Corporate Corporate GovernanceGovernance

What is Corporate What is Corporate GovernanceGovernance

It is a means to maximize long term It is a means to maximize long term shareholder value in a legal and shareholder value in a legal and ethical manner ensuring fairness, ethical manner ensuring fairness, courtesy and dignity in all courtesy and dignity in all transactions of the Company. transactions of the Company.

What is Corporate What is Corporate GovernanceGovernance

It refers to the guideline, It refers to the guideline, procedures, rules for decision procedures, rules for decision making.making.

It suggests how to monitor the It suggests how to monitor the performance.performance.

It has to do with power and It has to do with power and accountability; who exercises power, accountability; who exercises power, on behalf of whom and how the on behalf of whom and how the exercise of power is controlledexercise of power is controlled

The Need for Corporate The Need for Corporate GovernanceGovernance

Poor Governance can harm national Poor Governance can harm national economic performance.economic performance.

Poor disclosures and audit Poor disclosures and audit procedures result in deteriorating procedures result in deteriorating financial conditions of the financial conditions of the Corporations.Corporations.

Poor governance undermines the Poor governance undermines the confidence in the markets and hold confidence in the markets and hold the financial system hostage.the financial system hostage.

Factors behind the Origin Factors behind the Origin of Corporate Governanceof Corporate Governance

In the era of globalization, foreign In the era of globalization, foreign investors have become very careful about investors have become very careful about investing their money.investing their money.

Kumar Mangalam Birla Committee Report Kumar Mangalam Birla Committee Report appointed by SEBI has formulated some appointed by SEBI has formulated some guidelines.guidelines.

Increasing active rate of investigative Increasing active rate of investigative reporting in business journalism.reporting in business journalism.

Mergers and acquisitions taking place at a Mergers and acquisitions taking place at a fast pace.fast pace.

Important issues of Important issues of Corporate GovernanceCorporate Governance

Social responsibilitySocial responsibility Multiple, divergent expectations of Multiple, divergent expectations of

the shareholders.the shareholders. Fair Business dealsFair Business deals Prevention of corruptionPrevention of corruption

The CEO as a Corporate The CEO as a Corporate GovernorGovernor

Good public governance is about Good public governance is about putting public good over private putting public good over private good and being a good corporate good and being a good corporate citizen.citizen.

Corporate governance translates Corporate governance translates into fairness, transparency, raising into fairness, transparency, raising the trust and confidence in the trust and confidence in shareholders and understanding shareholders and understanding societal responsibility.societal responsibility.

Corporate Governance in Corporate Governance in IndiaIndia

Private SectorPrivate Sector

Public SectorPublic Sector

Private Sector- categories Private Sector- categories of shareholdersof shareholders

Promoter director – Called as a functional Promoter director – Called as a functional director and belongs from the promoter director and belongs from the promoter group.group.

Professional director - Category of Professional director - Category of directors who are invited by the promoter directors who are invited by the promoter group on the basis of competence and group on the basis of competence and favourable personal equation.favourable personal equation.

Institutionally nominated – These Institutionally nominated – These positions are fulfilled by senior activities positions are fulfilled by senior activities or person of good reputation.or person of good reputation.

Public Sector – categories Public Sector – categories of directorsof directors

Functional directors – Full time Functional directors – Full time employees of the PSUs.employees of the PSUs.

Govt. directors – They are the Govt. directors – They are the bureaucrats from different bureaucrats from different controlling administrative ministry.controlling administrative ministry.

Outside directorsOutside directors

Distinction between Distinction between management and controlmanagement and control

ManagementManagement ControlControl

-Initiation ( proposals for -Initiation ( proposals for managing the resources managing the resources of the firms are of the firms are developed)developed)

Ratification ( proposals Ratification ( proposals developed in the developed in the initiation stage are initiation stage are evaluated, if suitable, evaluated, if suitable, approved)approved)

Implementation Implementation ( execution of approved ( execution of approved proposals)proposals)

Monitoring ( Assessment Monitoring ( Assessment of executive’s of executive’s performance and performance and implementation of implementation of proper reward system)proper reward system)

Active role of Institutional Active role of Institutional InvestorsInvestors

Give a direct voice in governance Give a direct voice in governance

Need to improve their own Need to improve their own governance governance

Expand the role of non –Expand the role of non –executive directorsexecutive directors

CII has recommended the following :CII has recommended the following : NED’ s should occupy at least 30% of the NED’ s should occupy at least 30% of the

board seats.board seats. There must be a limit on the number of There must be a limit on the number of

Boards on which a person cans serve.Boards on which a person cans serve. An audit committee, having at least three An audit committee, having at least three

non-executive directors must be set and non-executive directors must be set and given access to all the information.given access to all the information.

