CORPORATE

GOVERNANCE
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.

Conduct of business in accordance with shareholders desires (maximising wealth) while

confirming to the basic rules of the society embodied in the Law and Local Customs
Corporate Governance involves a set of relationships and the networks
between a company’s management, its board of directors, its
shareholders and stakeholders.

Good corporate governance practice ensures the shareholders a fair rate

of return.
If management is about running the business, corporate governance is about
seeing that it is run properly. All companies need managing and governing.

Corporate Governance may be defined “as a set of systems, processes and

principles which ensure that a company is governed in the best interest of all
stakeholders”.

It is the system by which companies are directed and controlled.

It is about promoting corporate fairness, transparency and accountability.

FEATURES
It is concerned with how companies are managed

Involves appropriate supervision and control over the top management

It requires fair, transparent and efficient administration, effective monitoring is essential
for this purpose

To serve the interests of all stakeholders in a company

It is an inter play between company, stakeholders, capital market and corporate laws

Much more than corporate management. It involves outsiders too

Accountability

Ensure that management is accountable to the Board

Ensure that the Board is accountable to shareholders

Fairness

Protect Shareholders rights

Treat all shareholders including minorities, equitably

Provide effective redress for violations

Transparency

Ensure timely, accurate disclosure on all material matters, including the financial
situation, performance, ownership and corporate governance

Independence

Procedures and structures are in place so as to minimise, or avoid conflicts of interest

Independent Directors and Advisers i.e. free from the influence of others
GOOD BOARD PRACTICES
 Clearly defined roles and authorities

Duties and responsibilities of Directors understood

Board is well structured

Appropriate composition and mix of skills

Appropriate Board procedures

Director Remuneration in line with best practice

Board self-evaluation and training conducted

CONTROL ENVIRONMENT
Internal control procedures
 Independent audit committee established
Compliance Function techniques in use established
Business continuity
Independent external auditor procedures
TRANSPARENT DISCLOSURE
Financial Information disclosed
Non-Financial Information disclosed
Financials prepared according to International Financial Reporting Standards (IFRS)
Companies Registry filings up to date
High-Quality annual report published
WELL-DEFINED SHAREHOLDER RIGHTS
Minority shareholder rights formalised
Well-organised shareholder meetings conducted
Policy on related party transactions
Clearly defined dividend policy
BOARD COMMITMENT
A corporate governance improvement plan has been created
Appropriate resources are committed to corporate governance initiatives
Policies and procedures have been formalised and distributed to relevant staff
A corporate governance code has been developed
A code of ethics has been developed
The company is recognised as a corporate governance leader
NEED
A corporation is a congregation of various stakeholders, namely, customers,
employees, investors, vendor partners, government and society. A corporation should be
fair and transparent to its stakeholders in all its transactions.

Corporate governance is beyond the realm of law. It stems from the culture and mind
set of management, and cannot be regulated by legislation alone.

Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices.
Corporate governance is a key element in improving the economic efficiency of
a firm. Good corporate governance also helps ensure that corporations take into
account the interests of a wide range of constituencies, as well as of the
communities within which they operate.

The credibility offered by good corporate governance procedures also helps

maintain the confidence of investors – both foreign and domestic – to attract
more “patient”, long-term capital, and will reduce the cost of capital. This will
ultimately induce more stable sources of financing.
Corporate scams (or frauds) in the recent years of the past have shaken public
confidence in corporate management. The need for corporate governance is, then,
imperative for reviving investors’ confidence in the corporate sector towards the
economic development of society.
SEBI CODE ON CG
(a) Board of Directors:

(i) The Board of Directors of the company shall have an optimum combination of executive and non-
executive directors.

(ii) The number of independent directors would depend on whether the chairman is executive or non-
executive.

In case of non-executive chairman, at least, one third of the Board should comprise of independent
directors; and in case of executive chairman, at least, half of the Board should comprise of independent
directors.

The expression ‘independent directors’ means directors, who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship with the company.
(b) Audit Committee:

(1) The company shall form an independent audit committee whose constitution would be as
follows:

(i) It shall have minimum three members, all being non-executive directors, with the majority of them
being independent, and at least one director having financial and accounting knowledge.

(ii)The Chairman of the committee will be an independent director.

(iii)The Chairman shall be present at the Annual General Meeting to answer shareholders’ queries.
(2) The audit committee shall have powers which should include the following:
1.To investigate any activity within its terms of reference
2.To seek information from any employee
3. To obtain outside legal or other professional advice
4. To secure attendance of outsiders with relevant expertise, if considered necessary.
(3) The role of audit committee should include the following:

(i) Overseeing of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.

(ii) Recommending the appointment and removal of external auditor.

(iii) Reviewing the adequacy of internal audit function

(iv) Discussing with external auditors, before the audit commences, the nature and scope of
audit; as well as to have post-audit discussion to ascertain any area of concern.

(v) Reviewing the company’s financial and risk management policies.

