1
CORPORATE GOVERNANCE REVIEW OF PRACTICE
A study of corporate governance practices in leading corporates in India
December 2007
EXECUTIVE SUMMARY
The scope and significance of corporate governance in India increased sizeably in the
recent period, particularly following the financial sector reforms. As Indian
corporates are finding new space in domestic and global markets for business
growth, their interaction with the financial markets and investing community too
witnessed significant surge. In this process, corporate governance came as an
effective instrument for companies to communicate with the various types of
stakeholders in general and investors in particular.
What began as an industry initiative of CII, corporate governance today became an
essential part of the culture that defines better run companies and those held in
esteem by the investors and stakeholders. As the rigour of the regulation
intensified, governance standards began to be codified and formed an important part
of the evaluation and assessment process. Clause 49 of the Listing Agreement of the
Stock Exchanges is the key instrument that drives compliance of the corporate
governance standards and practices by companies.
Stock Exchanges and regulatory authorities which receive the compliance reports of
the companies regularly assess the record of performance in this regard and take
relevant actions. Securities and Exchange Board of India sending notices to 20
companies amongst which there are five public sector undertakings, is an instance of
review processes following the receipt of information and filing of reports on
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compliance of corporate governance norms. Such measures will make companies
more alert in adhering to the stipulated norms and guidelines.
Notwithstanding the ongoing review process of the regulatory authorities, a scope
exists for reviews and studies by independent agencies, and this study is an instance
of such nature.
The review makes an attempt to capture the essence of the quality of corporate
governance practice in Indian companies. Given the huge mass of companies that
India has, it would be rather difficult to take a large sample, which is a time
consuming exercise and that require considerable resources. Moreover, it would be
useful to know how the leading companies have devised effective ways of improving
governance standards that could serve as benchmarks for the others.
The review thus examined the practice of corporate governance in 42 companies
across 12 sectors that represent the vital sections of the Indian industry. The
information is obtained through corporate governance reports, published in the
annual reports of the companies, feedback obtained through a questionnaire,
consultations with officials of corporates, stock exchanges and regulatory authorities
as also independent professionals and analysts.
The outcome of the study is quite encouraging. India has advanced significantly in
adopting better governance standards and its standing in the world is quite high in
regard to designing effective policies and procedures. Several companies go beyond
the mandatory requirements in fulfilling the corporate governance objectives.
Companies have developed philosophies governing the governance practices that
were introduced in their respective companies and the outcome that is being
expected from these initiatives. Some of the modern governance practices such as
separation of the Chair and the CEO, constitution of boards, representation of
independent directors, meetings of the board and audit committees, discussion on
the corporate governance practices in the annual reports, disclosure through a wide
range of media and company sources etc., have greatly enhanced the image of the
quality of corporate governance in India. India currently is ranked third in Asia for
the overall quality of corporate governance.
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While great progress has been made in improving the governance standards, concerns
about quality of enforcement, companies routinely fulfilling the requirements as a
form of box ticking, deviating from the spirit of some of the important aspects of the
compliance code etc., are a few of the issues that engage the attention of the policy
makers and the regulatory agencies. Similarly, self evaluation processes for the
board and audit committees are not yet formalized in many companies. Family
ownership continues to dominate the corporate landscape thus providing a scope for
inadequate disclosures in regard to subsidiary companies operations and related
party transactions. As mentioned earlier, a beginning is made to review these
practices which would be further supplemented by independent studies and analysis
such as this report.
The next round of reforms in the corporate governance would be in the realm of
strengthening evaluation processes of the functioning of the board and its
subcommittees, in particular the audit committee, as also greater discussion on the
executive compensation policies, ombudsman for reviewing whistle blower policies
etc., As Indian companies assume greater responsibilities in expanding business in
domestic and global markets, compensation issues will become pertinent.
Similarly, gender related issues of representation in the board too might assume
importance. Only 8 percent women represent company board at present at the
global level, with the scope for this ratio to grow being high in the Asia region. Some
initial work in this regard may be evident in the medium term perspective of the
governance reforms.
The study is arranged in the following manner. Chapter I discusses the changes in
the governance standards and key factors driving these changes, particularly the
enormous growth of the financial markets and growing investor base from domestic
and global financial markets. Chapter II presents a broad review of literature on the
corporate governance and the emergence of issues central to good governance;
Chapter II examines the scope of significance of important instruments of corporate
governance; Chapter V discusses practice of corporates in India in regard to the
compliance of corporate governance standards and norms. Since this chapter
discusses the governance practices from the perspectives of the sectors, key
corporate governance practice profiles of individual companies are given separately.
Chapter VI looks at the issues and imperatives for better governance as an ongoing
process.
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In preparation of this study, some of the sources that were used extensively to
present the analysis and perspectives include; Clause 49 Listing Agreement of the
Stock Exchanges; Year Book 2007 of the International Corporate Governance
Network, Blue Ribbon Committee on the Audit Committee (NYSE/NASDAQ) etc.
Acknowledgements of the references used in this study are made wherever
appropriate.
For increasing the reference value of the study, annexures on a number of aspects of
the governance are attached. These include; objectives of the corporate governance
as evolved by different companies in their annual reports, a questionnaire for self
evaluation of the audit committee performance; indexes being developed to promote
good governance; codes of corporate governance in different countries; comparative
practices in corporate governance between India, China, Brazil and Malaysia;
overview of the functions of the audit committees in the sample companies selected;
differences in the US and Indian corporate governance etc.,
This study could serve as a beginning to promote independent assessment of the
governance practices in Indian companies. Scope exists for further studies by
expanding the size of the sample as also coverage of issues. Greater involvement of
the companies in these exercises will lead better outcome in the form of experiences
that could be useful for sharing and learning. It is hoped that similar studies are
undertaken on a continuous basis to keep up the assessment and evaluation of
quality of governance and its standards of compliance.
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CORPORATE GOVERNANCE REVIEW OF PRACTICE
CONTENTS Executive Summary 2 Chapter I Winds of Change 8 Governance standards surge on the back of financial sector development Chapter II Working of the Corporate Governance 20 Growing evidence of the positive effects of corporate governance Chapter III The Essence of Corporate Governance 34 Constituents of governance gain scope and significance Chapter IV India Rises 44 Corporate governance in India reaches global standards Chapter V Instruments of Importance 64 Growing significance of Board and Its Committees Chapter VI India Practice 78 Review of major governance practices in procedures amongst corporates in India Chapter VII Issues and Imperatives 99 Major issues and imperatives in corporate governance
Corporate Governace Practice : Company Profiles 109
Annexures 153
LISTS OF TABLES 1: Equity Prices 2004-06 14
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2: Cumulative Net Foreign Institutional Investment: India 15 3: Share Turnover in Equities Markets: India 15 4 Recent Evolution of the Corporate Governance 36 5: A Decade of Developments in Corporate Governance 46 6: India ranks high among Asia governance league tables 47 7: India manages well despite constraints 47 8: Matching Rules and Regulations 48 9: Comparative Analysis of Clause 49 to SOX 62 10: Sample Companies 80 11: Summary of Corporate Governance Practice 82 12: A Snapshot of Corporate Governance 83 13: Average Number of Directors 84 14: Proportion of Non Executive and Independent Directors when the Chairman is Non Executive 87 15: Proportion of Non Executive and Independent Directors when the Chairman is Executive 89 16: Average number of meetings held 90 17: Shareholding Pattern 92 18: Sector wise Key Indicators of Corporate Governance Practice 93 BOX 1: Working of the Compensation Committee 108
LISTS OF GRAPHS 1: Percentage of Companies with more than 33% Independent Directors 10 2: Percentage of Companies disclosing director remuneration 10 3: Percentage of companies separating the roles of CEO and Chair 10 4: Global IPO Activity 11 5: Composition of Capital Flows ($bn) 12 6: Net Equity and Debt Flows: 1990-2006 13 7: Stock Markets Indices: Emerging Markets 14 8: Foreign Capital Raised by Developing Country Corporations, (left) and Foreign Companies Listed on Major Global Stock Exchanges (Right), 1998-2006 17 9: Percent of Directors who are women 69 10: Distribution of Directors 84 11: Comparative Analysis of Entire Sample Data 85 12: Proportion of Directors in different categories 86 13: Average No. of Directors 86 14: Percentage Companies where the Chairman is Non Executive 87 15: Composition of the Board when the Chairman is Non Executive 88 16: Percentage of Companies where the Chairman is Executive 88 17: Composition of Board when the Chairman is Executive 88 18: Average Meetings 90 19: Shareholding Pattern 91 20: Spaced Devoted to Corporate Governance in Annual Report 93
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Chapter I WINDS OF CHANGE
Governance standards surge on the back of financial sector development
For corporate governance, it is now perhaps the best of the times. Usually, it is
believed that governance takes a back seat in times of growth. However, in the back
of unprecedented economic growth and wealth creation brought by large surge in
financial markets in a major part of the world, huge improvements in the quality of
corporate governance and standards of compliance are evident across a wide
spectrum of mature and emerging markets.
In a recent assessment (September 2007)1 on the implementation standards of
corporate governance on sample of about 1600 companies worldwide, Ethical
Investment Research Services (EIRIS), a UK based leading global provider of
independent research into the social, environmental and governance (ESG)
performance of companies that tracks performance of about 3000 companies across
the world, has brought out some interesting insights. These include;
• 62% of the companies studied have boards containing more than a third of
independent directors.However the proportion of independent directors varies
greatly between countries. Over 90% of companies in North America, UK,
Switzerland, the Netherlands, Norway, Finland and Australia have more than
a third of independent directors, compared with less than 10% in Germany,
Austria and Japan
• Disclosure of directors’ remuneration is consistently high, with 96% of all
companies disclosing this information.
• In half of the countries studied over 90% of companies separate the roles of
chair and chief executive However rates of separation are lower in the US
(30%), Japan (54%) and France (56%).
• These differences are driven by the fact that companies largely adhere to
their relevant national Corporate Governance guidelines
1 The EIRIS Foundation is a UK based charity that supports ethical investment
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• However corporate governance practices are converging. Governance
codes are being revised to improve levels of transparency and independence,
and the proportion of companies adopting western models of board structure
is increasing.
• Significant improvements were evident in respect of gender empowerment
and representation in the boards as also corporate social responsibility and
environment.
• Increasingly, companies view equal opportunities less as a way to avoid
criticism or lawsuits, but more as a means to build reputation and gain
competitive advantage by accessing a broader skill set.
• Around 90% of companies in North America (94%), Europe (88%) and
Australia/New Zealand (87%) have basic or advanced equal opportunities
policies. Conversely, just over 50% of Japanese and less than 25% of
companies in Asia ex-Japan meet these standards. The pattern is slightly
different for equal opportunities management systems. The criterion includes
disclosure of staff demographics in relation to women and ethnic minorities as
well as the presence of flexible working policies. Europe and Australia/New
Zealand both perform well, with around 80% and 70% respectively
demonstrating at least basic systems. Performance amongst Japanese
companies is also strong at 60%, whereas it is weaker amongst US
companies
at 25%. In the US, companies are less inclined to disclose this information,
possibly due to fear of litigation.
• Worldwide, only 8.1% of board members are women. Representation of
women on the board continues to be lowest in Japan at less than 1% and
remains generally low in Mediterranean countries. These low levels are driven
by a mixture of cultural factors including a history of fewer women in formal
employment combined with weak legislative encouragement.
• The highest rate of 33% is seen in Norway where the government has
enforced a quota for a minimum of 40% board members to be women by the
end of 2007. The number of women on the board is set to increase Spain as
9
the Spanish government has recently established a quota similar to that
imposed in Norway.
Graph1: Percentage of Companies with more than 33% Independent Directors
Graph2: Percentage of Companies disclosing director remuneration
Graph3: Percentage of companies separating the roles of CEO and Chair
Source: Ethitical Investment Research Service, 2007.
Good corporate governance standards assume significance from the enormous growth
of the capital markets in the recent period as also emerging trends in global
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investing. An important aspect of the world economic growth is the growing
influence of the emerging economies in contribution to the growth. At present, China
and India are contributing to about 45 percent of the world economic growth which
is likely to intensify further in the future.
An important outcome of the rapid economic growth is the great surge in the
financial market activity. Induced by liberalized global cross border financial flows,
financial markets in a large number of countries witnessed exceptional growth in the
recent period.
A global IPO survey by Earnest and Young (E&Y)2 showed that In 2006, amount of new
capital raised by global stock exchanges reached a record US$246 billion in 1729
deals. An interesting aspect of the global capital issuance is the strong share of the
emerging markets. China alone raised about $57 billion with two of the largest ever
share issues belonging to it; namely Industrial Commercial Bank of China and Bank of
China which raised $22 bn and $11 bn respectively from the global financial markets
in 2006. In 2006, India launched 78 Initial Public Offerings valued at $7.2 bn in 2007.
The size of the one single issue of DLF, a real estate company was $2 bn. Emerging
markets in the first five months of the year 2007 raised about $53.7 bn in global
financial markets, which is considered highest ever raised in the first five months of
a year
Graph4: Global IPO Activity
2 Globalisation: Global IPO Trends Report 2007. Earnest & Young
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It is not only issuance of fresh capital that got a big boost, but equally remarkable
was the growth of secondary markets for securities leading to record levels of market
capitalization. During the ten year period 1996-2006, market capitalization in the
North America rose from $8.9 trillion to $23 trillion, in Europe/Middle East/Africa
from $5.1trillion to $16.2 trillion and in the Asia Pacific $ 5 trillion to $11.8 trillion.
Huge levels of capital flows to the equity markets in several emerging markets led to
dramatic rise in securities prices. The flow of net foreign direct investment (FDI) into
developing countries increased from $170bn in 1998 to $325 bn in 2006 and net
portfolio equity flows increased from $6 to $94 bn during the same period. Net debt
flows during this period are rather subdued with net debt flows from official
creditors turning negative. Net portfolio equity flows to China between the year 2000
and 2006 rose from $6.9 bn to $32 bn and in India from $2.3 bn to $8.7 bn. In the
first ten months of 2007 alone, foreign institutional investment flows into India
peaked to about $18bn making it one of the most favored destination for global
portfolio flows.
Graph5: Composition of Capital Flows ($bn)
Graph6: Net Equity and Debt Flows: 1990-2006
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Global capital flows speeded up on the back growing institutional investment.
Institutional investors have been the major source of capital markets growth. During
the period 1995 and 2005, the assets under management of the institutional investors
doubled from $21trn to $53 trn. The shift of home bias of the institutional investors
into emerging markets stepped up the resource flows to the developing countries.
For instance in the United States, in 1994, pension funds invested 41 percent of their
portfolio in domestic equity and 7 percent in international equities, where as by
2005 that share rose to 48 percent in domestic equities and 15 percent in
international equities. The portfolio allocation to bond markets during the same
period reduced from 42 percent to 32 percent. Emerging markets received sizeable
portion of the investments. In the US the dedicated Emerging Market mutual funs
rose from about $27 billion in 2000 to $ 230 billion in 2006.
Table 1: Equity Prices 2004-06 Particulars Average rate of change All Developing Countries 33.3 United States 21.5 Euro Area 12.7 Russa 60 Peru 39.2 Brazil 54.6 Colombia 75.1 India 45 China 17 Argentina 48.5 Mexico 42.5 Indonesia 39.5
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Nigeria 35
Source: Global Development Finance. World Bank
Graph 7: Stock Markets Indices: Emerging Markets
Table2: Cumulative Net Foreign Institutional Investment: India
Year Cumulative Net Investment in US$ million
1992-93 4 1993-94 1638 1994-95 3167 1995-96 5202 1996-97 7634 1997-98 9284 1998-99 8898 1999-00 11237 2000-01 13396 2001-02 15242 2002-03 15804 2003-04 25755 2004-05 35927 2005-06 45259 2006-07 65000# #provisional
Source: Securities and Exchange Board of India
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Table3: Share Turnover in Equities Markets: India
Year National Stock Exchange
Bombay Stock Exchange
1992-93 45696 1993-94 84536 1994-95 1805 67749 1995-96 67287 50064 1996-97 295403 124190 1997-98 370193 207113 1998-99 414474 310750 1999-00 839052 686428 2000-01 133510 1000032 2001-02 513167 307292 2002-03 617989 314073 2003-04 1099534 503053 2004-05 1140072 518715 2005-06 1569558 816074 2006-07 1945285 956185
Source: SEBI
Following the foreign institutional investors, an important and emerging segment of
global investing will be the Soverign Wealth Funds3. According to a recent estimate
of the International Monetary Fund, assets held by Sovereign Wealth Funds include
$5.6 trillion in foreign exchange reserves and upto $3 trillion sovereign wealth
arrangements. IMF projects that the Sovereign Wealth Funds may accumulate
international assets in range of $800-900 bn a year leading to its total assets base in
the range of $12 trillion by 2012.