All the NED ‘s must be compensated well All the NED ‘s must be compensated well for their time and effortsfor their time and efforts

Proper and Timely Proper and Timely Information to the BoardInformation to the Board

Ensure that the Board is well Ensure that the Board is well equipped with information.equipped with information.

Information should be available on Information should be available on long term plans, budgets, long term plans, budgets, competitive developments, quarterly competitive developments, quarterly results etc.,results etc.,

Size of the BoardSize of the Board

Optimum size of the Board (10-12)Optimum size of the Board (10-12)

Bigger boards would be less Bigger boards would be less effective as there will be a problem effective as there will be a problem of coordination.of coordination.

Improve Accounting and Improve Accounting and reporting Practicesreporting Practices

Business line reportingBusiness line reporting Group accountingGroup accounting EPS reportingEPS reporting

Factors in Corporate Factors in Corporate governancegovernance

Transparency in decision makingTransparency in decision making Accountability which follows from Accountability which follows from

transparency because responsibility transparency because responsibility could be fixed easily for actions could be fixed easily for actions taken or not takentaken or not taken

Accountability is for safeguarding Accountability is for safeguarding the interests of the stakeholders and the interests of the stakeholders and the investors in the organizationthe investors in the organization

Pre requisites for corporate Pre requisites for corporate governancegovernance

Commitment of the management for Commitment of the management for the principle of integrity and the principle of integrity and transparency in business operations.transparency in business operations.

Legal and administrative framework Legal and administrative framework created by the government. created by the government.

Need for corporate Need for corporate governance in Indiagovernance in India

Financial scamsFinancial scams Legal and administrative framework Legal and administrative framework

in India provides for excellent scope in India provides for excellent scope for current practices.for current practices.

Specific steps to improve Specific steps to improve corporate governancecorporate governance

Abolition of the Sick Industries Abolition of the Sick Industries Companies Act (SICA) and BIFR.Companies Act (SICA) and BIFR.

Banking Secrecy Act – Reveal those Banking Secrecy Act – Reveal those who are wilful defaulters.who are wilful defaulters.

Benami Transactions Prohibition Act Benami Transactions Prohibition Act and Prevention of Money Laundering and Prevention of Money Laundering ActAct

The Power of Ethical The Power of Ethical ManagementManagement

Is the decision you are taking legal? If it is Is the decision you are taking legal? If it is not legal, it is not ethical.not legal, it is not ethical.

Is the decision you are taking fair? It Is the decision you are taking fair? It should be a win-win situation for both the should be a win-win situation for both the parties entering into an agreement or if it parties entering into an agreement or if it is a general policy or a multi – level is a general policy or a multi – level agreement, there should be equal risk and agreement, there should be equal risk and reward to all concerned.reward to all concerned.

Eleventh Commandment test – If the Eleventh Commandment test – If the decision you are taking is such that if it is decision you are taking is such that if it is known in the public through media, will known in the public through media, will you feel ashamed? If you are feeling you feel ashamed? If you are feeling ashamed then it is not an ethical decision. ashamed then it is not an ethical decision.

ConclusionConclusion

Corporate governance is the net result Corporate governance is the net result of the individual sense of values, the of the individual sense of values, the values held in society or part of a society values held in society or part of a society like professional bodies or business like professional bodies or business associations and finally the system of associations and finally the system of public governance. If those who violate public governance. If those who violate the norms are effectively punished then the norms are effectively punished then there is a fear and there will be there is a fear and there will be adherence of the principles of corporate adherence of the principles of corporate governance.governance.

Kumaramangalam Birla Kumaramangalam Birla Committee recommendations: Committee recommendations:

Three ConstituentsThree Constituents ShareholdersShareholders the Board of Directors the Board of Directors the Management the Management

Applicability of Applicability of recommendationsrecommendations

MandatoryMandatory Non mandatoryNon mandatory

Mandatory Mandatory recommendationsrecommendations

absolutely essential for the absolutely essential for the framework of corporate governance framework of corporate governance and virtually form its core and virtually form its core

which can be enforced through the which can be enforced through the amendment of the listing agreementamendment of the listing agreement

ApplicabilityApplicability Applicable to the listed companies, their directors, Applicable to the listed companies, their directors,

management, employees and professionals associated with management, employees and professionals associated with such companies,such companies,

The ultimate responsibility for putting the The ultimate responsibility for putting the recommendations into practice lies directly with the into practice lies directly with the board of directorsboard of directors and the and the management of the management of the companycompany. .

Recommendations will apply to all the listed private and Recommendations will apply to all the listed private and public sector companies, in accordance with the schedule public sector companies, in accordance with the schedule of implementation. As for listed entities, which are not of implementation. As for listed entities, which are not companies, but body corporates (e.g. private and public companies, but body corporates (e.g. private and public sector banks, financial institutions, insurance companies sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the etc.) incorporated under other statutes, the recommendations will apply to the extent that they do not recommendations will apply to the extent that they do not violate their respective statutes, and guidelines or violate their respective statutes, and guidelines or directives issued by the relevant regulatory authorities.directives issued by the relevant regulatory authorities.

