Corporate Governance

What is Governance?
Purpose of corporate governance is to have a demonstrable IMPACT on a
corporations FINANCIAL PERFORMANCE.
Corporate Governance is the application of best management practices,
Compliance of law in true letter and spirit and adherence to ethical standards
for effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders.

-The Institute of Company Secretaries of India

What is corporate governance?
Corporate Governance is concerned with holding the balance between
economic and social goals and between individual and communal
goals.

The corporate governance framework is there to encourage the
efficient use of resources and equally to require accountability for
the stewardship of those resources.

The aim is to align as nearly as possible the interests of individuals,
corporations and society

- Sir Adrian Cadbury
Unlike South-East and East Asia, the corporate governance initiative in
India was not triggered by any serious nationwide financial, banking and
economic collapse

The initiative in India was initially driven by an industry association, the
Confederation of Indian Industry

In December 1995, CII set up a task force to design a voluntary code of
corporate governance. The final draft of this code was widely circulated
in 1997.

In April 1998, the code was released. It was called Desirable Corporate
Governance: A Code.

Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI, etc.
Brief history of corporate governance in India
Following CII and SEBI, the Department of Company Affairs (DCA)
modified the Companies Act, 1956 to incorporate specific corporate
governance provisions regarding independent directors and audit
committees.

In 2001-02, certain accounting standards were modified to further
improve financial disclosures. These were:
Disclosure of related party transactions.
Disclosure of segment income: revenues, profits and capital
employed.
Deferred tax liabilities or assets.
Consolidation of accounts.

Initiatives are being taken to (i) account for ESOPs (employee share
ownership plan), (ii) further increase disclosures, and (iii) put in place
systems that can further strengthen auditors independence.
Brief history of corporate governance in India
Driving Forces of CG in India

1) Unethical Business Practices
Security Scams ---Harshad Mehtha Security Scam
Misdeed of Companies

2) Impact of Globalization
Integration with Foreign Market
Foreign Investors expectations
New Business Opportunities --- IT & ITES, BPO etc.,
New Capital formation FII, FDI

3) Impact of Privatisation
New structure of ownership
Multinational Companies
Fundamental Objective of Corporate Governance
Enhancement of Shareholder Value, keeping in view the Interests of
other Stakeholders

Corporate Governance a Way of Life rather than a Code


Good corporate governance involves a commitment of a company to run
its businesses in a legal, ethical and transparent manner a dedication
that must come from the very top and permeate throughout the
organization.
Clause 49 of Listing Agreement on Corporate
Governance
Deals with corporate governance norms that a listed entity should follow

First introduced in the financial year 2000-01 based on the
recommendations of Kumar Mangalam Birla committee

In order to evaluate the existing practices and to further improve the
existing practices, SEBI set up a committee under the Chairmanship of
Mr Narayana Murthy during 2002-03

Organisational framework for corporate governance initiatives in India
consists of the Ministry of Corporate Affairs(MCA) and the Securities and
Exchange Board of India(SEBI)

Most of the CII code was subsequently incorporated in Clause 49
CII Task Force Report
Task force of CII under the Chairmanship of Shri Naresh Chandra
published code of corporate governance for voluntary adoption by all
listed companies and its wholly owned subsidiaries.

Major aspects of the guidelines are:
1. Board of Directors
2. Responsibilities of the Board
3. Audit Committee of the Board
4. Auditors
5. Secretarial Audit
6. Institution of Mechanism for Whistle Blowing
Board of Directors - Appointment of Directors
Appointments to the Board
companies should issue formal letters of appointment to the Non-
Executive Directors(ED) and Independent Directors(ID) which shall
specify their terms of appointment, duties, remuneration, etc.
Such formal letter should form part of disclosure to the shareholders
at the time of ratification of his/her appointment and/or re-
appointment.

Separation of offices of Chairman and Chief Executive Officer
To prevent unfettered decision making power with a single
individual, there should be a clear demarcation of the roles and
responsibilities of the Chairman of the Board and that of the
Managing Director(MD)/ Chief Executive Officer(CEO).
Board of Directors - Appointment of Directors
Nomination Committee
Companies may have a nomination committee comprising of
majority of Independent Directors, including its Chairman for
considering proposals for searching, evaluating and recommending
appropriate ID, ED and NEDs.
Nomination committee should ensure that the Board comprises of a
balanced combination of ED and NED.
Annual Report should disclose the guidelines being followed by the
Nomination Committee and the role and work done during the year
under consideration.