The value of global financial assets, according to a study4 (2007) by the Mckinsey
Global Institute is about $140 trillion assets. United States, the United Kingdom, the
eurozone and Japan account for the more than 80 percent of the total. Equities
accounted for nearly half of the growth of the financial assets in 2005.
Every aspect of finance is assuming huge size. According to Market Metrics, a
business and market intelligence network, in 2006, global mergers and acquisitions
activity reached an all time high of $3.7 trillion, global direct real estate
investments $600 bn, market value of global non-public 150 companies $7 trillion
etc.,
3 Regional Economic Outlook, October 2007, International Monetary Fund 4 Mapping the Global Capital Market, January 2007, McKinsey Global Institute.
15
Corporates from developing economies are making aggressive forays into business
expansion and global reach and in this process are accessing global financial markets
in a big way. World Bank’s Global Development Finance enumerates some significant
facets of the globalization of the developing countries corporations. A few of these
include;
Developing countries companies in 2006, raised $156 bn through international
offerings of corporate debt and equity. $245 billion through syndicated loans and
engaged in cross border mergers and acquisitions involving developing countries
corporation bidding for foreign targets to the tune of $ 100 bn. In 1987 cross border
M&A of developing countries corporations amounted to $400 million. 1 Regional Economic Outlook, October 2007, International Monetary Fund 1 Mapping the Global Capital Market, January 2007, McKinsey Global Institute.
Amongst the World’s top Fortune 500 companies, 40 are from the developing world
and 394 developing country companies traded on the world’s major stock exchanges
accounting for one third of the global overseas cross listings.
Since 20025, 422 emerging market companies have tapped international bond
markets at least once, 537 contracted bank loans and 360 raised capital on the one
of the global major overseas stock exchanges. Private sector companies accounted
for more than 60 percent of total bank borrowing and 75 percent of the new bond
issuance during the period 2002-06.
Graph8: Foreign Capital Raised by Developing Country Corporations, (left) and Foreign Companies Listed on Major Global Stock Exchanges (Right), 1998-2006
5Global Development Finance, 2007, The World Bank
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In 2006, of the 1328 foreign companies listed in the major global stock exchanges,
394 (30%) were from the developing countries. This share was about 13.1% in 1998.
20 emerging countries, with Brazil, China, India, Mexico and Russia with strong
representation, accounted for 95 percent of the total bond issuance, 85 percent of
the total bank borrowing and 95 percent of the total equity offerings by developing
countries. These 20 countries account for 67 percent of the developing world’s
population and source of 78 percent of its Gross Domestic Product. These 20
countries have aggregate stock market capitalization of $5.3 trillion, which accounts
for 88 percent of the total for the developing world. These countries together have
about 12,557 public traded companies that represent 95 percent of all those based in
developing countries. 1Global Development Finance, 2007, The World Bank
In India too, the merger and acquisition activity increased substantially. Where as
foreign acquisitions in India rose from $2.9 billion in 2005 to $28 billion in 2007,
Indian acquisitions abroad rose from $1.5 billion to $18.1 billion during this period. In
addition to technology companies such as Infosys, Wipro and TCS, major Indian
corporates who conducted sizeable cross border mergers by acquiring foreign target
companies included; Tata, Suzlon, Bharat Forge, Ranbaxy, Hindalco, United
Breweries etc., In the first three quarters of the year 2007, Indian companies
announced 150 foreign acquisitions with a total value of $18.1 billion, a four fold
increase of the total value in 2005. A survey of 340 of the world’s largest
manufacturers, by the paris based Capgemini Consulting revealed that India could
challenge China as the leading manufacturing center of the world in the next three
to five years.
Simultaneous with growth and expansion challenges, concerns on stability and
sustainability assume equal importance. A few major messages brought out in the
Global Development Finance (2007) on the globalization of the developing countries
corporations are pertinent in this regard.
o Global borrowing by developing country firms has surged in recent years
o The pace of corporate globalization in the developing world is likely to
intensify in the medium term,
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o Concerns are growing that corporate credit spreads may not fully reflect
credit quality and that corporations may be underestimated global risk
aversion
o Managing these risks requires a comprehensive reponse, from the level of
the firm to the macro economic level
o Good policies reduce the cost of capital
o Greater coherence is needed in international standards for cross border
listings and public offering of securities.
A major challenge to manage the growth and sustain it in the long term is to evolve
efficient processes of governance. It is important to continuously update governance
standards as also enhance the skillssets, competence and capabilities of the
instruments of governance to deal with the rapidly changing world of finance and
infinite opportunities it offers and the challenges it poses.
An aspect of promise is the prospects for better standards across the world with
countries mutually learning from each other on the benchmarks and best practices.
Having built up a strong base for the governance, the real test and challenge will be
on enhancing its scope and significance so that it could continue to sub serve the
growth objective in the long term.
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Chapter II WORKING OF THE
CORPORATE GOVERNANCE Growing evidence of the positive effect of
corporate governance
Early discussion on the governance rose from an analysis by Berle and Means6 (1932) following the Great Crash in the US in 1929, which traced the problem of governance due to the separation of ownership and control. The authors recommended stake holder value over the share holder value as essential for good governance, a premise on which formal securities regulation began in the US with the setting up of the Securities and Exchange Commission (1933). This debate led the governance being associated with the agency problem {Coase, 1937)7, (Jensen and Meckling8, 1976), (Fama and Jensen9,1983) in which the essence is the separation of ownership and control. Agency problem refers to the difficulties financiers have in assuring that their funds are not expropriated or wasted on unattractive projects {Shliefer and Vishny10,1997)) Early work in the corporate law development in the 18th and 19th centuries in Britain, Continental Europe and Russia has focused more on addressing the problem of managerial theft rather than that of shirking or even empire building. Shleifer and Vishny cite studies on vast mangerialist literature that explains how mangers use their effective control rights to pursue projects that benefit them rather than investors which are described as private benefits of control {Grossman and Hart11,1982)} Managers can expropriate shareholders by entrenching themselves and staying in the job even if they are no longer competent or qualified to run the firm. Poor managers who resist being replaced might be the costliest manifestation of the agency problem (Jensen and Ruback12, 1983) Agency theory considered the firm as a nexus of contracts; associating the firm and the entire group of resource contributors (the team of productive inputs) and analyzing the relationship between the principle (shareholders) and the agent (mangers), the conceptual framework which is found
6 Berle A.A. and Means G.C.., The Modern Corporation and the Private Property, New York: MacMillan, 1932 7 Coase, Ronald (1937), The Nature of the Firm, Economica, 4, 386-405 8 Jensen, Micheal and William Meckling (1976), Theory of the Firm, Managerial Behaviour, Agency Costs, and Ownership Structure, Journal of Financial Economics, 3, 305-60 9 Fama, Eugene and Micheal Jensen (1983b), Separation of Ownership and Control, Journal of Law and Economcs, XXVI, 301-25 10 Shleifer, A.,and R.Vishny, 1997, A Survey of Corporate Governance, Journal of Finance, 52, 737-775 11 Grossman, Sanford., and Oliver D. Hart, 1982, Corporate Financial Structure and Managerial Incentives, in John J. McCall, ed.: The Economics of Information and Uncertainty (University of Chicago Press, Chicago, IL 12 Jensen, Michael and Richard Ruback,1983; The Market for Corporate Control: The Scientific Evidence, Journal of Financial Economics, 11, 5-50
19
relevant even today. This perspective has lead to a wide range of studies relating to the
board of directors, share holders meetings, remuneration system for managers, the legal
and accounting regulations and takeover etc.,
With the enormous growth of financial markets, the interest on corporate governance
flows beyond the finance and extends to law, economic, politics, sociology and
management science.
Historical developments that impact the overall scope of the corporate governance in
different countries is discussed by Randall K. Morck, Lloyd Steir13 (2005) who observed that
financial disasters tainted French confidence in financial securities early on, and set
corporate governance in that country on a different parity from that of Britain, where a
similar trauma was overcome and forgotten. Similarly historical trends such as imperial
monopoly in China that was evident in the late 19th century, large scale trading networks
belonging to particular communities and ethnic groups and sectarian groups in India,
family and bank controlled pyramidal groups in Germany, Zeibatsu and Keiratsu in Japan
and Chaebols in Korea etc., have influenced the process of growth of corporate
governance in the respective countries. Certain features that are common to all countries
that contributed to the varying types and pace of the corporate governance norms
include; Accidents of history, ideas, families,business groups, trust, law, origins,
evolution, transplants, large outside shareholders, financial development, politics and
entrenchment, etc.
Ownership is a key driver that determines the quality of governance. The first of the studies on the ownership of the global companies by Rafeal La Porta14 shows higher incidence of family ownership in global corporations that runs contrary to the earlier observation of widely held corporations analysed by Berley and Means. The study presents data on ownership structures of large corporations in 27 wealthy economies, making an effort to identify the ultimate controlling shareholders of these firms. The study found that except in economies with very good shareholder protection, relatively few of these firms are widely held. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions or other widely held corporations is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in
13 Morck, Randall K, Steier, Llyod, 2005, the Global History of Corporate Governance, an Introduction, NBER Working Paper No 11062, January 2005. 14 La Porta, Rafael, Florencia Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, 1999, Corporate Ownership Around the World, Journal of Finance (54(2), 445-70
20
management ownership issues; particularly the predominance of family owned companies
remains an important issue in several emerging economies and forms an important aspect
of the corporate governance reforms.
Franklin Yale and Dougles Gale15 (2002) discuss the term corporate governance that is used
in two distinct ways. In Anglo-Saxon countries like the US and UK good corporate
governance involves firms pursuing the interests of shareholders. In other countries like
Japan, Germany and France it involves pursuing the interests of all stakeholders including
employees and customers as well as shareholders. Anglo-Saxon capitalism has been widely
analyzed but stakeholder capitalism has not. The authors argue that stakeholder
capitalism can often be superior when markets are not perfect and complete.
Paolo Fulghieri and Matti Suominen16 (2005) find that the quality of the corporate
governance system may have a significant impact on the economy’s level of competition
and its degree of industry concentration. Poor corporate governance and low investor
protection may in fact lead to high industry concentration.
Craig Doidge, G. Andrew Karolyi, and René M. Stulz17 (2006) showed that the incentives to
adopt better governance mechanisms at the firm level increase with a country’s financial
and economic development. Further, these incentives increase or decrease with a
country’s investor protection depending on whether firm-level governance mechanisms
and country-level investor protection are substitutes or complements. The study observes
that when economic and financial development is poor, the incentives to improve firm-
level governance are low because outside finance is expensive and the adoption of better
governance mechanisms is expensive.
A cross country study by Vidhi Chhaochharia and Luc Laeven18 (2007) shows that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. The study showed that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what
15 Allen, Franklin, Gale, Douglas, 2002, A Comparative Theory of Corporate Governance, Financial Institutions Center, Wharton University, 2002 16 Fulghieri, Paolo, Suominen, Matti, 2005, Does Bad Corporate Governance Lead to Too Little Competition?, Finance Working Paper No. 74/2005, March 2005, European Corporate Governance Institute. 17 Dodge, Craig, Karolyi, George Andrew, Stulz, Rene M, 2004, Finance Working Paper Ho. 50/2004, European Corporate Governance Institute, Charles A. Dice Center Working Paper No.2004-16 and Fisher College of Business Working Paper No.2006—03-008 18 Chhaochharia, Vidhi, Laeven, Luc, 2007, The Invisible Hand in Corporate Governance, Finance Working Paper No. 165/2007, April 2007
21
considered the norm in the country, and these improvements in corporate governance
have a positive effect on firm valuation.
An Empirical analysis by Leora F. Klapper and Inessa Love19 (2002) of the World Bank
showed that better corporate governance is highly correlated with better operating
performance and market valuation. They provide the evidence that firm level corporate
governance provisions matter more in countries with weak legal environments. The results
suggest that firms can partially compensate for ineffective laws and enforcement by
establishing good corporate governance and providing credible and investor protection.
Good corporate governance commands high premium20. A CLSA April 2003 study showed
that over the past five years, high CG stocks (ranked in the 1st quartile) outperformed the
Sensex by 169%. The out-performance was at over 40% even if one excluded the software
stocks. A study by Wolfganag Dorbetz, University of Basel showed that an investment
strategy that bought high-CGR firms and shorted low CGR firms would have earned excess
returns of 12% compared to the DAX 100 during 1998-2000. A Lipper-GMI Mutual Fund
Report showed that Mutual funds that invest in companies with higher CG ratings have
been rewarded with superior returns
According to a Harvard Law School study21, the disregard for shareholder rights caused
lower firm valuations to the extent of 7 percent per annum and large negative abnormal
returns during the 1990-2003 period; A Deutsche Bank research showed that European
companies with improving governing standards outperformed a portfolio of deterioriating
companies by 4.4 per annum. A joint study of the European Corporate Governance Institute
and London Business School showed that the governance focused Hermes UK Focus Fund
outperformed its benchmark by an average 4.8% each year from 1999 through 2004. The
CLSA/ACGA Governance Score for 27 countries confirms that firms with better governance
outperform significantly even in bull markets when governance usually has a lower priority
with investors. All these show positive effects of the good governance A 2002 McKinsey
Survey revealed that investors then were willing to pay a premium of 23% for well governed
companies in India which in the recent time came down to 5 to 10 percent due to overall
improvement in the governance standards.
19 Klapper, Leora F, Love, Inessa, 2002, Corporate Governance, Investor Protection and Performance in Emerging Markets, Policy Research Working Paper 2818, Development Research Group, The World Bank. 20 Corporate Governance Ratings and Audit, a presentation by ICRA, October, 2004 21 Bebchuk, Lucian, Cohen Alma, Ferrell, Alma, 2005, What Matters in Corporate Governance, Discussion Paper No. 491., revised 03/2005, Hardvard Law School, Cambridge, MA
22
Christian Leuz, Karl V. Lins, Francis E. Warnock22 (2006), in their study using a set of
foreign holdings by U.S. investors as a proxy for foreign investment that analysed a sample
of 4,411 firms from 29 emerging market and developed economies found that, foreigners
invest significantly less in firms that are poorly governed, i.e., firms that have ownership
structures that are more conducive to outside investor expropriation Interestingly, this
finding is not simply a matter of a country’s economic development but appears to be
directly related to a country’s information rules and legal institutions. The authors argue
that information problems faced by foreign investors play an important role in this result.
Supporting this explanation, they argue that foreign investment is lower in firms that
appear to engage in more earnings management.
An event study by Bernard Black & Vikramaditya Khanna23 (2007) showed that good
corporate governance benefits faster growing firms (esp. mid sized ones) than others and
cross-listed firms get the benefit more than others.
Alexander Dyck, Adair Morse, Luigi Zingales24(2007)examine how external control
mechanisms are most effective in detecting corporate fraud. The authors study in depth
all reported cases of corporate fraud in companies with more than 750 million dollars in
assets between 1996 and 2004 and find that fraud detection does not rely on one single
mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are
revealed by the SEC and 14% by the auditors. More important monitors are media (14%),
industry regulators (16%), and employees (19%). Before SOX, only 35% of the cases were
discovered by actors with an explicit mandate. After SOX, the performance of mandated
actors improved, but still account for only slightly more than 50% of the cases.
Gillan and Starks25 (1998) define corporate governance as the system of laws, rules, and
factors that control operations at a company. The paper mentions governance consisting
of two aspects: Internal governance with five major categories the board of directors,
managerial incentives, capital structure, bylaw and charter provisions, internal control
systems where as external governance consisting of law and regulation, capital markets;
analysts, auditors, private sources of external oversight such as rating, media etc.