Board Of directorsBoard Of directors

The Board of a Company provides leadership The Board of a Company provides leadership and strategic guidance, objective judgment and strategic guidance, objective judgment independent of the management to the independent of the management to the Company and exercises control over the Company and exercises control over the Company. Company.

The Board must fulfils its legal requirements The Board must fulfils its legal requirements and also must be aware and understanding of and also must be aware and understanding of its responsibilities.its responsibilities.

An effective corporate governance system is An effective corporate governance system is one, which allows the Board to perform these one, which allows the Board to perform these dual functions efficientlydual functions efficiently

Functions of the Board Of Functions of the Board Of directorsdirectors

Directs the Company by formulating Directs the Company by formulating and reviewing the Company’s policies.and reviewing the Company’s policies.

Controls the Company and its Controls the Company and its management by laying down the management by laying down the code code of conduct.of conduct.

Is accountable to the shareholders for Is accountable to the shareholders for creating, protecting and enhancing creating, protecting and enhancing wealth and resources of the Company.wealth and resources of the Company.

Is not involved in day to day Is not involved in day to day management of the Company.management of the Company.

Composition of the Board Of Composition of the Board Of directorsdirectors

Executive directors are involved in Executive directors are involved in the day to day management of the the day to day management of the CompaniesCompanies

Non executive directors bring Non executive directors bring external and wider perspective and external and wider perspective and independence to the decision independence to the decision making.making.

Non executive directors may be Non executive directors may be independent or non-independent.independent or non-independent.

Independent directorsIndependent directors

Receive director’s remunerationReceive director’s remuneration Do not have any other material Do not have any other material

pecuniary relationship or pecuniary relationship or transactions with the Company, its transactions with the Company, its promoters, its management etc.,promoters, its management etc.,

Emphasis on the calibre of the non Emphasis on the calibre of the non executive directors.executive directors.

Mandatory Mandatory RecommendationsRecommendations

Optimum combination of executive Optimum combination of executive and non-executive directors with not and non-executive directors with not less than 50% of the board less than 50% of the board comprising the non executive comprising the non executive directors. directors.

At least one third of the board At least one third of the board should comprise of independent should comprise of independent directors directors

Nominee DirectorsNominee Directors

Institutions should appoint nominees Institutions should appoint nominees on the board of Companies only on on the board of Companies only on a selective basis where such a selective basis where such appointment is considered necessary appointment is considered necessary to protect the interest of the to protect the interest of the InstitutionInstitution

Chairman of the BoardChairman of the Board

The role of the Chairman is to The role of the Chairman is to ensure that the board meetings are ensure that the board meetings are conducted in an effective manner.conducted in an effective manner.

The Chairman’s role should in The Chairman’s role should in principle be different from that of principle be different from that of the Chief Executive.the Chief Executive.

Non mandatory Non mandatory recommendationrecommendation

A non executive Chairman should be A non executive Chairman should be entitled to maintain a Chairman’s entitled to maintain a Chairman’s Office at the Company's expense and Office at the Company's expense and also allowed reimbursement of also allowed reimbursement of expenses incurred in the expenses incurred in the performance of his duties. performance of his duties.

Audit CommitteeAudit Committee

Oversight of the finance function Oversight of the finance function and monitoringand monitoring

Relies on the senior financial Relies on the senior financial management and the outside management and the outside auditors. auditors.

Mandatory Mandatory recommendationrecommendation

A qualifies and independent audit A qualifies and independent audit committee should be set up by the committee should be set up by the board of a Company. This would go a board of a Company. This would go a long way in enhancing the credibility long way in enhancing the credibility of the financial disclosures of a of the financial disclosures of a Company and promoting Company and promoting transparencytransparency

Composition of the Audit Composition of the Audit CommitteeCommittee

Minimum of 3 members ( non executive Minimum of 3 members ( non executive directors, majority being independent and directors, majority being independent and with at least one director having financial with at least one director having financial and accounting knowledge)and accounting knowledge)

The chairman of the committee should be The chairman of the committee should be an independent director.an independent director.

The Chairman should be present at AGM to The Chairman should be present at AGM to answer shareholder queries.answer shareholder queries.

The Company Secretary should act as the The Company Secretary should act as the Secretary to the CommitteeSecretary to the Committee

( the above are mandatory recommendations)( the above are mandatory recommendations)

Frequency of meetings and Frequency of meetings and quorum of the Audit quorum of the Audit

committeecommittee Meet at least thrice a yearMeet at least thrice a year One meeting before finalization and One meeting before finalization and

one every 6 monthsone every 6 months Quorum should be either 2 members Quorum should be either 2 members

or 1/3or 1/3rdrd of the members of the audit of the members of the audit committee whichever is higher and committee whichever is higher and there should be a minimum of two there should be a minimum of two independent directors. independent directors.

