You are on page 1of 16

Corporate

Governance

Corporate
Governance

Corporate Governance is a process or set of systems and


processes to ensure that company is managed to suit the
interest of all the concerned. It is concerned with the
establishment of a system, whereby all directors are
entrusted with responsibilities and duties in relation to the
corporate affairs

Corporate Governance is concerned with the moral, ethics,


values, parameters, conduct and behaviour of the company
and its management. The role of Corporate Governance is to
ensure that the directors of a company are subject to their
duties, obligation, and responsibilities to act in the best
interest of the company, to give directions and remain
accountable to their shareholders and other beneficiaries for
their actions. It is founded on a system of accountability
primarily directed towards the shareholders.

One key element in improving economic


efficiency is Corporate Governance. Good
Corporate Governance helps to ensure that
corporation take into account the interests of a
wide range of constituencies, and that their
board are accountable to the company and
shareholders. This in turn helps to ensure that
corporations operate for the benefit of all
stakeholders. The credibility of Corporate
Governance systems help to maintain the
confidence of investors both foreign and
domestic to attract more long term capital.
The concept of Corporate Governance
primarily hinges on complete transparency,
integrity
and
accountability
of
the
management with an increasingly grater
focus on investor protection and public
interest.

Corporate Governance has gained tremendous


importance after the second half of 1996. Two of
the main reasons for this upsurge are:

The economic liberalization and deregulation of


industry and business,

Demand for new corporate ethos and stricter


compliance with the law of the land.
One more factor that has been responsible for
the sudden exposure of the corporate sector to
new paradigm for corporate governance that is
in tune with the changing times, is the demand
for greater accountability of companies to their
shareholders and customer.

Inception of Corporate
Governance in India

Initial efforts to crystallize standards for Corporate


Governance began in countries like United States and the
United Kingdom. After 1990 the transition from central
planning to marker economies, brought the issue of
Corporate Governance to the fore.
The Confederation of Indian Industry (CII) was first to
come out with its desirable code on Corporate
Governance in the year 1998 in India. However the first
and formal comprehensive attempt to formulate code of
Corporate Governance was made by SEBI on May 7,
1999 by the constitution of committee under the
chairmanship of Shri Kumar Mangalam Birla, to enhance
the standard of Corporate Governance in India.

Based on the recommendations of the committee SEBI


made provisions with regard to Corporate
Governance mandatory for listed companies by
inserting clause 49 to the listing agreement.

Core Principles of
Corporate Governance

Equitable Treatment

Disclosure and Transparency

Accountability

Role of Stakeholder

Strong independent element at


board level

Balanced board composition

Competence of Commitment

Vibrant Audit Committee

What is Corporate
Governance?

Control of Business by stakeholder

Optimum Board Composition

Reliable Disclosure

Public Reporting

OObjectivity

R Role of Stakeholder

level

Avoidance of concentration of power at top

T Transparency

Efficient monitoring of management by Board

Good morals and values

Openness

Vibrant & Independent Board

Equitable treatment

Risk Assessment

New corporate ethos

Accountability

Non-executive directors

Credibility, competence and commitment


Efficient and independent audit committee

Mandatory
Requirements as set
out
in
Clause 49 are:
BOARD
OF DIRECTORS

AUDIT COMMITTEE AND ITS


COMPOSITION

SUBSIDIARY COMPANIES

DISCLOSURES

CEO/CFO CERTIFICATION

REPORT ON
GOVERNANCE

COMPLIANCE

CORPORATE

Board of
Directors

Composition of Board
The Board of directors of the company shall have
optimum combination of executive and non- executive
directors with not less than fifty percent of the board
of directors comprising of non- executive directors.
Where the chairman of the board is a non- executive
director, at least one-third of Board should comprise of
independent directors and in case he is an executive
director, at least half of the board should comprise of
independent directors.
Board Meetings
The board shall meet at least four times a year, with a
maximum time gap of three months between any two
meetings

Independent director

Independent director shall mean a non- executive director of


company who:

apart from receiving directors remuneration , does not have


any material pecuniary relationships or transactions with the
company , its promoters , its directors, its senior
management or its holding company , its subsidiaries and
associates which may affect independence of directors;

is not related to promoters or persons occupying


management position at the board level or at one level below
the board;

has not been executive of the company in the immediately


preceding three financial years;

is not a partner or executive or was not partner or an


executive during the preceding three years, of any of the
following :

the statutory audit firm or the internal audit firm that is


associated with the company, and

the legal firm(s) and the consulting firm that have material
association with the company

is not a material supplier , service provider or customer or a


lessor or lessee of the company

is not a substantial shareholder of the company, i.e. owning


two percent or more of the block of voting shares

A qualified and independent Audit Committee shall be set up giving the


terms of reference subject to the following:

Audit Committee

The Audit committee shall have minimum three directors as members.

Two-third of the member of Audit committee shall be independent directors

All members of Audit committee shall be financially literate.

At least one member shall have accounting or related financial management


expertise.

The chairman of the Audit Committee shall be an Independent Director.

The chairman of the Audit Committee shall be present at Annual General


Meeting to answer shareholder queries.

The Audit committee may invite such of the executive, as it consider


appropriate to be present at the meeting of the committee ,but on occasions
it may also meet without the presence of executives of the company.

The company secretary shall act as the secretary to the committee.

The Audit Committee shall meet at least four


times a year, and not more than four
meetings shall elapse between any two
meetings.

The Quorum shall be either two members or


one third of the members of Audit committee
whichever is greater, but there should be a
minimum of two independent directors
present.

Meeting of Audit
Committee

Report on Corporate
There shall be a separate section on
Governance
Corporate Governance in the Annual

Report of company, with a detailed


compliance
report
on
Corporate
Governance.
Non-compliance of any
mandatory requirement of this clause
with reasons there of and the extent to
which the non-mandatory requirement
have
been
adopted
should
be
specifically highlighted.
The companies shall submit a
quarterly compliance report to the stock
exchanges within 15 days from the
close of quarter. The report shall be
signed either by the Compliance Officer
or the Chief Executive Officer of the
company.

List of items to be included in the


Report on Corporate Governance in
the Annual Report of Companies

A brief Summary on companys philosophy on


code of governance

Board of Directors

Audit Committee

Remuneration Committee

Shareholders Committee

General Body Meetings

Disclosures

Means of Communication

General Shareholders Information

Non- Mandatory
Requirements

The Board should set up a remuneration committee to determine on


their behalf and on behalf of the shareholders with agreed terms of
reference the companys policy on remuneration package.
The remuneration committee should consist of three directors at the
minimum all of whom should be non-executive directors. The chairman
of the committee to be Independent Director.

All the members of remuneration committee shall be present at meeting.

The chairman of remuneration committee should be present at AGM to


answer Shareholders queries.

Postal Ballot facility for the shareholders who may not be able to attend
the general meetings remuneration committee. Some of the critical
matters which should be decided by postal ballot are:
Sale of whole or substantially of the whole of the undertaking
Corporate Restructuring
Entering a new area of business not germane to the existing business of
the company.
Variation in rights attached to class of securities.
Matters relating to change in management.