Extensive research work on each of these aspects has been conducted in the recent times
Extensive development work is being carried out in a large number of countries in making
corporate governance comprehensive and effective. Major reforms in the corporate
22 Leuz, Christian, Lins, Karl V, Warnock, Francis E., 2006, Do Foreigners Invest Less in Poorly Governed Firms, Finance Working Paper No. 43/2004, Revised version: April 2006, European Corporate Governance Institute 23 Black, Bernand S, Khanna, Vikramaditya S., Can Corporate Governance Reforms Increase Firms’ Market Values? Event Study Evidence from India, Havard Law School 24 Dyck, Alexander, Morse, Adair, Zingales, Luigi, 2007, Who Blows the Whistle on Corporate Fraud, 25 Gillan, Stuart L, and Laura T. Starks, 1998, A Survey of Shareholder Activism, Motivation and Empricial Evidence, Contemporary Finance Digest, 2,3, 10-34
23
governance in selected countries as sourced from the Year Book 200726 of International
Corporate Governance Network are reproduced below.
European Union27 The EU’s approach to corporate governance matters is principle-based. It seeks to ensure
the adoption of certain key specific standards throughout the EU, while leaving it to
Member States and market participants to determine how to best apply these standards.
The EU corporate governance framework, which consists of a mix of binding and non-
binding rules, has as its cornerstone the ‘comply or explain’ principle. Every listed EU
company is under an obligation to make an annual statement indicating which Code of
corporate governance it applies and declaring whether it complies with all the provisions
of that Code. If that company does not comply with some provision of the Code, it must
state to what extent and give a justification. Alongside the corporate governance
statement, the Commission has adopted two non-binding recommendations on the
remuneration of directors and on the role of independent directors, which contain key
substantive standards. With these measures, the Commission seeks to encourage national
corporate governance codes to converge gradually. The European Corporate Governance
Forum, set up by the Commission and composed of fifteen high level experts, seeks to
reinforce this through exchanges of views on best practices to promote the convergence of
national corporate governance practices within the European Union.
UK28 In June 2007, the EU adopted the Shareholder Rights Directive to create consistent standards across Member States and simplify cross-border investment. It aims to reduce problems associated with cross-border investment which include: a lack of sufficient information on a timely basis; the inability to trade shares ahead of general meetings (share blocking); and inefficient voting procedures and constraints. National governments are required to implement the Directive within two years. Some of the key measures of the Directive are: • Share-blocking is banned. Instead, companies are required to set a
26 Year Book 2007, International Corporate Governance Network 27 The Regulatory Regime: Focus in Europe by Charlie Mccreevy, European Commissioner for the Internal Market and Services, ICGN Year Book 2007. 28 The UK at the Hear of European Developments, Kerrie Waring, Corporate Governance Manager, Institute of Chartered Accountants of England and Wales, ICGN Year Book 2007.
24
record date within a 30-day period before the election, giving the vote to whoever holds
shares on that day. • Notice of Annual General Meetings (AGM) must be at least 21 days in
advance, or 14 days for special meetings. • Shareholders must be able to ask questions
related to AGM agenda items. • Shareholders must have the opportunity to vote by post. •
Companies must disclose results on resolutions and this should be published on its website
no more than 15 calendar days after the AGM. In April 2007 the Financial Reporting
Council (FRC) issued a consultation on the ‘Review of the Impact of the Combined Code’.
It will address the effectiveness of the ‘comply or explain’ regime, the impact of the
Combined Code on smaller companies, how it supports board performance and whether
disclosures are considered useful and proportionate in terms of cost to companies
United States29 In the United States, investor protection being governed by the federal and state laws, in
addition to the implementation of the Sarbanes-Oxley corporate governance norms,
different states have brought in several laws. These include; Under Delaware law: (1) any
stockholder can inspect and copy a corporation’s stock ledger, a list of stockholders, and
certain books and records of the corporation; (2) any stockholder can sue for an appraisal
by the chancery court of the fair value of the stockholder’s stock in connection with
certain mergers; and (3) interested director transactions are subject to heightened
approval requirements. Further, the US federal securities laws and the SEC’s rules also
contain provisions aimed at protecting individual shareholders, such as: (1) requiring
heightened disclosure for going private transactions; (2) requiring issuers to send proxy
materials to all shareholders (not just certain shareholders); and (3) mandating significant
disclosures for related-party transactions. Simultaneously rigorous work on further areas of
reforms on the governance are being actively pursued and these include; • improved
quality in compensation disclosure; • advisory votes on executive compensation; • access
to the management proxy for shareholder designated board candidates; • reform of
shareholder communications and proxy voting mechanics; • promotion of global corporate
governance standards and cross-border voting protections; • transparency in stock lending,
empty voting and the governance impact of hedging and derivative trading strategies; •
reduction of regulatory costs; • use of technology in disclosure and communications; •
alleviation of short-term investment and business focus; • maintaining financial market
efficiency and competitiveness.
29 The Regulatory Regime: US Perspective, Roel C. Campos, SEC Commissioner, ICGN Year Book 2007.
25
China30 The total market capitalisation at the end of March 2007 was RMB12.36 trillion,
representing about 55% of the country’s GDP last year. From only about a dozen listed
companies in 1990, there were 1459 listed companies by March of 2007. There are now
116 securities firms, with over 100,000 practitioners, and 82 million investor accounts.
From 1991 to 2005, total funds raised by Chinese companies through public offerings
reached RMB 1,159 billion. One of CSRC’s major reforms is the requirement to have
independent directors on the board to overcome the “insider control” problem in many of
China’s listed companies. The CSRC Guidelines on Independent Directors (August 2001)
required that each listed company should have at least one third of the board made up of
independent directors by June 2003. Independent directors are required to serve as chairs
of audit, compensation, and nomination committees and major related-party transactions
of the company have to be approved by independent directors. A recent survey showed
that, as of December 2005, 4,640 independent directors had been appointed at
shareholder meetings for the 1,381 listed companies in China. In most companies now at
least one-third of the board are independent directors and it is evident that they are
playing a more important role in corporate governance. A listed company is required to
publish an audited annual report as well as a semi-annual report. From 2002, listed
companies are also required to publish un-audited quarterly reports. The rules have
recently been revised to simplify and streamline the format of these reports so that they
would be more readable and easily understood by investors. To better protect the rights
and interests of public investors, the CSRC issued The Provisions on Strengthening the
Protection of Rights & Interests of Public Shareholders (December 2004). According to the
Provisions, listed companies’ major business decisions, such as rights issues and issuing
additional new shares, and equity-for-debt plans, should receive a majority of the votes
from holders of tradable-shares present at the general shareholders meeting.
France31 A law passed in July 2005 set things on course by requiring shareholder approval of the
pension schemes of executive directors as well as golden parachutes and retirement
schemes of managing directors. Another positive step was made with the introduction of a
legal requirement for the chairman of the board of directors/ supervisory board to explain
the remuneration policy to shareholders, who generally do not find these explanations
30 Regulatory Issues in China: Progress and Challenges, Daochi Tong, Deputy Director General, Public Offering, China Securities Regulatory Commission, ICGN Year Book 2007. 31 Corporate Governance Progress in France, Josiane Fanguinoveny, Services Director, Governance for Owners, ICGN Year Book 2007.
26
satisfactory. 1) The compensation review must be exhaustive, 2) compensation must be
seen by reference to the relevant business lines, 3) performance criteria must correspond
to corporate targets and be simple to determine. Current trends in AGM voting indicate
that shareholders are voting against the following: • Authorities to issue shares without
preferential subscription rights. • Poison pills and other takeover defences. • Allocation of
free shares to employees and stock option plans. • Amendments to the articles of
association relating to the threshold disclosure requirements. • Share buy backs.
Germany32 The survey shows that independent non-executive directors today comprise only 28%
compared to the European average of 54%. Just 27% of the major companies have an
independent chairman. The proportion of independent members of audit and
remuneration committees in Germany is only 26% and 23% respectively. Only 7% of German
supervisory boards are international board members compared to the UK with 31% and
Switzerland with 45%. However, the 8th EU Directive (auditor directive) to be
implemented by June 2008 could lead to a change of this proportion since it requires an
independent chairman for the audit committee.
Russia33 A survey on the corporate governance in Russia by the Russia Institute of Directors brings out the following features. Major areas of where improvement was evident included; • the practice of recording the property title; • board authority to approve material transactions; • regulation of using insider information; • ways of disclosing information to shareholders before the general meeting; • cross-ownership of shares; • dividend payments on common and preferred stock; • the adoption of a corporate governance code. In respect of governance and control, major improvements were evident in ; • bringing external (independent) directors to the boardroom;• the regularity of board meetings; • the establishment of board committees; • having a regulatory framework for the board and the executive body; • the introduction of board members’ remuneration practices; • putting in place the procedures for identifying possible conflicts of interests in the board and amongst top managers; • the establishment of internal control functions. Improvements observed in the disclosure standards include; • information about the company’s strategy; • information about the composition of the company’s governance
32 The Progress of Corporate Governance in Germany-The Quality Question, Christian Stranger Member of the German Government Commission on Corporate Governance, ICGN Year Book 2007 33 Corporate Governance Practices in Russia : A Survey, Igor Belikov, CEO, Russian Institute of Directors, ICGN Year Book 2007.
27
and control bodies; • disclosure about general practices of corporate governance.
Weaknesses that persist include; • deficiencies in the procurement of goods and services;
• the involvement of independent appraisers; •the practice of hiring external auditors; •
the existence of an approved dividend policy; • the absence of formal corporate
documents that outline the principles used for the calculation of dividends and the
minimal share of net profit; the formalistic nature of many board committees; •
insufficient attention to the professional development of board members; • the absence of
a clear and understandable procedure of executive and board evaluation; • the loose link
between executive remuneration and the company’s performance; • poorly developed
succession practices and succession planning; • low level of independence and efficiency
in the work of the audit commissions. poor disclosure of beneficiary ownership; • poor
disclosure about individual remuneration of members of the governance and control bodies
and the principles on which such remuneration is based, insufficient use of available
disclosure channels such as the annual report and corporate website.
South Africa34 Some of the key reforms proposed in a recent Bill on the corporate governance include; (a) There should be a uniform accounting standard to ensure that any financial information published by a company is calculated in accordance with generally accepted accounting practice (GAAP), which has to be comparable with the international standards adopted by the International Accounting Standards Board. (b) A companies’ ombud is created which provides a forum for alternative dispute resolution on company issues. (c) The Bill introduces three categories of companies, with the one category, namely a public interest company, having greater responsibility to a wider public and more demanding disclosure and transparency provisions. (d) The Bill creates a capital maintenance regime based on solvency and liquidity requirements which is a shift from a regime based on par value. (e) The chapter on corporate governance provides for the codification of directors’ duties, provisions addressing conflicts of interest and an increase in directors’ liability. (f) The Bill sets out simplified and flexible processes for approval of transactions that will fundamentally alter the structure of a company. The provisions deal with the disposal of substantially all of a company’s assets or an undertaking, a scheme of arrangement or a merger or amalgamation. Minority shareholders are also afforded better protection in line with modern international corporate law. g) Business rescue is being introduced in place of judicial management. Business rescue will be conducted by an independent supervisor
34 South Africa’s Ambitions: Achieving International Standards of Governance, Mervyn King, Chairman of the Global Reporting Initiative, and Chairman, King Committee on Corporate Governance in South Africa. ICGN Year Book 2007.
28
and subject to court intervention. The interests of shareholders, creditors and employees
are recognised in the development and approval of a business rescue plan. Notably, the
interests of workers are protected by recognising them as creditors of the company, with a
voting interest to the extent of any unpaid remuneration. (h) The Bill tends to
decriminalise non-compliance and uses a system of administrative enforcement
Middle East35 The first Code of corporate governance was launched in Oman as early as 2002. Egypt has
published two corporate governance Codes, one for listed companies and one for State
Owned Enterprises. Egypt has sought to strengthen its listing rules and is focusing on
implementation by launching the Egyptian Institute of Directors and a series of training
programs being conducted by the Egyptian Banking Institute for bank directors. Bahrain,
Morocco, Qatar, and Tunisia have facilitated the review of their legal and regulatory
framework and are in the process of preparing a corporate governance Code. Jordan is
developing a model corporate governance Code for listed companies. Lebanon has
conducted a bank corporate governance survey and conducted a legal review followed by
the Central Bank issuing a corporate governance regulation. Additionally the Lebanese
corporate governance Task Force has spearheaded the development of a Code of
corporate governance for non-listed companies and is working with Lebanese companies
for voluntary compliance. In the UAE, the Central Bank has drafted corporate governance
guidelines for banks, and the UAE’s Securities and Commodities Authority has issued a
corporate governance Code, setting a national governance standard, for both the Dubai
Financial Markets and the Abu Dhabi Securities Market. Similarly, Saudi Arabia’s Capital
Market Authority launched corporate governance regulations for its listed companies, and
the banking sector is seriously looking at improving corporate governance standards. The
West Bank/Gaza is also in the process of developing a Code of Corporate Governance,
after a series of corporate governance awareness programs organised by business
associations and regulatory authorities.
Corporate governance plays an important role in investment decisions. In Brazil, Sau Paulo Stock Exchange launched a new market segment in 2001, The Novo Mercado where companies listed in this exchange have to comply with international standards and not those applicable to the companies listed in the main board. Institutional investors invested
35 A Dynamic and Changing Environment: Middle East and North Africa, Nsser Saidi, Executive Director, Hawkamah Institute for Corporate Governance and Chief Economist, Dubai International Financial Center. ICGN Year Book 2007.
29
teams of people responsible for reviewing corporate governance practices in the
companies in which they are investing.
Morck and Steir (2007) sum up the essence of the evolution of the corporate governance in
different countries “Corporate governance deals with the mechanisms that ensure
investors in corporations get a return on their investments (Shleifer and Vishny, 1997).
Corporate governance varies widely across countries and across firms. Better governance
enables firms to access capital markets on better terms, which is valuable for firms
intending to raise funds. It is therefore expected that firms planning to access capital
markets – especially those with valuable growth opportunities that cannot be financed
internally – to adopt mechanisms that commit them to better governance. With the
availability of data on corporate governance and disclosure practices of individual
companies around the world, provided first by the Center for International Financial
Analysis and Research (CIFAR) and, more recently, by Credit Lyonnais Securities Asia
(CLSA), Standard and Poor’s (S&P), and Institutional Shareholder Services (ISS), several
studies have investigated whether governance and transparency scores are related to firm
characteristics. In general, they find that the quality of governance practices is positively
related to growth opportunities, the need for external financing, and the protection of
investor rights, and this rapidly developing body of literature began with the finding that
the laws that protect investors differ significantly across countries, in part because of
differences in legal origins (see La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998).
Recent literature finds that cross-country differences in laws and their enforcement affect
ownership structure, dividend payout, availability and cost of external finance and market
valuations.'is negatively related to the concentration of ownership. However, until now,
the importance of other country characteristics, such as the financial and economic
development of the country in which a company is domiciled, and how that importance is
affected by financial globalization, has not been investigated. This is surprising since a
number of studies show that other country characteristics besides measures of investor
protection have a significant impact on country-level measures of governance”.
The developments in corporate governance as described above show that;
• Corporate governance is catching up fast as a major instrument of corporate
reform in several countries
30
• Good governance emerged as a major incentive for corporate growth and in
pursuing global business aspirations
• Good companies are going beyond the mandatory requirements in adopting best
practices in governance
• Greater interaction and sharing of knowledge is gaining ground across countries in
setting effective governance frameworks
• Disclosure and transparency are emerging as the key determinants of good
governance
• As the financial markets grow and the developing countries corporations
increasingly explore global financial markets for resources and business,
harmonization of the corporate governance increases and intensified
The pace of developments in strengthening corporate governance in different countries
provides an insight on the urgency with which strong governance norms are devised and
implemented all over the world.
31
Chapter III THE ESSENSE OF
CORPORATE GOVERNANCE Constituents of governance gain scope and significance
Corporate governance has been defined by scholars and market practioners as per the
perspective with which they were analyzing the subject. The practioner’s point of view
that was powerfully conveyed was that of N.R. Narayana Murthy, Chairman, Committee on
Corporate Governance, Securities and Exchange Board of India, 2003 and he himself a
highly successful and globally acclaimed entrepreneur who built Infosys on the premise
and foundations of a strong corporate governance “The term “corporate governance”, is
susceptible both to broad and narrow definitions. In fact, many of the codes do not even
attempt to articulate what is encompassed by the term. The important point is that
corporate governance is a concept, rather than an individual instrument. It includes
debate on the appropriate management and control structures of a company. Further, it
includes the rules relating to the power relations between owners, the Board of Directors,
management and, last but not least, the stakeholders such as employees, suppliers,
customers and the public at large:”.