( this is a mandatory recommendation( this is a mandatory recommendation

Powers of the Audit Powers of the Audit CommitteeCommittee

To investigate any activity within its To investigate any activity within its terms of referenceterms of reference

To seek information from any To seek information from any employeeemployee

To obtain outside legal or other To obtain outside legal or other professional adviceprofessional advice

To secure services of outsiders with To secure services of outsiders with relevant expertiserelevant expertise

( this is a mandatory recommendation)( this is a mandatory recommendation)

RemunerationRemuneration The Board of Directors should decide the The Board of Directors should decide the

remuneration of the non-executive directorsremuneration of the non-executive directors The annual report must contain :The annual report must contain :

- all elements of the remuneration - all elements of the remuneration package of all the directors package of all the directors

- Details of fixed component and - Details of fixed component and performance linked incentives performance linked incentives

- Service contracts, notice period, - Service contracts, notice period, severance severance fees fees

- Stock option details, if any- Stock option details, if any

( this is a mandatory recommendation)( this is a mandatory recommendation)

Board proceduresBoard procedures The Board meetings should be held at least The Board meetings should be held at least

4 times in a year with a maximum time gap 4 times in a year with a maximum time gap of 4 months between any two meetings.of 4 months between any two meetings.

A director should not be a member in more A director should not be a member in more than 10 committees or act as a Chairman than 10 committees or act as a Chairman of more than 5 committees across all of more than 5 committees across all companies in which he is a director.companies in which he is a director.

Every director must inform the Company Every director must inform the Company about the Committee positions he occupies about the Committee positions he occupies in other Companies and notify changes as in other Companies and notify changes as and when they take place.and when they take place.

ManagementManagement Management is responsible for ensuring Management is responsible for ensuring

that the principles of corporate that the principles of corporate governance are adhered to and enforced.governance are adhered to and enforced.

Disclosures must be made by the Disclosures must be made by the management to the Board relating to all management to the Board relating to all material financial and commercial material financial and commercial transactions, where they have personal transactions, where they have personal interest that may have potential conflict interest that may have potential conflict with the interest of the Company at largewith the interest of the Company at large

( this is a mandatory recommendation) ( this is a mandatory recommendation)

ShareholdersShareholders

The GBM provide an opportunity to The GBM provide an opportunity to the shareholders to address their the shareholders to address their concerns to the Board of Directors concerns to the Board of Directors and comment on and demand any and comment on and demand any explanation on the Annual report or explanation on the Annual report or on the overall functioning of the on the overall functioning of the Company.Company.

Responsibilities of Responsibilities of ShareholdersShareholders

Show a greater degree of interest Show a greater degree of interest and involvement in the appointment and involvement in the appointment of directors and the auditors.of directors and the auditors.

Inform themselves about the new Inform themselves about the new directors.directors.

Shareholders’ rightsShareholders’ rights Right to transfer and registration of shares.Right to transfer and registration of shares.

Obtaining relevant information on the Company on a Obtaining relevant information on the Company on a timely and regular basis timely and regular basis

Participating and voting in shareholder meetingsParticipating and voting in shareholder meetings

Electing members of the BoardElecting members of the Board

Right to information on takeovers, sale of assets or Right to information on takeovers, sale of assets or divisions of the Company and changes in the Capital divisions of the Company and changes in the Capital structure.structure.

Half yearly declaration of financial performance Half yearly declaration of financial performance including summary of significant events in the last 6 including summary of significant events in the last 6 months should be sent to each household of months should be sent to each household of shareholders.shareholders.

( these are mandatory recommendations)( these are mandatory recommendations)

Shareholders rightsShareholders rights

A board committee under the A board committee under the chairmanship of a non-executive chairmanship of a non-executive director should be formed to director should be formed to specifically look into the redressal of specifically look into the redressal of shareholder complaints like transfer shareholder complaints like transfer of shares, non-receipt of balance of shares, non-receipt of balance sheet, non receipt of declared sheet, non receipt of declared dividends etc.,dividends etc.,

( this is a mandatory recommendation)( this is a mandatory recommendation)

Institutional Institutional ShareholdersShareholders

Have acquired large stakes in the Have acquired large stakes in the equity share capital of listed equity share capital of listed companies . They have a bigger role companies . They have a bigger role to play in corporate governance as to play in corporate governance as retail investors look upon them for retail investors look upon them for positive use of their voting rights. positive use of their voting rights.

ConclusionConclusion

Corporate governance must ensure Corporate governance must ensure commitment of the Board in commitment of the Board in managing the Company in a managing the Company in a transparent manner for maximising transparent manner for maximising long term shareholder value.long term shareholder value.