Number of companies in which an individual may become a Director
Maximum number of companies where a MD of a company can
serve as NED or ID should be restricted to seven.
Board of Directors - Independent Directors
ID to have the option and freedom to meet Company Management
periodically

Attributes for Independent Directors
Board should put in place a policy for attributes of such as integrity,
expertise, foresight, ability to understand financial statements.
All ID should provide a certificate of independence at the time of
their appointment, and thereafter annually.
This certificate should be displayed on the website of the company
and in case of listed company, also on the website of the stock
exchange where the securities of the company are listed.

Tenure for Independent Director
Is not more than six years.
A gap of three years between two successive appointments.
Only three such tenures for one company.
Board of Directors Remuneration to Directors
Remuneration
Guiding principles linking corporate and individual performance
Companies should have an option of giving a fixed contractual
remuneration to NEDs, not linked with profits, which should be
uniform for all NEDs.
Companies may structure the remuneration to NEDs into fixed,
variable and additional variable component.
Adequate sitting fees to be paid to ID which may depend upon twin
criteria of net worth and turnover of companies.
Board of Directors Remuneration to Directors
Remuneration committee
Should comprise of at least 3 members, majority of whom should be
NEDs with at least one being an ID.
Responsibility to determine the remuneration for all EDs and the
Executive Chairman.
Should also determine principles, criteria and the basis of
remuneration policy of the company which should be disclosed to
shareholders.
Should also recommend and monitor the level and structure of pay
for senior management.
Terms of reference, role, authority delegated to the Committee by
the Board, and work of Committee for the year under review shall be
disclosed in the Annual Report.

Responsibilities of the Board
Training of Directors

Enabling quality decision making

Risk Management

Evaluation of performance of Board of Directors, Committees thereof
and of Individual Directors

Board to place Systems to ensure compliance with laws
Audit Committee of the Board
Constitution
Three-member Audit Committee, with IDs constituting the majority.
Chairman of such a Committee should be an ID.

Enabling powers
Independent back office support and other resources from the company.
Access to information contained in the records of the company.
Obtain professional advice from external sources.
Facility of separate discussions with both internal and external auditors
as well as management.
Audit Committee of the Board
Role and responsibilities
Monitor the integrity of the financial statements of the company
Review the companys internal financial controls, internal audit function
and risk management systems.
Make recommendations in relation to the appointment, reappointment
and removal of the external auditor and to approve the remuneration
and terms of engagement of the external auditor.
Monitor and approve all related party transactions.

Auditors
Appointment of auditors
Audit Committee of the Board should be the first point of reference
regarding the appointment of auditors.
Audit Committee should consider the profile of the audit firm,
qualifications and experience of audit partners, strengths and
weaknesses, if any, of the audit firm and other related aspects.
Audit Committee should discuss the audit plan to be undertaken by the
auditor, with the auditor; examine and review the certificate of proof of
independence of the audit firm, and recommend to the Board, with
reasons, either the appointment/re-appointment or removal of the
statutory auditor, along with annual audit remuneration.

Certificate of Independence
Every company should obtain a certificate from the auditor certifying
his/its independence and arms length relationship with the client
company.
Auditors
Rotation of Audit partners and firms
To maintain independence of auditors, the company must adopt a policy
of rotation of auditors in the following manner:
audit partner to be rotated once every three years
Audit firm to be rotated once every five years
A cooling period between two audit assignment.

Need for clarity on information to be sought by auditor and/or provided
by the company to him/it

Appointment of internal auditor
Board may appoint an internal auditor and such auditor, where
appointed, should not be an employee of the company.

Secretarial Audit

To ensure that the Board processes and compliance mechanisms of the
company are robust, the companies may get the Secretarial Audit
conducted by a competent professional.

Board should give its comments on the Secretarial Audit in its report to
the shareholders.
Institution of Mechanism for Whistle Blowing

Companies should ensure the institution of mechanism for employees to
report concerns about unethical behavior, actual or suspected fraud, or
violation of the companys code of conduct or ethics policy.

Companies should also provide for adequate safeguards against
victimization of employees who avail of the mechanism
Board of Directors: frequency of meetings and composition

Board must meet at least four times a year, with a maximum time gap of
four months between two successive meetings.

If the chairman of the Company is a non-executive then one-third of the
board should consist of independent directors, and 50% otherwise.