From a policy perspective and who chaired the first ever influential and widely discussed
report on the subject, Adrian Cadbury, the author of the Cadbury Report, said “In its
broadest sense, corporate governance is concerned with holding the balance between the
economic and social goals and between individual and communal goals. The 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 interest of the individuals, of corporations and of society. The incentives to
corporations and those who own and manage them to adopt internationally accepted
governance standards is that these standards will assist them to achieve their aims and to
attract investment. The incentive for their adoption by states is that these standards will
strengthen their economies and encourage business probity”.
From a regulatory point of view Arthur Levitt, former chairman of the Securities and
Exchange Commission, United States emphasized the importance of the corporate
governance as “If a country does not have a reputation for strong corporate governance
32
practices, capital will flow elsewhere. If investors are not confident with the level of
disclosure, capital will flow elsewhere. If a country opts for a lax accounting and reporting
standards, capital will flow elsewhere. All enterprises in that country- regardless of how
steadfast a particular company’s practices may be-suffer the consequences. Markets exist
by the grace of investors. And it is today’s more empowered investors that will determine
which companies and markets will stand the test of time and endure the weight of greater
competition. It serves us well to remember that no market has a divine right to investors’
capital”.
Organization of Economic Cooperation and Development (OECD) which spearheaded the
design and development of corporate governance principles and guidelines defined it as”
Corporate governance involves a set of relationships between a company’s management,
its board, its shareholders, and other stakeholders. Corporate governance also provides
the structure through which the objectives of the company are set and the means of
attaining those objectives and monitoring performance are determined”
An institutional point of view presented by Ira Millstein, who worked on drafting the OECD
corporate governance guidelines as also the co-chairman of the NYSE-NASDAQ constituted
Blue Ribbon Committee36 (1998) that looked into important aspects of the audit
committees, defined “Corporate governance refers to that blend of law, regulation and
appropriate voluntary private sector practices which enables the corporation to attract
financial and human capital, perform efficiently and thereby perpetuate itself by
generating long term economic value for its stakeholders, while respecting the interests of
stakeholders and society as a whole”.
From an academic perspective based on extensive surveys and studies on the subject,
Shleifer and Vishny (1997) define corporate governance as the ways in which suppliers of
finance to corporations assure themselves of getting a return on their investments;
Zingales (1998) views governance systems as the complex set of constraints that shape the
ex post bargaining over the quasi-rents generated by the firm; Gillan and Stakes (1998)
define corporate governance as the system of laws, rules, and factors that control
operations at a company.
To sum up, the important message of the need for good corporate governance is well articulated by M. Damodaran, Chairman, Securities and Exchange Board, who spearheaded
36 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of the Corporate Audit Committees. NYSE and NASDAQ, 1998.
33
introduction of most significant reforms in the Indian stock markets, including the October 2007 guidelines on the Participatory Notes (PNs) observed “There are those who will tell you that business and ethics cannot stand together. In the short run, it might appear that company pay a price for adhering to values while their competitors get ahead in a shorter time frame, but in the long run people would learn to distinguish, stakeholders learn to ask the right questions and distinguish between the grain and chaff. Those that don’t
subscribe to values will fall by the way side; those that subscribe to values will last the
course and will set benchmarks”.
The roots of the recent developments in the corporate governance could traced to
Treadway Commission (1985), United States which found that inadequate internal controls
lead to financial failures, which later led to the Commission defining three objectives of
the internal controls which are; (a) effectinvess and efficiency of operations (b) reliability
of financial reporting and (c) compliance with laws and regulations and (d) safeguarding of
assets.
The evolution of the corporate governance guidelines is given in the chart below.
Table 4 Recent Evolution of the Corporate Governance
Cadbury Report, United Kingdom 1995
The objective of the Cadbury committee was to investigate how large public companies should adopt corporate governance guidelines with a focus on the procedures of financial report production and the role of the accounting profession. Issues included the role of the board of directors, standard s of financial reporting, accountability of the auditors and directors pay.
Greenbury Report, United Kingdom, 1995
The report dealt with the remuneration of executives and non-executives board members and recommended the setting up of a remuneration committee in each public company to determine remuneration packages for the board members. It also provided suggestions on the disclosure of remuneration and the setting up of remuneration policy and service contracts and compensation.
34
Hampel Report, United Kingdom, 1998
Four major issues were discussed with practical guidelines offered; (a) the role of directors (b) directors compensation (c) the role of shareholders (d) accountability and audit.
CII Voluntary Code of Corporate overnance,1998
The first of the voluntarily evolved codes in India.
Kumara Mangalam Birla Committee, India, 1999
The mandatory recommendations of the Kumar Mangalam committee include the constitution of Audit Committee and Remuneration Committee in all listed companies, appointment of one or more independent directors in them, recognition of the leadership role of the Chairman of a company, enforcement of Accounting Standards, the obligation to make more disclosures in annual financial reports, effective use of the power and influence of institutional shareholders, and so on. The Committee also recommended a few provisions, which are non- mandatory.
Sabanes-Oxley Act, 2002 A major initiative of corporate compliance, the Sarbanes-Oxley Act of 2002, is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 is a US federal law that has main features such as ; establishment of the Public Company Accounting Oversight Board (PCAOB), auditors independence, corporate responsibility, enhanced financial disclosures, analyst conflict of interest, commission resources and authority, corporate and criminal fraud accountability, while collar crime penalty enhancement, corporate tax returns and corporate fraud accountability.
Higgs Report, 2003 On non-executive directors. Smith Report, 2003 On Audit Committees. Narayana Murthy Committee, 2002
The key mandatory recommendations focus on strengthening the responsibilities of audit committees; improving the quality of financial disclosures, including those related to related party transactions and proceeds from initial public offerings; requiring corporate executive boards to assess and disclose business risks in the annual reports of companies; introducing responsibilities on boards to adopt formal codes of conduct; the position of nominee directors; and stock holder approval and improved disclosures relating to compensation paid to non-executive directors. Non-mandatory recommendations include moving to a regime where corporate financial statements are not qualified; instituting a system of training of board members; and the evaluation of performance of board members.
Naresh Chandra Committee,2003
The auditor-company relationship, Auditing the auditors Independent directors: Role, remuneration and training.
OECD Principles,2004 The OECD Principles cover five aspects of governance (a) the rights of shareholders (b) the equitable treatment of shareholders (c) the role of stakeholders (d) disclosure and transparency (e) the responsibilities of the board.
35
Clause 49 of the Listing Agreement, 2005
A major compliance directive that came into force from the quarter ended June 2005, it has major aspects of compliance by listed companies that include; definition of independent directors; Non-Executive Director’s compensation and disclosures, other provisions as to Board and Committees, Code of Conduct, Composition of Audit Committee, Meeting of Audit Committee, Subsidiary Companies, Disclosures pertaining to (a) basis of related transactions (b) accounting treatment (c) risk management (d) proceeds from public/rights/preferential issues (e) remuneration of directors and management discussion and analysis, CEO/CFO Certification, report on corporate governance, auditors certificate on compliance etc.,
Mature governance is caused by protection of property rights, enforcement of contractual
rights, protection against fraud and unfair practices,, centralized banking laws,
bankruptcy laws, strong and independent judiciary
The quality of corporate governance of a company is a key determinant of its market
performance. Institutional investors have a great hold on the market performance as also
they contribute significantly in inducing companies to adopt best practices. It is in this
regard, the guidelines evolved by CalPERS37, the leading institutional investor in the world
are summarized below.
Core Principles on Corporate Governance
Corporate governance practices should focus board attention on optimizing the company’s operating performance and returns to shareowners.
• Directors should be accountable to shareowners, and management accountable to
directors. To ensure this accountability, directors must be accessible to
shareowner inquiry concerning their key decisions affecting the company’s
strategic direction.
• Information about companies must be readily transparent to permit accurate
market comparisons; this includes disclosure and transparency of objective globally
accepted minimum accounting standard.
• All investors must be treated equitably and upon the principle of one-share/one-
vote.
37 CalPERS, Core Principles of Accountable Governance.
36
• Proxy materials should be written in a manner designed to provide shareowners
with the information necessary to make informed voting decisions. Similarly, proxy
materials should be distributed in a manner designed to encourage shareowner
participation. All shareowner votes, whether cast in person or by proxy, should be
formally counted with vote outcomes formally announced.
• Each capital market in which shares are issued and traded should adopt its own
Code of Best Practices; and, where such a code is adopted, companies should
disclose to their shareowners whether they are in compliance.
• Corporate directors and management should have a long-term strategic vision that,
at its core, emphasizes sustained shareowner value. In turn, despite differing
investment strategies and tactics, shareowners should encourage corporate
management to resist short-term behavior by supporting and rewarding long-term
superior returns.
Board Independce and Leadership
• At a minimum, a majority of the board consists of directors who are independent.
Boards should strive to obtain board composition made up of a substantial majority
of independent directors.
• Independent directors meet periodically (at least once a year) alone in an
executive session, without the CEO. The independent board chair or lead (or
presiding) independent director should preside over this meeting.
• Each company should disclose in its annual proxy statement the definition of
“independence” adopted or relied upon by its board.
• With each director nomination recommendation, the board should consider the
issue of continuing director tenure and take steps as may be appropriate to ensure
that the board maintains openness to new ideas and a willingness to critically re-
examine the status quo.
Independent Board
The board should be chaired by an independent director. The CEO and chair roles
should only be combined in very limited circumstances; in these situations, the
board should provide a written statement in the proxy materials discussing why the
37
combined role is in the best interest of shareowners, and it should name a lead
independent director to fulfill duties .
• When selecting a new chief executive officer, boards should re-examine the
traditional combination of the “chief executive” and “chair” positions.
• Generally, a company's retiring CEO should not continue to serve as a director on
the board and at the very least be prohibited from sitting on any of the board
committees.
• Corporate insiders are not considered independent and should therefore not
constitute any more than one board seat.
• Certain board committees consist entirely of independent directors. These include
the committees who perform the audit, director nomination, CEO evaluation, and
executive compensation functions.
• The full board is responsible for the oversight function on behalf of shareowners.
Should the board decide to have other committees (e.g. executive committee) in
addition to those required by law, the duties and membership of such committees
should be fully disclosed.
Board Evaluation
• The board has adopted and disclosed a written statement of its own governance
principles, and regularly re-evaluates them.
• The board has adopted and disclosed an annual board, committee, and individual
director evaluation process.
• With each director nomination recommendation, the board considers the mix of
director characteristics, experiences, diverse perspectives and skills that is most
appropriate for the company. The board should address historically under-
represented groups on the board, including women and minorities.
• Companies should submit executive compensation policies to shareowners for non-
binding approval.
• Executive contracts should be fully disclosed, with adequate information to judge
the "drivers" of incentive components of compensation packages.
38
• Director compensation should be a combination of cash and stock in the company.
Audit Integrity
• The selection of the independent external auditor should be ratified by
shareowners annually.
• The board, through its independent Audit Committee, should ensure that excessive
non-audit fees are prohibited. To limit the risk of possible conflicts of interest and
independence of the auditor, non-audit services and fees paid to auditors for non-
audit services should both be approved in advance by the Audit Committee and
disclosed in the proxy statement on an annual basis.
Shareholder Rights
• A majority of proxies cast should be able to amend the company's bylaws by
shareowner proposal.
• A majority of shareowners should be able to call special meetings or act by written
consent.
• In an uncontested director election, a majority of proxies cast should be required
to elect a director. In a contested election, a plurality of proxies cast should be
required to elect a director.
• A majority of proxies cast should be able to remove a director with or without
cause. Unless the incumbent director has earlier resigned, the term of the
incumbent director should not exceed 90 days after the date on which the voting
results are determined.
• Shareowners should have the right to sponsor resolutions. A shareowner resolution
that is approved by a majority of proxies cast should be implemented by the board.
• Every company should prohibit greenmail.
• No board should enact nor amend a poison pill except with shareowner approval.
• Every director should be elected annually.
39
• Proxies should be kept confidential from the company, except at the express
request of shareowners.
• Broker non-votes should be counted for quorum purposes only.
• Shareowners should have effective access to the director nomination process.
• Shareowners should have the right to cumulate votes.
40
Chapter IV INDIA RISES
Corporate governance in India reaches global standards
An assessment by the Institute of International Finance38 (Corporate Governance in India,
An Investor Perspective, February 2006) brings out the following features of governance
practice in India.
• Corporate governance-related requirements in India are largely based on the
recommendations of the Cadbury and Higgs Reports and the Sarbanes-Oxley Act.
SEBI has been proactive in keeping India’s corporate governance rules and
regulations in line with best practices in the world.
• The state of corporate governance in India has improved over the last four years
particularly among large cap Indian companies.
• In many large Indian companies, globalization- and not regulatory requirements-
has served as the impetus for adoption of corporate governance best practices.
• High market premiums that the stock of these (good corporate governance)
companies command has reinforced the belief among Indian investors and, more
importantly, other Indian companies that better corporate governance contributes
to a high stock price and provides access to cheaper capital.
• Improvements in corporate governance in Indian companies seem largely to be
voluntary and driven by globalization
• Companies that wish to access markets for capital or that wish to become leading
global suppliers to corporations in developed markets are becoming increasingly
transparent and more willing to adopt higher corporate governance standards.
38 Institute of International Finance, Inc, Corporate Governance in India, An Investor Perspective, IIF Equity Advisory Group, Task Force Report, February 2006
41
These governance changes are having a trickle-down effect on smaller Indian
companies.
• Stock exchanges are viewed as being at the front line of the surveillance function
for compliance with all listing requirements, including those that pertain to
corporate governance.
Corporate governance practice and procedures underwent dramatic changes during the
period 1997-2007. Major economic and financial developments that have during period
such as Asian financial crisis (1997-98), burst of the dotcom bubble (2000), major
corporate failures (Enron, WorldCom), large scale mis-statement of financial information
(Parmalat, Ahold, Alstom), surge in non-performing loans in several countries etc., have
reinforced the need to tighten governance standards and brought into focus the scope and
need for a wide of range of reforms in this regard. These initiatives have begun to pay off
as could be evident from the vast improvement in the governance form and practice Asia
as evident from several studies focused on assessment of the quality of the governance.
From the year 2003 onwards CLSA and Asia Corporate Governance Network39 together
collaborated in bringing performance scores of countries in the Asian region in regard to
corporate governance. The first of the report, CG Watch 2003, had an interesting title,
“Faking It : Board Games in Asia “ perhaps most appropriate at that time in the
background of global meltdown of stock markets brought about by severe inadequacies
and abuses in corporate conduct and disclosure standards. The 2004 report had a more
promising title “Spreading the Word. Changing Rules in Asia “reflecting changing landscape
of the corporate governance brought out in the backdrop of Sarbanes-Oxley and a host of
regulatory reforms that came into being a number of countries. The CG Watch 2005 had
the title “Holy Grail : Quality at Reasonable Price(QARP) showing growing commitment
towards, better corporate governance. The 2007 report had a much more encouraging
theme “On a Wing and a Prayer: Greening of the Governance” that brought out the
significant changes in the corporate governance practice in the Asia region. The 2007
survey assessed the quality of corporate governance in 11 Asian markets that included
Japan for the first time, and provided aggregate data from 582 companies in the region.
Table5: A Decade of Developments in Corporate Governance
39 Allen, Jamie, 2007,.The Benefits of Corporate Governance to Emerging Economies, Asian Corporate Governance Network.
42
Country/ Market
1997
2007
Was there an official code of best practice?
Did the idea of the “Independent director” exist?
Did the idea of the audit c’tee exist?
Date of main code (s)
Are independent directors required?
Are audit committees required
China - - - 2002/2005 Yes Yes Hong Kong Yes (but
very short
Yes Yes 1993/2004 Yes Yes
India - - - 1999/2005/ 2007
Yes Yes
Indonesia - - - 2001/2006 Yes Yes Japan - - - (2003)/
2004 Optional Optional
Korea - - - 1999/2003 Yes Yes Malaysia - Yes Yes 2001 Yes Yes Philippines - - - 2002 Yes Yes Singapore - Yes Yes 2001/2005 Yes Yes Taiwan - - - 2002 Yes (certain
firms) Yes (certain firms)
Thailand - - - 1999/2006 Yes Yes Source: ACGA research.
