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Outside Forces:

Regulators,Governmnet
Enforcement,Legisative

Presented By :
Raunaq Singh
MBA GEN-B
Outside Forces
The corporate governance as a fair and transparent
mechanism to run and administer corporations resulting in
long term shareholder value and benefits to the entire
society has been fairly a recent phenomenon.

There has been huge amount of change in peoples minds


to the objective of a corporationfrom the shareholders
to all its stakeholders.

The corporate scams, frauds have brought about a change


in the thinking of advocates of free enterprise that the
system was not self-regulatory and needed external
regulations.
About Outside Forces
These regulations should definitely have some
penality for the wrongdoers while those who abide by
the rules of the game are to be amply rewarded by the
market forces.

The response of the society to the major frauds


reflected in the legislative and regulatory changes
brought out by governments and large institutional
investors want that corporates they invested in adopt
better governance practices, and in the formation of
major committees to study the issues in depth and
make recommendations, codes and guidelines on
corporate governance that are to be put in practice
THEThe
Securities
SECURITIES andOFExchange
AND EXCHANGE BOARD INDIA Board of India Act,
1992 was enacted by the Indian Parliament to
provide for the establishment of a Board to protect
the interests of investors in securities and to
promote the development of, and to regulate the
securities market.

The objectives of the SEBI aregiven below:

Protection of interests of investors in securities.


Promoting the development of the securities
market.
Regulation of the securities market.
SEBIS INITIATIVES
The Securities and Exchange Board of India had
appointed a committee on corporate governance on 7
May 1999, which had 18 members and chairmanship
of Kumar Mangalam Birla with view to promote and
raising the standards of the corporate governance.

The committees objectives were:

(1) suggesting the suitable amendments to the listing


agreement which is run by the stock exchange with
the companies and any other measures and to
improve corporate governance standards in the listed
companies
and also in matters such as disclosure of continuos
material information which is both financial and
non-financial and the manner and frequency of
such disclosures, the responsibilities of directors

(2) Code of corporate best practices should be


drafted

(3) suggest safeguards to be made within the


companiesto deal with problems like insider
information and insider trading.
SEBIS RESPONSE
In accordance with the guidelines provided by the SEBI :
the stock exchanges in India have modified the so
listing requirements and incorporated in them a new
clause which is Clause 49 so that the that proper
disclosure for ensuring corporate governance is made
by the companies:

The Board of directors


The Audit committee
Remuneration of directors
Procedure of the Board
Management of Comp.
The Shareholders
corporate governance reports
SEBI Response
(Contd..)
The following information has to be placed by a
company before the board of directors periodically as
per the requirements of SEBI Code of Corporate
Governance
Budgets and Annual operating plans
Capital budgets
Quarterly results for the company, operating divisions
and the business segments.
Minutes of the audit committee meetings.
Information on the recruitment and remuneration of
senior
Material communications from government bodies.
Fatal or serious accident or any material effluent
pollution problems.
Details of the joint venture and collaboration
agreement
Labour relations.
Material transactions.
Disclosures which are made by the management on
material transactions with potential for conflict of
interest.
Details of foreign exchange exposures quarterly and
strategies for risk management
Compliance with regulatory and statutory
requirements.
SEBI ROLE IN PROMOTING
CORPORATE GOVERNANCE
According to the SEBIs former chairman The
Securities and Exchange Board of India has
focussed on these areas to improve corporate
governance

Ensuring the timely disclosure of relevant


information.
Providing an efficient and effective market system.
Demonstrating reliable and effective enforcement.
Enabling highest standards of governance.
DEVELOPMENTS IN THE US
Corporate governance had gained importance when the
Watergate scandal in the United States had occurred

Development of the Foreign and Corrupt Practices


Act of 1977 which contains s provisions which is
regarding the establishment, maintenance and review of
systems of internal controL which was followed in 1979
by the Securities and Exchange Commissions
proposals on mandatory reporting on internal financial
controls

The Treadway Report which was published in 1987


highlighted the need for a proper control environment
SARBANESOXLEY ACT, 2002
The recent SarbanesOxley Act is a step in this
direction, which codifies certain standards of good
governance as specific requirements.
The Act calls for protection to those who have the
courage to bring frauds to the attention of those who
have to handle frauds. But it ensures that such things
are not left to the individuals who may or may not
choose to reveal them, it is better for the corporations
to appoint an officer with the responsibility to oversee
compliance and ethical issues
The SarbanesOxley Act (SOX Act), 2002 is a
sincere attempt to address all the issues associated
with corporate failures to achieve quality governance
and to restore investors confidence
Important provisions contained in SOX Act

Establishment of Public Company Accounting


Oversight Board (PCAOB)
Audit committee

The SOX Act requires that registered public


accounting firms should report directly to the audit
committee on all critical accounting policies and
practices and other related matters

Conflict of interest:
Audit partner rotation:
Improper influence on conduct of audits
Prohibition of non-audit services
CEOs and CFOs required to affirm financials
Loans to directors
Attorneys
Securities analysts
Penalties
DEVELOPMENTS IN THE UK

The seeds of modern corporate governance were sown


in England by the Bank of Credit and Commerce
International scandal.