Independent defined as those directors who, apart from receiving
directors remuneration do not have any other monetary relationship or
transactions with the company, its promoters, management or
subsidiaries, which in the view of the board may affect independence of
judgment.
Mandated CG guidelines and disclosures
Board of Directors: frequency of meetings and composition

The frequency of board meetings and board committee meetings, with
their dates, must be fully disclosed to shareholders in the annual report
of the company.

The attendance record of all directors in board meetings and board
committee meetings must be fully disclosed to shareholders in the
annual report of the company.

Full and detailed remuneration of each director (salary, sitting fees,
commissions, stock options and perquisites) must be fully disclosed to
shareholders in the annual report of the company.

Loans given to executive directors are capped (no loans permitted to
non-executives), and must be fully disclosed to shareholders in the
annual report of the company.
Mandated CG guidelines and disclosures
Board of Directors: information that must be supplied

Annual, quarter, half year operating plans, budgets and updates.
Quarterly results of company and its business segments.
Minutes of the audit committee and other board committees.
Recruitment and remuneration of senior officers.
Materially important legal notices and claims, as well as any accidents,
hazards, pollution issues and labor problems.
Any actual or expected default in financial obligations.
Details of joint ventures and collaborations.
Transactions involving payment towards goodwill, brand equity and
intellectual property.
Any materially significant sale of business and investments.
Foreign currency and other risks and risk management.
Any regulatory non-compliance.
Mandated CG guidelines and disclosures
Board of Directors: Audit Committee

Audit Committee is mandatory. Must have minimum of three members, all
non-executive directors, the majority of whom are independent.

Chairman must be an independent director, and must be present at the
annual shareholders meeting to answer audit or finance related questions.

At least one member must be an expert in finance/accounts.

Must have at least three meetings per year, including one before finalisation
of annual accounts.

Must meet with statutory auditors and internal auditors; have the powers to
seek any financial, legal or operational information from the management;
obtain outside legal or professional advice.
Mandated CG guidelines and disclosures
Board of Directors: Audit Committee functions

Adequacy of internal audit and internal control systems, through
discussion with internal and statutory auditors as well as management.

Significant findings, follow-up and action taken reports.

Discussion with internal and statutory auditors about scope and design of
audits.

Reviewing financial and legal risks and companys risk management
policies.

Examining reasons behind any materially significant default to creditors,
bond-holders, suppliers and shareholders.
Mandated CG guidelines and disclosures
Disclosures to shareholders in addition to balance sheet, P&L
and cash flow statement

Board composition (executive, non-exec, independent).

Qualifications and experience of directors.

Number of outside directorships held by each director (capped at
director not being a member of more than 10 board-level committees,
and Chairman of not more than 5).

Attendance record of directors.

Remuneration of directors.

Relationship (familial or pecuniary) with other directors.

Warning against insider trading, with procedures to prevent such acts.

Details of grievances of shareholders, and how quickly these were
addressed.

Date, time and venue of annual general meeting of shareholders.
Mandated CG guidelines and disclosures
Disclosures to shareholders in addition to balance sheet, P&L and cash flow
statement

Dates of book closure and dividend payment.

Details of shareholding pattern.

Name, address and contact details of registrars and/or share transfer
agents.

Details about the share transfer system.

Stock price data over the reporting year, and how the companys stock
measured up to the index.

Financial effects of stock options.

Financial effects of any share buyback.

Financial effects of any warrants that are to be exercised.

Chapter reporting corporate governance practices

Mandated CG guidelines and disclosures
Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement

Detailed chapter on Management Discussion and Analysis focusing on
markets, operations, finances, accounts, risks, opportunities and threats,
internal control systems.

Consolidated financial statement, incorporating accounts of all subsidiaries
(over 50% shares held by reporting company).

Details of all significant related party transactions.

Detailed segment reporting (revenues, costs, operating profits and capital
employed).

Deferred tax liabilities and assets and debit/credit in the P&L for the
reporting year
Mandated CG guidelines and disclosures
Summary
Indian corporate governance system has both supported and held back
Indias ascent to the top ranks of the worlds economies.

While on paper the countrys legal system provides some of the best
investor protection in the world, enforcement is a major problem with
slow, over-burdened courts and significant corruption.

Ownership remains concentrated and family business groups continue to
be the dominant business model.

Securities and Exchanges Board of India has a rigorous regulatory
regime to ensure fairness, transparency and good practice.