Corporate governance score of all countries in Asia have improved sizeably. India now
ranks third after Singapore and Hong Kong in regard to performance in corporate
governance. The slight decline in the 2007 score is not due to lowering of standards but
due to inclusion of a larger number of parameters for evaluation, that was common to all
the countries. The 2007 study has also included Japan in among the countries assessed.
The “CG Watch 2007” has this to say on the quality of governance standards in India “A
large population (hence low GNI per-capita); economic reform started much later than
China (1991) vs 1978); yet corporate governance reform started early by regional
standards (1998) and the country has some pockets of world-class corporate governance”.
43
Table6: India ranks high among Asia governance league tables
Country40 2000 2001 2002 200341 200442 200543 2007 Singapore 75 74 74 77 75 70 65 Hong Kong 71 68 72 73 67 69 67
India 56 54 59 66 62 61 56 Malaysia 32 37 47 55 60 56 49 Taiwan 57 53 58 58 55 52 54 Korea 52 38 47 55 58 50 49
Thailand 28 37 38 46 53 50 47 Philippines 29 33 36 37 50 48 41
China 36 34 39 43 48 44 45 Indonesia 29 32 29 32 40 37 37
Source: “CG Watch”, a joint report by CLSA Asia- Pacific Markets and ACGA.
The credibility of India, in regard to corporate governance, comes into review, in the light of
vast improvements made in the back ground of lower per capita gross national income as also
the absence of a full fledged independent agency for fighting corruption, which indicates that
most of the initiatives were proactive in nature and the processes evolved and practice
standards are mostly voluntary in nature.
Table7: India manages well despite constraints
Country / Market
CG macro quality v/s national income
CG macro quality v/s corruption
“CG Watch 2007” score
GNI per capita ($ :2006)
Is there an independent agency fighting corruption
Hong Kong 67% 28, 460 Yes (for a long time) Singapore 65% 29, 320 Yes (for a long time)
India 56% 820 Marginally Taiwan 54% NA Somewhat Japan 51% 38, 410 Largely Korea 49% 17, 690 Marginally
Malaysia 49% 5, 490 Marginally Thailand 47% 2, 990 No
China 45% 2.010 Marginally Philippines 41% 1, 420 Somewhat (but recently) Indonesia 37% 1, 420 Yes (but recently)
Source: Asian Corporate Governance Association.
40 Ranked in descending order according to 2005 score 41 First year in which ACGA collaborated with CLSA 42 Introduced more rigorous scoring methodology in 2004 43 Enhanced methodology further in 2005
44
India now fulfills all the standards regard best practices in corporate governance and
compares quite favorably with all the major countries in the Asia region. Much of the
progress has happened in the last decade that enabled India to make a big leap in the
league tables of best practices.
Table8: Matching Rules and Regulations
Sourc
e:
CLSA
/
ACGA
“CG
Watc
h
2005:
The
Holy
Grail
”.
The
ext
ensi
ve
wor
k
carr
ied
by the policy and regulation in developing an effective framework induced companies to
improve the quality of their governance and enabled them to adopt best practices which
provided an opportunity to scale higher in quality and performance. India is recognized as
a market having best corporate governance standards, though issues of quality of
enforcement, review and effectiveness continue to be raised.
A broad outline of the framework for the corporate governance network in India that
formed a recent assessment of the Institutional Institute of Finance is reproduced below.
The assessment provides the current status of the regulatory framework from the point of
view a global markets perspective.
Legal Framework
Question China HK India Indonesia
SKorea Malaysia
Phil Sing Tai Thai
Is quarterly reporting mandatory
Yes No Yes Yes Yes Yes Yes Yes Yes Yes
Are Auidt committees mandatory?
Yes Yes Yes Yes Some Yes Yes Yes No Yes
Must ownership stakes above 5% be disclosed?
Yes Yes Yes Some Yes Yes Yes Yes Some
Yes
Detailed disclosure of material transactions?
Some Yes Yes Some Yes Yes Yes Yes Yes Yes
Is the national code of CG based largely on International standards?
Yes Yes Yes Some Yes Yes Yes Yes Yes Yes
Is there n national policy to converge with IAS/IFRS?
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
45
India’s legal framework for corporate governance is found in the Companies Act of 1956,
most recently amended in 2002, and in Clause 49 of SEBI’s requirements for listed
companies.
Minority Shareholder Protection
The legal structure for corporate governance in India provides for strong minority
shareholder protection compared with other emerging markets. The Companies Act
and SEBI’s listing requirements together account for most of the key minority
shareholder protections.
• Voting Rights
According to Indian rules and regulations, all shareholders have the right to
participate and vote at general meetings. The Companies Act encourages proxy
voting by granting all shareholders the legal right to appoint a proxy.
Until recently, laws in India promoted the “one share, one vote” principle. But
a rule enacted in 2001 by the Ministry of Company Affairs, now permits Indian
companies to issue shares with multiple voting rights or dividends as long as
such shares do not exceed 25 percent of share capital and shareholders
approve the issuance.
Provisions for cumulative voting, particularly in the election of directors,
would be a means to foster stronger minority shareholder protection. But
Indian law does not have specific provisions for cumulative voting.
46
• Firm Capital Structure
Laws in India regarding a firm’s capital structure recommend that firm
require shareholder approval or board approval to change their
capital structure through takeovers, mergers, division or spin-
offs, capital increases, dilution of voting and ownership rights,
IPOs and significant share buybacks. To approve a merger, under
SEBI’s regulations a shareholder vote of 75 percent is required.
India’s Companies Act requires that new capital issues first be offered to
existing shareholders in proportion to their shares of paid-up capital. only by a
special resolution can this requirement be waived. This is intended as a
minority shareholder protection mechanism.
• Shareholder Meetings/Other Rights
The Companies Act requires that an Annual General Meeting (AGM) be held
every year, and that a notice convening the meeting be sent to all
shareholders at least 21 days in advance of the meeting. In addition to the
AGM, the Companies Act allows for shareholders controlling 10 percent of
voting rights or paid-up capital to call a special or Extraordinary General
Meeting (EGM).
India’s legal provisions for quorum at the AGM may not sufficiently protect
minority shareholders. The Companies Act only stipulates that 5 people must
be present at the AGM to reach quorum.
To help expedite minority shareholders’ grievances, SEBI’s Clause 49 stipulates
that there must be a board-level shareholder grievance committee to address
such disputes, and that a non-executive director must chair this committee.
The introduction of grievance committees is one mechanism whereby
shareholders can obtain redress outside of India’s inefficient and corrupt court
system.
47
Structure and Responsibilities of the Board of Directors
India’s laws and regulations address all issues pertaining to boards of directors.
Scope for improvement lies in requiring the creation of a board level nomination
committee that would be responsible for identifying and recommending new
directors. This would help curb the appointment of friends of
founder/promoters or controlling shareholders as non- executive/independent
directors.
• Board Structure
SEBI’s Clause 49 includes a definition of board independence that says at least
one-third of the board be non-executive and a majority of these be
independent. Clause 49 goes further to require that in cases where the
chairman of the board is an executive, 50 percent of the board be comprised
of independent directors.
Despite the requirement for board independence, the availability of trained
independent directors in India is limited. Qualified directors are often willing
to join only prestigious companies but shy away from joining the boards of
smaller companies that could benefit the most from the guidance of
independent directors. Recognizing the need for qualified independent
directors, efforts are being made by organizations such as the Confederation of
Indian Industries, the Federation of Indian Chambers of Commerce and
Industry, and stock exchanges to train directors.
• Board meetings
SEBI’s Clause 49 states that the board should meet at least four times a year.
The Companies Act requires that 33 percent of board members or two
members, whichever is greater, be present. There is no provision that specifies
whether non-executive or independent members need be present.
• Nomination and election of directors
48
The Companies Act mandates that the directors of the Board be approved and
appointed by the company in the Annual General Meeting. In India,
founder/promoters or controlling shareholders generally appoint directors.
There is limited scope for minority shareholders to recommend director
nominees.
Moreover, Indian rules and regulations have no provisions mandating the
creation of a board-level nomination committee.
• Board committees
In India, every board is required to have a shareholder grievance committee,
as discussed above, and an audit committee. Creation of a separate
remuneration committee is a non-mandatory requirement in Clause 49 of the
SEBI Code. In practice, however, boards of some large companies have an
audit, remuneration and nomination committee.
• Disclosure
SEBI’s Insider Trading Regulations, 2002, require every company to appoint a
compliance officer who is responsible for setting policies, procedures, and
monitoring adherence to the rules for the preservation of ‘price sensitive
information’ to prevent insider trading. SEBI has established an insider trading
committee to monitor this activity. The Task Force learned that insider trading
is common in India, but difficult to detect. There is no good legal definition of
insider trading, which hampers surveillance efforts.
Clause 49 also requires that listed companies begin disclosing their corporate
governance practices in the Annual Report to shareholders. Moreover,
companies are required to provide on their website information such as
quarterly results and presentations made to analysts.
Companies that do not have their own website have to send this information to
the stock exchange on which they are listed so that the stock exchange can put
it on its website. All fees and compensation paid to non-executive directors
49
are fixed by the board of directors and require prior approval of shareholders
in the Annual General Meeting.
• Other responsibilities
Clause 49 requires listed companies to inform board members about risk
assessments and risk minimization procedures in the company. The audit
committee is also responsible for reviewing all related-party transactions and
internal audit functions of the company.
There are no such provisions in the Indian governance framework that require
companies to have an investor relations program and to provide a policy
statement concerning environmental issues and social responsibility. However,
in practice, some large Indian companies have social responsibility initiatives.
3. Accounting/Auditing
At present, under the non-mandatory requirement of Clause 49, Indian
companies are encouraged to send half-yearly financial reports. Listed
companies are required to provide quarterly compliance reports to regulatory
authorities but the information provided in the half-yearly report and quarterly
reports are not subject to full audit review.
• Standards
The Institute of Chartered Accountants of India (ICAI) is an independent body
regulating the accounting and auditing profession in India. Over the past two
years the ICAI has revised a majority of India’s Accounting Standards to comply
with International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS).
The Companies Act requires shareholders to appoint an independent auditor at
each Annual General Meeting. It also requires that the independent auditor be
certified by the ICAI. Comprehensive audits are conducted annually in India.
• Audit Committee
50
Revisions to Clause 49 incorporate several practices required by the Sarbanes-
Oxley Act in the United States. Audit committees of listed Indian companies
are now required to have a minimum of three directors as members, with at
least two-thirds of the members being independent. In addition, at least one
member of the audit committee should have accounting or related financial
management expertise. Clause 49 also requires audit committees to review the
adequacy of internal control systems.
Clause 49 does not prohibit the contemporaneous provision of audit and non-
audit services from the same entity. It does, however, require the audit
committee to fix audit fees and approve payments to auditors for other
services provided.
Transparency of ownership and control
The Indian corporate governance requires senior management to disclose
potential conflicts of interest only to the Board. Given that most large Indian
companies are family-controlled conglomerates, related-party transactions and
related lending are a concern. Disclosure to shareholders in the Annual Report is
needed. Clause 49 requires listed companies to disclose materially significant
related-party transactions in the Report on Corporate Governance in the Annual
Report to shareholders; however, it does not define the term ‘materially
significant’.
However, there is scope for improvement by making disclosure of related-party
transactions mandatory to shareholders.
51
Regulatory Environment
Although SEBI, the capital markets regulator, is an independent body, the weak
enforcement mechanism in the country is a key concern for members of the
India Task Force. Significant government action is needed to improve the
enforcement and surveillance functions of regulators in India.
CLAUSE 49 44
Implementation of corporate governance is mainly through the Clause 49 of the
Listing Agreement that the companies make with the stock exchanges.
Important provisions of the Clause 49 are briefly discussed below.
Objectives of Corporate Governance
• Fairness to all Stakeholders
• Greater transparency through better disclosures
• Greater Accountability of Executive Management to stakeholders.
• Enforcement & Verifiability of various Acts, Regulations,
Recommendations, etc.
• Creating value for the shareholders
• Protecting interests of other stakeholders.
Essentials of Good Governance
• Quality and clarity of norms
• Enforcement systems and structure processes
• Dialogue and discussion and awareness
Factors affecting governance
• Integrity of the Management
• Ability of the board
44 Source : Bombay Stock Exchange
52
• Adequacy of the process
• Commitment level of individual board members.
• Quality of corporate reporting
• Participation of stakeholders in the management.
Applicability
• All listed companies including PSUs and excluding Mutual funds.
• All companies that are incorporated under other statutes, so far the
recommendations do not violate their respective statutes and guidelines or
directives issued by the relevant regulatory authorities
Implementation Schedule
• By all entities seeking listing for the first time, at the time of listing.
• having a paid up share capital of Rs 3 crores and above or net worth of Rs 25
crores or more at any time in the history of the company
Board of Diectors
• Fifty percent of the Board of Directors should be non-executive & at least 1/3rd
should be independent, if the Chairman is Non-Executive. Else 50% should be
independent
• No director should be a member in more than 10 committees or act as Chairman of
more than 5 committees across all companies. Committees reckoned are Audit
Committee and Shareholders/ Investors Grievances Committee
• Directors should be judicious mix of experts drawn from different field of
specialization.
• Board should have adequate knowledge of the business of the enterprise.
Definition of Independent Director
53
The expression ‘independent director’ shall mean non- executive director of the company
who
• apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
• is not related to promoters or management at the board level or at one level
below the board; has not been an executive of the company in the immediately
preceding three financial years;
• is not a partner or an executive of the statutory audit firm or the internal audit
firm that is associated with the company, and has not been a partner or an
executive of any such firm for the last three years. This will also apply to legal
firm(s) and consulting firm(s) that have a material association with the entity.
is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationships also; and
• is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
• Institutional directors on the boards of companies shall be considered as
independent directors whether the institution is an investing institution or a
lending institution
Compensation
• All compensation paid to non-executive directors shall be fixed by the Board of
Directors and shall be approved by shareholders in general meeting
• Limits shall be set for the maximum number of stock options that can be granted in
any financial year and in aggregate. The considerations as regards compensation
paid to an independent director shall be the same as those applied to a non-
executive director
• The company shall publish its compensation philosophy and statement of entitled
compensation in respect of non-executive directors in its annual report.
• Alternatively, this may be put up on the company’s website and reference drawn
thereto in the annual report.
54
• Company shall disclose on an annual basis, details of shares held by non-executive
directors, including on an "if-converted" basis. Non-executive directors shall be
required to disclose their stock holding (both own and held by / for other persons
on a beneficial basis) in the listed company in which they are proposed to be
appointed as directors, prior to their appointment. These details should accompany
their notice of appointment
Responsibility of the Independent Director
Independent Director shall however periodically review legal compliance reports
prepared by the company
• steps taken by the company to cure any taint
• In the event of any proceedings against an independent director in connection
with the affairs of the company, defence shall not be permitted on the ground
that the independent director was unaware of this responsibility.
Code of Conduct
• It shall be obligatory for the Board of a company to lay down the code of
conduct for all Board members and senior management of a company. This
code of conduct shall be posted on the website of the company. All Board
members and senior management personnel shall affirm compliance with the
code on an annual basis. The annual report of the company shall contain a
declaration to this effect signed by the CEO.
• Normally, the term “ Senior Management” would comprise all members of
management one level below the executive directors
Term of Office of Non Executive Director
• Person shall be eligible for the office of non-executive director so long as the term
of office did not exceed nine years in three terms of three years each, running
continuously (Non mandatory requirement).
55
Audit Committee:
• Composition
o Minimum 3 members
o all non-executive with majority independent.
• All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise. The
term "financially literate" means the ability to read and understand basic financial
statements i.e. balance sheet, profit and loss account, and statement of cash flows
• A member will be considered to have accounting or related financial management
expertise if he or she possesses experience in finance or accounting, or requisite
professional certification in accounting, or any other comparable experience or
background which results in the individual’s financial sophistication, including
being or having been a chief executive officer, chief financial officer, or other
senior officer with financial oversight responsibilities.
CEO/CFO Certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the
Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any
other person heading the finance function shall certify to the Board that:
• They have reviewed financial statements and the cash flow
statement for the year and that to the best of their knowledge and
belief :
• these statements do not contain any materially untrue/ misleading
statement or omit material fact;
• these statements present a true and fair view of the company’s
affairs and
• are in compliance with existing accounting standards, applicable
laws and regulations.