Another landmark that heightened people awareness


and sensitivity on the issue was the failure of Barings
Bank .

The report produced by it in 1992 suggested a control


framework and was endorsed and refined in the four
subsequent UK reports :Cadbury, Ruthman, Hampel
and Turnbull.
CADBURY COMMITTEE ON
CORPORATE GOVERNANCE, 1992
The Cadbury Committee was set-up in May 1991 and by the
Financial Reporting Council of the London Stock Exchange. The
committee had published its report in December 1992. Adrian
Cadbury was the chairman of the Cadbury committee .

Relating to the Board of Directors ,the recommendations


were as follows.
The board should meet regularly, retain full and effective
control over the company and monitor the executive
management.
All directors should have access to the advice and services of
the company secretary, who is responsible to the board for
ensuring that board procedures are followed and that
applicable rules and regulations are complied with.
Relating to the non executive directors the
recommendations are:

Non-executive directors should bring an independent


judgment to bear on issues of strategy, performance,
resources, including key appointments, and standards of
conduct.

Non-executive directors should be appointed for specified


terms and reappointment should not be automatic.

Non-executive directors should be selected through a


formal process and both this process and their
appointment should be a matter for the board as a whole.
For Executive directors the recommendations
were.

Directors service contracts should not exceed three


years without shareholders approval .

Shareholders require that the remuneration of


directors should be both fair and competitive.

The Annual General Meeting provides the


opportunity for shareholders to make their views on
such matters as directors benefit known to their
boards.
On reporting and controls, the Cadbury code of best
practices stipulated the following:

It is the boards duty to present a balanced and understandable


assessment of the companys position.
The board should ensure that an objective and professional
relationship is maintained with the auditors.
The board should establish an audit committee of at least three
non-executive directors with written terms of reference which
deal clearly with its authority and duties.
The directors should explain their responsibility for preparing
the accounts next to a statement by the auditors about their
reporting responsibilities.
The Cadbury model is one of self regulation. It was recognised
that in the event British companies failed to comply with the
voluntary code,regulation and external regulation would follow.

The Paul Ruthman Committee

The Ruthman committee was made to deal


with the controversial point of Cadbury report. It
laid down the proposal which was on the grounds
of practicality. It had restricted the reporting
requirements to the internal financial controls as
against effectiveness of the company system of
the internal controls which was stipulated by the
code of best practices which was contained in the
Cadbury report
The GREENBURY COMMITTEE
The GREENBURY COMMITTEE was set up in January
1995 to identify best practices by the Confederation of
British Industry (CBI) in determining the directors
remuneration prepared a code of such practices for use
by public limited companies of the United Kingdom.
The committee had provided an answer to the general
concerns about the accountability and level of directors
pay
had argued against statutory control and for
strengthening accountability by proper allocation of
responsibility for determining the directors remuneration
and the proper reporting to shareholders and greater
transparency in the process;
The Hampel Committee
The Hampel Committee had been set up in November
1995 to promote high standards of the corporate
governance both to protect investors and enhance the
standing of companies which are listed on the London
stock Exchange.
The Committee had developed the Cadbury Report
further and recommended that
The auditors should report on the internal controls which
should be privately to the directors.
The directors should maintain and review all the controls.
Should introduce the Combine code which should have
consolidated the recommendations of earlier corporate
governance reports.
The Combined Code 1998
The Combined Code 1998 was derived from Ron Hampel
Committees Final Report, the Cadbury Report and Greenbury
Report. The Combined Code is appended to the listing rules of
the London Stock Exchange. Compliance of the code for all
listed companies in n the United Kingdom is mandatory

It was clear that the boards of directors were not only


responsible but also needed guidance in not just reviewing the
effectiveness of internal controls but also for providing
assurance that all the significant risks had been reviewed
assurance was also required that the risks had been managed
and an embedded risk management process was in place.
THE TURNBULL COMMITTEE, 1999
The Turnbull Committee had been set up by the
Institute of Chartered Accountants in England and
Wales (ICAEW) in 1999 to provide guidance to assist
companies in implementing the requirements of the
Combined Code relating to internal control.
The committee had to provide guidance to assist
companies in implementing the requirements of the
Combined Code which is relating to internal control
should recommend that where companies do not have
an internal audit function, the board should consider
the need for carrying out an internal audit annually
recommended that the boards of directors confirm the
existence of procedures for evaluating and managing
the major risks.
THANKYOU !!!

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