

BHARAT NAHATA & KUSHAL BHADANI

INTRODUCTION

The report on corporate governance set up by SEBI under the chairmanship of N.R.NARYAN MURTHY was submitted in February 2003. The main objective of the report was to review the performance of corporate governance and to determine the role of companies in responding to rumour and other price sensitive information circulating in the market in order to enhance integrity of the market.

MAJOR POINTS IN THE REPORT

Disclosure of contingent liabilities. Certification by CEOs and CFOS. Definition of independent directors. Independence of audit committees.

MANDATORY RECOMMENDATIONS

AUDIT COMMITTEE: An audit committee is the bedrock of quality governance. An effective audit committee is a pre-requisite for achieving high standard of governance. It is required to review the following points: Financial statements and draft audit reports including quarterly and half-yearly information. Report related to compliance with laws and risk management. Management letters of internal control weaknesses issued by statutory internal auditors.

CONTINUED

RELATED PARTY TRANSACTIONS:-A Statement of all transactions with related parties including their bases should be placed before the audit committee for formal approval and if any transaction is not on an arms length basis, management should provide explanation to the audit committee justifying the same. PROCEEDS FROM INITIAL PUBLIC OFFERINGS:Companies raising money through initial public offerings should disclose to the audit committee the uses and application of funds under major heads on quarterly basis RISK MANAGEMENT:-Procedures should be in place to inform the board members about the risk assessment and minimization procedures. These procedures should

CONTINUED..

CODE OFCONDUCT:-It should be obligatory for the board of a company to lay down a code of conduct for all board members and senior management of the company. The annual report of the company shall contain a declaration to this effect signed off by the CEO and COO. NOMINEE DIRECTORS:- If a corporation wishes to appoint a director on the board, such appointment should be made by the shareholders. An institutional director should have the same duties and responsibilities and shall be subject to the same liabilities as any other director

DR. JJ IRANI COMMITTEE REPORT ON COMPANY LAW, 2005

ADITI PATTANAYAK & ROHAN MOHANTY

Dr. JJ Irani Committee Report On Company Law, 2005

Constitued on 2nd December 2004 Dr. JJ Irani Former MD of TISCO Interest of investors Better framework of Corporate Governance Report submitted on 31st May 2004 Attempt to equate the pulls & pressures of modern business & those of shareholder democracy

Topics of discussion

Responses received from various stakeholders on the concept paper Issues arising from the revision of the Companies Act, 1956 Bringing about compactness by reducing the size of the Act and removing redundant provisions Enabling easy & unambiguous interpretations by recasting the provisions of the law

Providing greater flexibility in role making to enable timely response to ever evolving business models Protecting the interests of the stake holders & investors, including small investors

Recommendations

Independent directors in listed companies Against SEBI, the committee recommended that one third of the board of a listed company should comprise of independent directors Pyramidal Structures Multiple layers allowed Power to shareholders Shift from government approval regime to a shareholder approval disclosure regime