• no transactions entered into by the company were fraudulent, illegal
or violative of the company’s code of conduct.
• Responsible for Establishing and maintaining internal controls
• Evaluating effectiveness of the internal control systems
• Disclosed to the auditors and the Audit Committee, deficiencies in
the design or operation of internal controls
56
• Taking steps to rectify these deficiencies.
They have indicated to the auditors and the Audit Committee
• (I) significant changes in internal control/ accounting policies;
• (ii) disclosed changes in accounting policies in the notes to the
financial statements; and
• (iii) instances of significant fraud and the involvement if any, of the
management or an employee having a significant role in the internal
control system.
Subsidiary Companies
• Provisions relating to the composition of the Board of Directors of the holding
company shall be applicable to the composition of the Board of Directors of
subsidiary companies
• At least one independent director on the Board of Directors of the holding
company shall be a director on the Board of Directors of the subsidiary company
• The Audit Committee of the holding company shall review the financial
statements, in particular the investments made by the subsidiary company
• The minutes of the Board meetings of the subsidiary company shall be placed
for review at the Board meeting of the holding company
Related Party Transaction
• A statement of all transactions with related parties including their basis shall
be placed before the Audit Committee for formal approval/ratification.
• If any transaction is not on an arm’s length basis, management shall provide an
explanation to the Audit Committee justifying the same
Risk Management
• It shall put in place procedures to inform Board members about the risk
assessment and minimization procedures
• These procedures shall be periodically reviewed to ensure that executive
management controls risk through means of a properly defined framework.
57
• Management shall place a report certified by the compliance officer of the
company, before the entire Board of Directors every quarter documenting the
business risks faced by the company, measures to address and minimize such
risks, and any limitations to the risk taking capacity of the corporation. This
document shall be formally approved by the Board
Disclosures and Reports
• Non-Executive Directors’ pecuniary relationship or transactions with the
company has to be disclosed in the Annual Report.
• Disclosures on the remuneration of the directors
• Management Discussion and Analysis report should form part of directors’
report or in addition thereto it should form part of the annual report to the
shareholders.
Whistle Blower Policy
Internal Policy on access to Audit Committees
• Personnel who observe an unethical or improper practice (not
necessarily a violation of law) shall be able to approach the audit
committee without necessarily informing their supervisors
• This right of access be communicated to all employees through
circulars
Submissions
• Quarterly Compliance Report within 15 days from the end of the quarter.
(Format revised)
• Annual Compliance by the separate section in the Annual report.
• Compliance Certificate from the auditors of the company.
These guidelines make Indian corporate governance norms on par with the global
standards and in particular, the much discussed and debated aspects of the Sarbanes-
Oxley. A comparison of the guidelines of the Clause 49 and SOX, given below is self
explanatory.
Table9: Comparative Analysis of Clause 49 to SOX
58
Topic Clause 49 (Listed companies)
US- SOX & Other Laws
Board - Independence (gen.majority) -Internal Control system - Disclosure & Code of Conduct
-Independence - Internal Control System - Disclosure & Code of Conduct
Audit Committee - Independence (2/3) & Financially Literate - Review audit & internal audit
- Independence & Financially Literate - Review audit & Internal audit
Disclosures - Compensation - RPTs - Risk Management & Accounting Standards - Use of Proceeds
- Compensation - RPT’s -Risk Management, etc…not required, but generally provided. - Use of Proceeds
Certifications - CEO & CFO – Financials, Internal Control, Comply with Laws, Changes in Policy
- CEO & CFO – Financials, internal controls, etc…
Compliance - Certificate on this. - Disclosure compliance or not with mandatory and non-mandatory req’ts.
- Similar, but no requirement to disclose if meet non-mandatory req’ts.
CG Reports Quarterly Not required though often provided
Subsidiary - Significant issues report to parent board. - Independent directors.
- Generally required to report important issues as per state corporate law.
Non Mandatory - Training - Whistleblower policy - Evaluate non-executive board - Limits on independence
- Whistleblowers much more prevalent - Training not required, but often provide. - Performance evaluation - Greater discussion on compen. levels
Penalties & Enforcements De-Listing - Large criminal penalties (individuals & companies) - Large civil penalties (public & private).
From the above, it could be seen that;
• India has an effective framework for corporate governance
• The features of corporate governance are comparable to the best in the world.
• Significant improvements took place in the quality of corporate governance
• Regulation has shown keen interest in promoting better governance amongst
companies
59
• International investors recognize the reforms in corporate governance; though
expect further reforms in enforcement
• Better governance helped Indian companies to explore global markets in a
significant manner
60
Chapter V INSTRUMENTS OF
IMPORTANCE The growing significance of Board and its
Committees in designing and driving the CG agenda
The Board and its committees are the key instruments in driving the scope, significance,
quality of the governance in the companies. A board is defined as a group of individuals
that are elected as, or elected to act as, representatives of the stockholders to establish
corporate management related policies and to make decisions on major company issues.
Such issues include the hiring/firing of executives, dividend policies, options policies and
executive compensation. Every public company must have a Board of Directors. The Board
of Directors should be a fair representation of both management and shareholder's
interests, because too many insiders serving as directors will mean the board will make
decisions more beneficial to management. On the other hand, possessing too many
independent directors may mean management will be left out of the decision-making
process and may cause good managers to leave in frustration.
The board structure can be in the form of unitary board, dual board and mixed board. US
has the unitary board structure so as India. Other countries where unitary board structures
are prevalent included, Australia, Brazil, Canada, Egypt, India, Italy, Japan, Malaysia,
Norway, Philippines, Singapore, South Africa, South Korea, Sweden, Thailand, Turkey,U.S.,
Ukraine, United Kingdom, Zimbabwe.Dual board structure where share holders elect a
supervisory board that in turn appoints and supervises a management board, are more
prevalent in European countries such as Germany, Austria, Belgium, China, Croatia, Czech
Republic, Denmark, Estonia, Georgia, Germany, Holland, Indonesia, Latvia, Mauritius,
Poland, Spain, Taiwan, where as mixed board structures are more evident in countries like
Bulgaria, Finland, France, Switzerland.
In the aftermath of several codes of corporate governance coming into force in several
countries, the Board and its various committees, in particular the role and functions of the
Audit Committee have been extensively implemented and analysed. This chapter
discusses major aspects in regard the board in various aspects of composition, structure,
independence, as also one of the most importance committees of the board, namely the
Audit Committee.
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Recent academic and analytical exercises on the various aspects of the board of directors,
shows that (a) board size and independence have increased since SOX
{(Chhaochharia and Grinstein45, (2005)} (b) Busy boards donot harm shareholder wealth
(Ferris, Jagannathan and Pritchard46, (2003) (c) Board’s ability to monitor is compromised
at firms with several busy directors (Fich and Shivdasani47,2004)
(d) cozy board relationships limit effective monitoring (Larcker, Richardson, Tuna and
Seary48, 2005) (d) financial expertise on boards limits the likelihood of accounting
restatements (Agrawal and Chadha49, 2005) (e) market attaches more credibility to
earnings announcement when boards and audit committees are both independent and
active (Booth, Deli,50 1999) (f) presence of commercial bankers on boards is associated
with the size of loans, whereas on the presence of investment bankers is associated with
more frequent outside financings and larger public debt issues (Guner, Melmendier and
Tate51 (2005) (g) presence of financial experts does not necessarily improve shareholder
value (h) Excess compensation paid to directors is associated with excess CEO
compensation (Brick, Palmon and Wald52)
(i) Excess compensation is associated with poor future performance (j) excess
compensation for directors compromise their independence and leads to overpayment of
CEOs (k) proportion of outside directors, the number of board meetings and the tenure of
the board chair are associated with the incidence of fraud (Chen, Firth, Gao, and Rui53).
The board structure indicates risk elements on the evident of the following trends.
• Chairman not independent upon appointment
• Less than half of the board are non-executives
• Board turnover has been greater than 25% over the previous year or more than
three new people (excluding internal promotions) have joined the board in the
same period 45 Chhaochharia, Vidhi, Yaniv Grinstein, 2005, Corporate Governance and Firm Value: The Impact of 2002 Governance Rules, Working Paper, Cornell University. 46 Ferris, Stephen P., Murali Jagannathan and A.C. Pritchard, 2003, Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments, Journal of Finance, 58, 3, 1087-1112. 47 Fich, Eliezer and Shivdasani Anil,, 2004, Are Busy Boards Effective Monitors? Finance Working Paper No. 55/2004, European Corporate Governance Institute 48 Larcker, David F., Scott A. Richardson, Andrew Seary and A. Irem Tuna, 2005, Back Door Links Between Executives and Executive Compensation, Working Paper, The University of Pennsylvania. 49 Agrawal, Anup and Chedda, Shaiba, 2005, Corporate Governance and Accounting Scandals, Journal of Law and Economics. 50 Booth, James, Deli, Daniel N, 1999, On Executives of Financial Institutions as Outside Directors, Journal of Corporate Finance 5, 227-250. 51 Guner, A. Burak, Ulrike Malmendier,m Geoffrey Tate, 2005, The Impact of Board with Financial Expertise on Corporate Policies, Working Paper, Stanford University. 52 Brick, Ivan E., Oded Palmon and John Wald, CEO Compensation, Director Compensation and Firm Performance, Evidence of Cronyism. 53 Chen, Firth, Gongmeng Gao and Rui, Ownership Structure, Corporate Governance and Fraud: Evidence from China.
62
• Fewer than three executive directors
• No senior independent director on the board
• Chairman of the company is chair of the audit committee
• Executives on the audit committee.
• Remuneration risk indicators:
• Any Insight votes against or abstentions on the company’s remuneration report in
the past three years
• Any Insight votes against or abstentions on the company’s share schemes in the
past three years.
Board evaluation forms an important aspect of assessing the performance as also sharing
important aspects that will lead to better functioning of the board. Board performance
review is emerging as an important aspect of strengthening the board structure and
performance. In a recent evaluation of the board performance, The Institute of Chartered
Secretaries and Administrators (ICSA), London brought out some important observations.
These observations published in the Year Book 2007 of the International Corporate
Governance Network are reproduced below.
• People factors are of far greater importance than process factors in getting an
effective board – eg how do the directors work as a team; what are their
interpersonal skills; is there a dominant or bullying chairman or CEO; how effective
is the Senior Independent Director; is the chairman an effective leader; do all
directors contribute; what is the level of commitment (preparedness, engagement,
absenteeism); is the board objective in acting on behalf of the company; is it
robust in taking and sticking to difficult decisions; are decisions reached by the
whole board; do decisions take account of shareholders’ views; are there any
“unmanaged” conflicts of interest; is the composition of the board being refreshed
(succession planning)?
• Backing from the chairman for both the evaluation and the form of the evaluation
is extremely important. If they are doing it for the sake of doing it – for example
because the UK Combined Code requires it – the evaluation process becomes
difficult. The chairman is likely to want to prove that he was right in thinking that
it need not be done, so he may be tempted to try to rubbish the report. Although
difficult to do under those circumstances, the recommendations (obviously if well-
founded) should still have an impact, but it is likely to take longer for the directors
to find their own ways to implement them. • Sometimes there can be a surface
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(occasionally almost belligerent) complacency that the board is performing well –
so why bother with an evaluation? • We encounter occasional complaints that
“doing all this box ticking does not help the bottom line” – but recent scandals
have served only to heighten shareholder concern that the companies in which they
invest are being run soundly.
• There are often problems getting the optimum level of interaction between non-
executive and executive directors. Lack of contact between meetings and
sometimes a lack of understanding of the role of nonexecutives (particularly in
smaller companies) are both contributors to this. If good interaction is not
achieved then the company fails to gain the most from all concerned.
• There can be a lack of interaction between the nonexecutive directors and the
senior managers outside the board, which makes it difficult for the non-executives
to get a real feel for the business. This can happen where there is a strong culture
against allowing senior management or external advisers to attend board meetings
to present items.
• It was some good succession planning, for example in one company less than nine
months after the current chairman (a former NED) had been appointed, one board
was looking ahead six years to finding a new chairman.
• It was found that some poor succession planning, in another a change of finance
director and the lead audit partner at the same time.
• The volume of business now handled by the main committees, particularly the
audit committee, has resulted in executive directors not involved in those
committees feeling distanced from those matters.
• It is found some excellent use of the nomination committee – one’s remit was
widened to embrace top management development.
• There are also examples of poor use of the nomination committee: a new
executive director appointed from outside the company without reference to the
committee; an executive director switched to an entirely different main board
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portfolio without reference to the committee; the committee was just not
meeting.
• In some companies the executive directors, other than the CEO, do not act as full
directors but as department heads looking to the CEO to take the lead. •
Occasionally, where a small caucus of key directors gets on particularly well, the
NEDs can feel like mushrooms (at least as regards light levels)!
• Many companies struggle, or have struggled, with getting the right level of
information to the board. The optimum amount will vary from board to board
depending on the type of business and the level of trust that has built up.
• Getting the optimum number of board meetings can be a problem – balancing the
needs of the business with the time available from the best directors, particularly
when there are overseas directors. There are instances where presentations are
made to a board and then no time is available for discussion.
• Directors have welcomed the opportunity to stand back and look at how they
work.
Another important aspect that is assuming importance in regard to the board structures in
particular its composition is the representation of women. Gender equality in boards is
assuming significance, though women representation in the boards remains at very low
levels in many countries. Norway made a major breakthrough in this regard by introducing
from January 2003, that enterprises that are subject to statutory audit to prepare an
annual report are required to be specific in that report the state of the gender equality in
that enterprise and what measures have been or planned to be implemented to promote
gender equality. The percentage of women on the boards increased from 6 percent in 2004
to 25 percent by January 2007. and thirty eight percent of the 500 odd public limited
companies in the private sector were able to fulfill the gender requirements in the board.
Special databases have been created to find companies find competent women as board
directors and several activities to promote women participation in the boards such as
arranging training courses to develop women directors are being carried out. Stringent
action is provided for companies not complying with women representation in the board.
The Public Limited Companies Act, the Norwegian law provides for the liquidation and
65
dissolution of the company found failing to meet the statutory requirements regarding
women representation in the board.
Graph9: Percent of Directors who are women
Source: EISIR Significant developments are taking place in the realm of the audit committee. DeZoort, F
Todd 54 (2002) observe that an effective audit committee has qualified members with the
authority and resources to protect stakeholder interests by ensuring reliable financial
reporting, internal controls, and risk management through its diligent oversight efforts.
Major aspects that determine the effectiveness of the board include; Composition -
expertise, independence, integrity, objectivity; Authority - responsibilities, influence
(derived from full board of directors, federal law, and exchange listing requirements);
Resources - adequate number of members; access to management, external auditors, and
internal auditors ; Diligence - incentive, motivation, perseverance. Mark L. DeFond,
Rebecca N. Hann, Xuesong Hu55( 2004) examine 3-day cumulative abnormal returns (CARs)
around the announcement of 850 newly appointed outside board members assigned to
audit committees during 1993-2002, a period prior to the implementation of the Sarbanes-
Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose
whether they have a financial expert on their audit committee, the authors tested
whether the market reacts favorably to the appointment of directors with financial
expertise to the audit committee. In addition, because it is controversial whether SOX
should define financial experts narrowly to include primarily accounting financial experts
54 Dezoort, F Todd, Hermanson, Dana Ra, Archambeault, Deborah S.,Scott A, 2002, Audit Committee Effectiveness, Journal of Accounting Literature. 55 Defond, Mark L, Hann, Rebecca N, Hu Xuesong, 2004, Does the Market Value Financial Expertise on Audit Committees of Boards of Directors, Leventhal School of Accounting, University of South California, Los Angeles.
66
(as initially proposed), or more broadly to include non-accounting financial experts (as
ultimately passed), the authors separately examined appointments of each type of expert.