(c) Remuneration of Directors:

The following disclosures on the remuneration of directors shall be made in the

section on the corporate governance of the Annual Report:

(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock
options, pension etc.

(ii) Details of fixed component and performance linked incentives, along with performance
criteria.
(d) Board Procedure :

(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4
months between any two meetings.

(ii) A director shall not be a member of more than 10 committees or act as chairman of
more than five committees, across all companies, in which he is a director.
(e) Management:

A Management Discussion and Analysis Report should form part of the annual report to the shareholders;
containing discussion on the following matters (within the limits set by the company’s competitive position).

(i) Opportunities and threats

(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational performance

(v) Material development in human resource/industrial relations front.

(f) Shareholders:

(i) In case of appointment of a new director or reappointment of a director, shareholders must be

provided with the following information:

1.A brief resume (summary) of the director

2.Nature of his expertise

3. Number of companies in which he holds the directorship and membership of committees of the Board.

(ii) A Board Committee under the chairmanship of non-executive director shall be formed to specifically look
into the redressing of shareholders and investors’ complaints like transfer of shares, non-receipt of Balance
Sheet or declared dividends etc. This committee shall be designated as ‘Shareholders / Investors Grievance
Committee’.
(g) Report on Corporate Governance:

There shall be a separate section on corporate governance in the Annual Report of the
company, with a detailed report on corporate governance.

(h) Compliance:

The company shall obtain a certificate from the auditors of the company regarding the
compliance of conditions of corporate governance. This certificate shall be annexed with the
Directors’ Report sent to shareholders and also sent to the stock exchange.
CII CODE ON CG
Any listed companies with a turnover of Rs.100 crores and above should have
professionally competent, independent, non- executive directors, who should constitute •
at least 30 percent of the board if the Chairman of the company is a non-executive
director, or • at least 50 percent of the board if the Chairman and Managing Director is
the same person.

No single person should hold directorships in more than 10 listed companies.

For non-executive directors to play a material role in corporate decision making and
maximising long term shareholder value, they need to

• become active participants in boards, not passive advisors;

• have clearly defined responsibilities within the board such as the Audit Committee;

• know how to read a balance sheet, profit and loss account, cash flow statements and
financial ratios and have some knowledge of various company laws.
To secure better effort from non-executive directors, companies should: • Pay a
commission over and above the sitting fees for the use of the professional inputs and
consider offering stock options, so as to relate rewards to performance.

While re-appointing members of the board, companies should give the attendance
record of the concerned directors. If a director has not been present (absent with or
without leave) for 50 percent or more meetings, then this should be explicitly stated in
the resolution that is put to vote. As a general practice, one should not re-appoint any
director who has not had the time attend even one half of the meetings.
Key information that must be reported to, and placed before, the board must contain:

• Annual operating plans and budgets

• Quarterly results for the company as a whole and its operating divisions or business segments.

• Internal audit reports

• Default in payment of interest or non-payment of the principal on any public deposit, creditor or fI’s.

• Any issue which involves possible public or product liability claims of a substantial nature

• Details of any joint venture or collaboration agreement.

• Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property
1. Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores
should set up Audit Committees within two years.

2. Audit Committees should consist of at least three members, all drawn from a company’s non-
executive directors

3. To be effective, the Audit Committees should have clearly defined Terms of Reference and its
members must be willing to spend more time on the company’s work

4. Audit Committees should assist the board in functions relating to financial statements and proposals
that accompany the public issue of any security

5. Audit Committees should periodically interact with the statutory auditors and the internal auditors to
ascertain the quality of the company’s accounts as well as the capability of the auditors themselves.
Under “Additional Shareholder’s Information”, listed companies should give data on:
1. High and low monthly averages of share prices
2. Greater detail on business segments
1. Consolidation of Group Accounts should be optional and subjective
2. If a company chooses to voluntarily consolidate, it should not be necessary to represent the
accounts of its subsidiary companies under section 212 of the Companies Act.
Major Indian stock exchanges should gradually insist upon a compliance certificate,
signed by the CEO and the CFO, which clearly states that: • The management is
responsible for the preparation, integrity and fair presentation of the financial statements
and other information in the Annual Report
For all companies with paid-up capital of Rs. 20 crores or more, the quality and quantity
of disclosure that accompanies a GDR issue should be the norm for any domestic
issue.
Government must allow far greater funding to the corporate sector against the security of
shares and other paper.
1. If any company goes to more than one credit rating agency, then it must divulge in the
prospectus and issue document the rating of all the agencies that did such an exercise.
2. It is not enough to state the ratings. These must be given in a tabular format that
shows where the company stands relative to higher and lower ranking. It makes
considerable difference to an investor to know whether the rating agency or agencies
placed the company in the top slots, or in the middle, or in the bottom.
Companies that default on fixed deposits should not be permitted to

• accept further deposits and make inter-corporate loans or investments until the default
is made good;

and • declare dividends until the default is made good.