The study finds significantly positive CARs around the appointment of accounting financial
experts to the audit committee, but not around the appointment of non-accounting
financial experts or directors without financial expertise. In addition, CARs are only
positive when the newly appointed outside directors are independent (as opposed to
affiliated), and when the appointing firms have relatively strong corporate governance
prior to appointing the new directors. Zulkarnain Muhamad Sori, Mohamad Ali Abdul
Hamid, Siti Shaharatulfazzah Mohd Saad, Jonathan Gerard Evans56 (2007) investigated the
perceptions of senior managers of Malaysian publicly listed companies on issues relating to
audit committee authority and effectiveness. The perceptions were sought on seven
issues, namely audit committee appoints the auditor, audit committee determines and
reviews audit fees, audit committee determines and reviews the auditor’s scope and
duties, and audit committee’s reports, meetings, charter and roles. The majority of
respondents agreed that auditor would be more effective and independent if audit
committee assumed the responsibility to appoint the auditor, determine and review the
audit fees, and determine and review the external auditor’s scope and duties. It is also
found that disclosure of audit committee report, quarterly meeting and disclosure charter
in annual report would enhance the perceptions of users of financial statement concerning
the effectiveness of the committee. A study by the JD Power57 on the effectives of the
audit committees brought out the following aspects;
• More frequent meetings between the audit committee and the external auditor
improve performance ratings by the audit chair. External auditors who meet with
the audit chair seven or more times per year receive the highest ratings. Most audit
committees meet five or more times annually with the external auditor. Compared
to 2003, audit committees of both small and large companies are meeting more
frequently.
• Excluding management from some meetings also increases ratings with the audit
process.
• The majority of companies that meet four to six times annually frequently exclude
management.
56 Sori, Mhumamad Zulkarnain, Hamid, Mohamad Ali Abdul, Saad, Stiti Sharatulfazzah Mohd, Evans, Jonathan Gerard (2007), Audit Committee Authority and Effectiveness: The Perceptions of Malaysian Senior Managers, Euro Journals Publishing Inc, 2007 57 J.D.Power and Associates, 2004.
67
• Audit committee chairs who spend between 16 and 20 hours annually attending
audit committee meetings rate the audit experience higher than those spending
fewer than 16 hours. Conversely, ratings begin to drop once the number of hours
attending audit committee meetings exceeds 20.
The Blue Ribbon Committee constituted by the New York Stock Exchange and NASD which
was headed by John Whitehead and Ira Millstein (1998) made following recommendations
for the strengthening of the audit committees.
Membership of the Audit Committee
Members of the audit committee shall be considered independent if they have no relationship to
the corporation that may interfere with the exercise of their independence from management and
the corporation. Examples of such relationships include:
• • a director being employed by the corporation or any of its affiliates for the current year
or any of the past five years;
• • a director accepting any compensation from the corporation or any of its affiliates other
than compensation for board service or benefits under a tax-qualified retirement plan;
• A director being a member of the immediate family of an individual who is, or has been in
any of the past five years, employed by the corporation or any of its affiliates as an
executive officer;
• A director being a partner in, or a controlling shareholder or an executive officer of, any
for-profit business organization to which the corporation made, or from which the
corporation received, payments that are or have been significant to the corporation or
business organization in any of the past five years;
• A director being employed as an executive of another company where any of the
corporation’s executives serves that company’s compensation committee.
• A director who has one or more of these relationships may be appointed to the audit
committee, if the board, under exceptional and limited circumstances, determines that
membership on the committee by the individual is required by the best interests of the
corporation and its shareholders, and the board discloses, in the next annual proxy
statement subsequent to such determination, the nature of the relationship and the reasons
for that determination.
Financial Literacy
• A well-balanced and effective board should, as noted above, have directors with an array of
talent, experience, and expertise which bear on different aspects of the company’s
activities; such diverse contributions are often made by different directors. Because of the
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audit committee’s responsibility for overseeing the corporate accounting and financial
controls and reporting, however, this committee clearly has a more recognizable need for
members with accounting and/or related financial expertise -- where “expertise” signifies
past employment experience in finance or accounting, requisite professional certification in
accounting, or any other comparable experience or background which results in the
individual’s financial sophistication, including being or having been a CEO or other senior
officer with financial oversight responsibilities. While all members of the audit committee
must have the ability to ask probing questions about the corporation’s financial risks and
accounting, the Committee recognizes that a director’s ability to ask and intelligently
evaluate the answers to such questions may not require “expertise” but rather hinges on
intelligence, diligence, a probing mind, and a certain basic “financial literacy.” Such
“literacy” signifies the ability to read and understand fundamental financial statements,
including a company’s balance sheet, income statement, and cash flow statement.
Directors who have limited familiarity with finance can achieve such “literacy” through
company-sponsored training programs. Because of the audit committee’s responsibilities
and the complex nature of the accounting and financial matters reviewed, the committee
merits significant director resources, both in terms of the number of directors dedicated to
the committee and the time each director devotes to committee matters.
Audit Committee Structure and Process
• A key attribute of a good board is its own diligence in defining the board’s role,
responsibilities, structure, and processes. An effective board is self-aware and determines
how best to carry out its important tasks. Likewise, a well-functioning audit committee will
be concerned about and spend a significant amount of time defining the scope of its over-
sight responsibilities and how it discharges its duties. Just as good boards often adopt
formal guidelines on how they should operate; a good audit committee should memorialize
its understanding of its role, responsibilities, and processes in a charter. In focusing its
activities on oversight of the entire reporting process, the committee will be more likely to
recognize those duties better left to management, including the internal auditor, and the
outside auditors. Further, the audit committee should disclose its self-determined role,
structure, and practices. Such transparency is at the heart of good governance, serves to
inform investors, and also acts as a disciplinary measure on the committee. It will
encourage committees to think about their important role, to articulate a clear mission,
and then to establish appropriate practices and follow them. Disclosure will guide the
committee to responsible practices, as sunlight generally does. It is not the Committee’s
intention or belief that such additional disclosure requirements would impose greater
liability on the audit committee or full board under state law. Rather the current standards
for liability under the business judgment rule -- in essence, gross negligence -- would
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continue to apply. While such a “safe harbor” presumably exists in the context of a state-
law fiduciary duty claim, the Committee believes that the SEC should adopt a safe harbor
under the federal securities laws similar to the one now applicable to the executive
compensation committee’s report which appears in the proxy statement. Importantly, the
Committee does not recommend mandating every detail to be included in the guidelines for
every audit committee. There are too many variables amongst the multitude of different
corporations comprising our economy. The Committee recommends that every audit
committee consider the contents of the section of this Report entitled “Guiding Principles
for Audit Committee Best Practices,” which is designed to guide the development of the
substantive content of an audit committee charter. We also encourage audit committees to
refer to the sample charters included in Appendix C and the publications included in the
Bibliography to this Report as a starting point for best practices to be considered.
Ultimately, the market will be the judge of whether each committee’s disclosed guidelines
are adequate.
Audit Committee Relationships with Management, including the Internal Auditor, and with the Outside Auditors
• Management including the internal auditor, the full board including the audit committee,
and the outside auditors, all has a distinct role in corporate accounting and financial
reporting. All of these actors must work together fluidly to effectuate an objective and
responsible system. In this system, management is principally responsible for company
accounting policies and the preparation of the financial statements. The outside auditor is
responsible for auditing and attesting to the company’s financial statements and evaluating
the company’s system of internal controls. The audit committee, as the delegate of the full
board, is responsible for overseeing the entire process. In those companies with an internal
audit function, the internal auditor also plays a significant role in working with
management, the outside auditor, and the audit committee in ensuring the effectiveness of
internal controls and in bringing any weaknesses to the attention of the appropriate
parties. In light of these interrelated functions, it is important to delineate the nature of
the relationships among these actors -- specifically the “direction” of certain reporting
relationships and tiers of accountability among them. In particular, the relationship of the
outside auditor with each of management and the audit committee must be clarified. As
noted in the 1994 POB Report “[i]n most companies today, management selects or
recommends auditors and changes in auditors, negotiates fees, selects accounting
principles, makes estimates, prepares the financial statements and monitors the audit.”
Consequently, the outside auditors typically develop over time close relationships with
management. Indeed, by virtue of their responsibility for everyday operations, senior
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managers need to interact closely with the outside auditors over issues arising in the
financial reporting process. Additionally, the expanding role of outside auditors,
particularly in providing non-audit services, has further entwined the relationship of
management and the outside auditors. It is therefore imperative to the integrity and
effectiveness of the audit committee oversight process that all parties recognize that the
audit committee and full board, as the representatives of shareholders, are the ultimate
entities to which the auditors are accountable. As such, the audit committee has the
responsibility to review regularly the relationship between management and the outside
and internal auditors. Since audit committees are members of the board of directors with
enhanced responsibility for overseeing a company’s financial reporting, they serve, as SEC
Chairman Levitt has noted, as the “primary link” between a board and its outside auditors.
To make this relationship effective, the committee and the outside auditors must develop a
direct, strong and candid relationship. That is to say that the lines of communication and
reporting should facilitate independence from management and encourage the outside
auditors and the internal auditors to speak freely, regularly and on a confidential basis with
the audit committee. Moreover, because the outside auditor is responsible for attesting to
the fair presentation of the financial statements, its reputation for objectivity must not be
compromised. In recognition of this, the Independence Standards Board (ISB) recently
adopted a new Standard mandating that the outside auditor of a public company: (i)
disclose in writing to the company’s audit committee all relationships with the company
that could affect the auditor’s independence; (ii) confirm its view that it is independent of
the company; and (iii) discuss such matters with the audit committee. The Committee
recognizes that this disclosure and discussion is a two-way street: to ensure a useful
examination of the objectivity of the outside auditor, the audit committee must be an
active participant in this process.
Practical Improvements to Audit Committee Oversight
• To facilitate audit committee oversight of the financial reporting process and deepen the
audit committee’s probing of the relevant issues, the Committee believes that both the
outside auditor and the audit committee should have greater affirmative disclosure
requirements – to each other and, when appropriate, to the public.
Enhancing the Outside Auditors’ Communication with the Audit Committee
• The audit committee is dependent on both management and the outside auditors for a full
range of information -- based in both fact and judgments -- regarding the financial
reporting process. Under the current auditing standards, the outside auditor is required to
communicate certain information to the audit committee, including matters such as
disagreements with management, consultations with other accountants, and difficulties
encountered in performing the audit such as unreasonable delays by management or
unavailability of client personnel. In addition, the auditor is required to report to the audit
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committee “reportable conditions,” which are deficiencies that could adversely affect the
company’s ability to produce reliable financial statements. Further, the outside auditor
may be required to report illegal acts detected during the audit to management and the
audit committee. While all this information serves as a concrete basis upon which the audit
committee evaluates a company’s compliance with financial reporting requirements, it may
too often be distilled into a standardized “form” letter. In addition, such information offers
little guidance on the more subjective judgments that arise in the ordinary course of
financial reporting. In preparing a company’s financial statements, judgments are made
concerning estimates, elective accounting principles and new significant transactions. The
Committee believes that many concerns about the “quality” of financial reporting can be
attributed to a failure to question such significant subjective judgments. These judgments
can have a significant impact on how the financial statements are presented, and the
Committee believes that the audit committee should be positioned to adequately assess
their influence on the company’s financial reports.
Instituting Audit Committee Disclosure
• Disclosure and transparency form a cornerstone of corporate governance, enabling
shareholders to make informed decisions about their investments and the performance of
those parties managing company assets and representing their interests. Past groups that
have studied ways to improve the financial reporting process have differed over the value
of requiring audit committees to disclose specified information about their activities. In
recommending implementation of a disclosure requirement, the Treadway Report noted
that this action could “reinforce the audit committee’s awareness and acceptance of their
responsibilities.” By comparison, the 1994 POB Report expressed concern that this
additional disclosure could become “lengthy `boilerplate’ that does not get to the heart of
the underlying issue.” Past experience supports both these views. After the SEC imposed
disclosure requirements on those committees that establish executive compensation, for
instance, there were numerous reports of increased director awareness of the important
role compensation plays in providing the proper incentives for management performance.
However, many of these well-meaning disclosure requirements over time have fallen prey
to well-parsed language that is nearly identical from one filing to the next. Based on these
and other examples and the feedback provided through its hearings and invitation to
comment, the Committee supports a “middle ground” approach between the Treadway
Report’s recommendation for a full fledged report and the 1994 POB Report’s rejection of
imposing a meaningless disclosure requirement. General disclosure about the audit
committee’s review of the entire audit process -- from management’s and the internal
auditor’s accounting practices to the outside auditor’s audit of the company’s financial
statements -- will highlight that the audit committee is in place to assure shareholders that
procedures that promote accountability are integrated into the roles and practices of all
the other relevant players. A formal disclosure by the audit committee as to its view of the
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company’s financial statements that is consistent with the board’s existing duty to sign the
Form 10-K, will serve to raise public awareness of the importance of the audit committee’s
role as well as underscore its importance for audit committee members. The Committee
appreciates the impracticability of having the audit committee do more than rely upon
information it receives, questions, and assesses in making this disclosure.
Mandating Auditor Interim Financial Review
• The Committee acknowledges the pressures on companies to meet or beat Wall Street
earnings projections and the important role of interim reporting to a company’s market
performance. Currently, companies can have their outside auditors limit their review of
such financial statements to the end of the year before the annual report is filed with the
SEC. This practice has led to “adjustments” at year end for inaccuracies not detected
during the preceding three quarters. The Committee believes that increased involvement
by the outside auditors and the audit committee in the interim financial reporting process
should result in more accurate interim reporting. Recognizing the importance of these
reviews, each of the Big Five accounting firms recently required their clients to implement
such procedures as a condition to their audit engagement. An increased level of monitoring
of the interim reporting process can be achieved by requiring regular interim
communications by the outside auditor with financial management and the audit
committee. Of course, the outside auditors’ ability to fulfill such a requirement would be
dependent on the cooperation and availability of financial management and the audit
committee. The Committee fully expects that financial management and the audit
committee would engender the appropriate diligence, initiative and commitment to
participate in such communications.
Board and Audit Committee thus form the key instruments governing the quality of
corporate governance. In this background, it is important that measures involved in these
instruments are devised with greater care and focus so to enable these to make effective
and meaningful contribution to the standards of governance. Though in principle these
instruments are put in place for implementation and compliance, there is much to be done
in regard to improving their overall quality and robustness. International evidence
available on the subject should provide useful insights to corporates in evolving effective
frameworks
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Chapter VI INDIA PRACTICE
A review of governance practices and procedures In major corporates in India
India has been ranked high on several aspects of corporate governance such as shareholder
rights, creditor rights, disclosure requirements, liability standards and quality of
regulation; whereas it displays limitations on aspects such as enforcement, corruption, red
tape, ease of doing business, hiring and firing staff, quality of credit information, contract
enforcement. India’s position in regard to key indicators of standards in governance and
securities law is given in annexure.
The above trends could be better explained by Indian companies winning global accolades
for the corporate governance on one hand and the securities market regulator show
causing some companies, including the public sector, to tone up the governance
parameters on the other. In September 2007. World Council for Corporate Governance, a
UK based organisation, announced global awards in the emerging markets category for
ONGC, NTPC, Jubilant Technologies and GTL. Several others awarded in the national
category included; LIC India (Insurance); Punjab National Bank (Banking); Hindustan
Construction Company (Construction); India Travel House (Hospitality); KPIT Ltd (IT);
Power Finance Corporation (Power); Hindustan Petroleum Company Ltd (Petroleum);
Hindustan Zinc, Ltd (Metal) and Shree Cement (Manufacturing). In a related development,
Infosys Technologies, Kotak Mahindra Bank, Satyam Computer Services and Grasim
Industries were figured in the IR Global Rankings: 2007 announced by the IR Global
Rankings, a global investor relations web company. Around the same time, Securities and
Exchange Board of India, has initiated proceedings against 20 companies for non
compliance of corporate governance, among which five were reported to be the public
sector undertakings.
Practice of corporate governance has progressed in a big way in Indian companies. There
are several companies which made proactive initiatives in introducing good governance
norms and standards even before these became mandatory. For instance, in its corporate
governance report, Wipro, mentions about some of the pioneering efforts made by it in
setting good governance standards such as; instituting stock ownership in 1984,
constitution of sub-committees of the Board of Directors for Audit, compensation and
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benefits in 1986 and preparation of consolidated financial statements in 1983 the first
year in which it established a subsidiary company. Similarly, good governance in Tata
Power is governed by “Leadership with Trust” a principle that has been in practice since
long; where as Tata Motors began Tata Business Excellence Model and the Tata Code of
Conduct. Ranbaxy voluntarily adopted several best practices in good governance in 1999
that included; majority independent directors in the composition of the board,
constitution of board committees for oversight and guidance concerning key decisions and
soundness of decision making processes connected with the functioning of the company,
timely dissemination of information to shareholders and a code of conduct. Infosys not
only complies with Indian governance standards but also Euro shareholders Corporate
Governance Guidelines 2000 and the recommendations of the Conference Board
Commission on Public Trusts and Private Enterprises in the United States. It also adheres
to the UN Global Compact Programme. ACC has instituted a Chair for Business Ethics at
the Management Center for Human Values at the Indian Institute of Management, Kolkata.
The objectives of the corporate governance of the companies included in this paper are
given along with the corporate governance practice profiles of the respective companies.
The governance practices set out by the Reliance Energy beyond the regulatory
requirements include; Values and Commitments, Code of Ethics, Business Policies,
prohibition of insider trading, prevention of sexual harassment, whistle blower policy,
environment policy, risk management, SA 8000 (standard for social accountability), six
sigma, OHSAS 18001 (for establishment of occupational and safety management system)
etc., Some of the innovations in the boardroom practices that were detailed in the
corporate governance report included; Board charter, tenure of independent director,
Interaction of non-executive, including independent directors with the chairman, lead
independent directors, independent director’s interaction with shareholders, meeting of
independent directors without the management, independent director on the risk
management committee, commitment of directors, evaluation of the board etc.,
For the purpose of this study, corporate governance standards as in prevalence and
practice are assessed in respect of 42 companies across 12 sectors. Information for the
study was collected through a wide range of means which included, analysis of the
corporate governance reports of the respective companies, information collected through
a separately designed questionnaire for the study, consultations with the senior officials of
75
the board secretariats of the respective companies, consultations with the officials of the
stock exchanges and regulatory authorities etc.
A total of 42 companies are analysed in regard to their corporate governance practices and
these companies belong to the following sectors.
Table 10: Sample Companies
Sector Companies
Automobiles Tata Motor, Bajaj, Hero Honda (3)
Cement ACC, Ultratech, Gujarat Ambuja (4)
Consumer Durables Whirlpool, Videocon (2)
Diversified ITC, L&T (2)
Energy NTPC, Reliance Energy, Tata Power (3)
Financial Services SBI, ICICI Bank, HDFC Bank (3)
FMCG HLL, Nestle, Brittania (3)
Information Technology Infosys, Wipro, Satyam, Mphasis (4)
Metals SAIL, Hindalco, Essar, Tata Steel, Jindal Steel (5)
Petroleum and Mining HPCL, BPCL, ONGC, Indian Oil, RIL (5)
Pharma Dr. Reddy’s. CIPLA, Merck, Ranbaxy, Glaxo (4)
Telecom Bharti, MTNL, VSNL, Reliance Com (4)
The study has also carried out extensive research on the academic perspectives on the
subject of corporate governance as also important literature emanating from global,
regional and national institutions engaged in the subject.
The 42 Companies included in the study are taken from 12 major sectors and these
companies together account for over 80 percent of the stock market capitalization
(October 2007). These companies represent 77 percent of the Sensex and 64 percent of
the Nifty (50) constituents.
A broad overview of the practice of corporate governance in these companies shows that,
excepting maintaining the proportion of the independent directors, a problem that was
found more pertinent amongst the public sector undertakings, companies by and large
have adhered to the compliance standards as prescribed under the Clause 49 of the Stock
Exchange Listing Agreements as also other related guidelines. Some companies even have
76
exceeded the mandatory norms by adopting best practices as prevalent in global
corporates.
The summary table given below shows the major aspects of the corporate governance in
respect to the following aspects.
1. Average number of directors in the board
2. Percent of companies where the chairman is non executive
2a.Proportion of non executive directors
2b. Proportion of Independent directors
3. Percent of companies where the chairman is executive
3a. Proportion of non executive directors
3b. Proportion of Independent directors
4. Number of companies in which the chairman is Independent director
5. Number of Board Meetings held
6. Number of Audit Committee Meetings held
7. Number of Investor Grievances Meetings held
8. Share holding pattern
8a. Promoters
8b. FIIs
8c. Individuals
9. Space devoted to Corporate Governance Report.
Aspects taken for assessment no 1 to 8 are self explanatory. For the purpose of this study
a new parameter is taken for assessment that measures the amount of space devoted to
discussion on corporate governance in the annual reports of the companies. This measure
needs to be further examined and validated, but for the purpose of the study is taken to
assess the extent of efforts made by the corporates in discussing various aspects of the
policy and practice of corporate governance in their respective annual reports. This is
computed on the basis of the number of pages devoted to the discussion on the corporate
governance in the total number of pages of the annual report.
Table 11: Summary of Corporate Governance Practice
Directors Total Companies 42 Total Directors 500 Total Number of Non Executive Director 323 Total Number of Independent Directors 228
77
Proportion of Independent Directors to Total Directors 45.6 Proportion if Non Executive Directors to Total Directors 64.6 Chairman Total Number of Companies having Executive Chairman 20 Total Number of Companies having Non Executive Chairman 19 Total Number of Companies having Non-exe Independent Chairman 3 Proportion of Companies having Executive Chairman 47.62 Proportion of Companies having Non-Executive Chairman 45.23 Proportion of companies having Non exe Independent Chairman 7.14 Meetings Total Board Meetings held 326 Total Audit Committee Meetings held 262 Total Investor Committee Meetings held 206 Average Boards Meetings held 7.76 Average Audit Committee Meetings held 6.24 Average Investor Grievances Committee Meetings held 4.9 Companies where the Chairman is Non Executive Total number of directors 210 Total Number of non executive directors 146 Total number of Independent director 93 Proportion of non executive directors 69.53 Proportion of independent Directors 44.28 Companies where the Chairman Executive Total number of directors 255 Total Number of non executive directors 162 Total number of Independent director 119 Proportion of non executive directors 63.52 Proportion of independent Directors 46.66 Companies where the Chairman is Non Executive & Independent Total number of directors 35 Total Number of non executive directors 25 Total number of Independent director 16 Proportion of non executive directors 71.42 Proportion of independent Directors 45.71
A brief discussion on each of the aspects examined in respect to the practice of the
corporate governance are discussed below.
78
Table 12: A Snapshot of Corporate Governance
Particulars Metals FMCG
Con Dur
Petro Mine Banks Energy IT Pharma
Cem ent
Tel com
Diver sified Auto
Average No of Directors 12.33 9.7 9 12.6 12.33 11 11 10.4 14 12 14.5 14.33 %companies where the
chairman is non executive 83 66 50 na 66.6 33.3 50 80 100 33.3 na 33
Proportion of Non Executive Directors 73 74 50 na 50 67 74 60 67 80 na 81
Proportion of Independent Directors 42 43 33.3 na 61.5 33.3 48 42 33.3 40 na 45
% of companies where the chairman is executive 17 33 50 100 33.3 33.3 50 20 na 67 100 67
proportion of non executive directors 59 83 67 57 36.4 47.6 76 75 na 89 62 72
Proportion of Independent Directors 50 50 33.3 41 36.4 38.1 71 75 na 50 55 50
Number of companies in which the chairman is Independent
Director 60 na na na No of Board Meetings held in
FY07 7.5 5.33 12 11.4 8.33 8.67 6.5 5.4 7.33 7.67 8 6.33 No of Audit Committee
Meetings held 5.33 5 4.5 7.8 8.33 7 6 4.6 6.33 5.33 7.5 8 Number of Investor Grievances
Comm Meetings 1 1.33 2 1.2 8.33 1.33 3 2 8 4.66 18 8
Promoter Shareholding 61.46 54.75 76.34 62.58 27.1 58.63 38.87 40.21 39.14 59.28 34.38 39.39
FII Share holding 12.67 12.2 2.03 13.29 32.02 14.06 23.94 15.79 21.93 13.76 15.58 22.34
Individual share holding 13.57 17.8 9.28 7.52 8.25 9.57 10.95 19.73 19.91 1.99 20.12 14.45 Space devoted to Corporate
Governance Report 7.93 16 11.58 13.37 9.55 11.16 10.63 14.77 16.71 11.26 10.15 11.08 Sectors : Metals; Fast Moving Consumer Goods, Consumer Durables, Petroleum and Mining, Banks, Energy, Information Technology, Pharmaceuticals, Cement, Telecommunications, Diversified and Automobiles
1. Average number of directors in the Board
The 42 companies have together 500 directors giving an average of 11.9 per company. Of
the 500 directors, 64.6 percent are non executive directors and 45.6 percent are
independent directors. The average number of directors range from 9 in the Consumer
Durables to 14.5 in the Diversified industry sector.
79
Table 13: Average Number of Directors
Sector Average Number of Directors
Automobiles 14.33
Cement 13
Consumer Durables 9
Diversified 14.5
Energy 11
Banks 12.33
FMCG 9.7
Information Technology 11
Metals 12.33
Petroleum and Mining 12.6
Pharma 10.4
Telecom 12
Graph 10: Distribution of Directors
Distribution of Directors
45.6
64.6
Proportion of IndependentDirectors to Total Directors
Proportion if Non ExectuiveDirectors to Total Directors
80
Graph 11: Comparative Analysis of Entire Sample Data
Comparitive Analysis of Entire Sample Data
0
20
40
60
80
Proportion of Non-executive
Directors
64 70 41
Proportion of Independent
Directors
47 45 46
Executive Chairman Non executive Chairman Independent Chairman
Graph 12: Proportion of Directors in different categories
0
1
2
3
4
5
6
7
Non Executive Independent Chairman 0 0 0 0 0 0 0 0 3 0 0 0
Non Executive Chairman 4 2 1 0 2 1 1 1 1 2 3 0
Executive Chairman 2 1 1 5 1 2 2 2 1 2 0 2
Metals FMCG
Consume
r
Durables
Petroleu
m&MiningBanks Energy
Automobi
leTelecom
Pharmace
uticalsIT Cement
Diversifie
d
81
Graph 13: Average No. of Directors
Average No of Directors
0
4
8
12
16M
etal
s
FMCG
Con
sum
er D
urab
les
Petr
oleu
m &
Min
ing
Fina
ncia
l Ser
vice
s
Ener
gy
Aut
omob
ile
Tel
ecom
mun
icat
ions
Phar
mac
euti
cals
Info
rmat
ion
Tec
hno
logy
Cem
ent
Dive
rsif
ied
Sectors
2. Percent of companies where the chairman is non executive
2a.Proportion of non executive directors
2b. Proportion of Independent directors
Of the 42 companies, 19 have non executive chairman. In companies where the chairman
is non executive, there are about 210 directors of which 69.53 are non executive directors
and 44.28 percent as independent directors. Proportion of non executive directors and
independent directors in companies where the chairman is non executive is given below.
Graph 14: Percentage Companies where the Chairman is Non Executive
% companies where the chairman is non executive
0
20
40
60
80
100
120
Met
als
FMCG
Cons
umer
Dur
able
s
Petr
oleu
m &
Min
ing
Fina
ncia
l Ser
vice
s
Ener
gy
Auto
mob
ile
Tele
com
mun
icat
ions
Phar
mac
euti
cals
Info
rmat
ion
Tech
nolo
gy
Cem
ent
Dive
rsif
ied
Sectors
%
Graph 15: Composition of the Board when the Chairman is Non Executive
82
Composition of the board when the Chairman is Non executive
0
20
40
60
80
100
120
140
Proportion of Independent Directors 42 43 33.3 0 61.5 33.3 45 40 42 48 33.3 0
Proportion of Non Executive Directors 73 74 50 0 50 67 81 80 60 74 67 0
Metals FMCG
Consume
r
Durables
Petroleu
m &
Mining
Financial
ServicesEnergy
Automob
ile
Telecom
municati
ons
Pharmace
uticals
Informati
on
Technolo
CementDiversifie
d
Table 14: Proportion of Non Executive and Independent Directors when the Chairman is Non Executive
Sector Percent of
companies
where the
Chairman is non
executive
Proportion of
Non
Executive
Directors
Proportion of
Independent
Directors
Automobile 33 81 45
Cement 100 67 33.3
Consumer Durables 50 50 33.3
Diversified Executive chairmen
Energy 33.3 67 33.3
Banks 67 50 61.5
FMCG 66 74 43
Information Technology 50 74 48
Metals 83 73 42
Petroleum and Mining Executive Chairmen
Pharma 80 60 42
Telecom 33 80 40
3. Percent of companies where the chairman is executive
3a. Proportion of non executive directors
3b. Proportion of Independent directors
83
There are 20 companies in which the chairman is executive. In companies where the
Chairman is executive, there are 255 directors of which 63.42 percent are non executive
and 46.7 percent are independent. The proportion of non executive directors and
independent directors in companies where the Chairman is executive is given below. From
the table below it could be observed that the proportion of independent directors when
the chairman is executive is shot of the mandatory requirements in sectors like energy,
financial services and petroleum in mining. In all these sectors, the company specific data
indicates that public sector undertakings face constraints in filling up the positions of the
non independent directors in the board since they are appointed by the Government.
Graph 16: Percentage of Companies where the Chairman is Executive
% of companies where the chairman is executive
0
20
40
60
80
100
120
Met
als
FMCG
Cons
umer
Dur
able
s
Petr
oleu
m &
Min
ing
Fina
ncia
l Ser
vice
s
Ener
gy
Auto
mob
ile
Tele
com
mun
icat
ions
Phar
mac
euti
cals
Info
rmat
ion
Tech
nolo
gy
Cem
ent
Dive
rsif
ied
Sectors
%
Graph 17: Composition of Board when the Chairman is Executive
Composition of Board when the Chairman is executive
0
20
40
60
80
100
120
140
160
Sectors
%
Proportion of Independent Directors 50 50 33.3 41 36.4 38.1 50 50 75 71 0 55
Proportion of Non Executive Directors 59 83 67 57 36.4 47.6 72 89 75 76 0 62
Metals FMCGConsumer
Durabl
Petroleum & Mining
Financial
ServiceEnergy
Automobile
Telecommunications
Pharmaceutica
ls
Information
Techno
Cement
Diversified
Table 15: Proportion of Non Executive and Independent Directors
84
When the Chairman is Executive Sector Percent of
companies
where the
Chairman is non
executive
Proportion of
Non
Executive
Directors
Proportion of
Independent
Directors
Automobile 67 72 50
Cement Non executive
Consumer Durables 50 67 33.3$
Diversified 100 62 55
Energy 67 47.6 38.1Sa
Banks 33 36.4 36.4$b
FMCG 33 83 50
Information Technology 50 76 71
Metals 17 59 50
Petroleum and Mining 100 57 41$c
Pharma 20 75 75
Telecom 67 89 50
$: Videocon Annual Report for the FY06, where in four independent directors are reported in a total of 12. $a. In respect of NTPC, four out of 13 directors are reported as independent. $b. In State Bank of India, 4 out of 11 directors are reported as independent. $c. Number of independent directors reported in the respective annual reports are; 3 out of 10 in respect of BPCL; 4 out of 14 in ONGC; 5 out of 14 in Indian Oil. 4. Number of companies in which the chairman is Independent director
There are 3 companies all belonging to the Pharmaceuticals in which the chairman is non
executive as also independent director. There are 35 directors in companies where the
chairman is non executive and independent of which 71 percent of the directors are non
executive and 46 percent are independent directors.
5. Number of Meetings held
5a. Meetings of the Board
5b. Meetings of the Audit Committee
5c. Meetings of the Investor Grievances Committee
The sample of 42 companies held 326 meetings of the Board and 262 meetings of the Audit
Committee. The average meetings of Board and the Audit Committee works out to 7.76
and 6.24 per company, which is higher than the stipulated number of meetings required to
be held as per the Clause 49 Listing Agreement.
85
Graph 18: Average Meetings
Average Meetings
0
5
10
15
20
25M
etal
s
FMCG
Cons
umer
Dur
able
s
Petr
oleu
m &
Min
ing
Bank
s
Ener
gy
Aut
omob
ile
Tele
com
mun
icat
ions
Phar
mac
euti
cals
Info
rmat
ion
Tech
nolo
gy
Cem
ent
Div
ersi
fied
Sectors
Aver
age
Audit CommitteeMeetingsBoard Meetings
Table16: Average number of meetings held
Sector Average Number
of Board
Meetings held
Average
Number of
Audit
Committee
Meetings
Average Number
of Investor
Grievances
Committee
Meetings
Automobile 6.33 8 8
Cement 7.33 6.33 8
Consumer Durables 12 4.5 2
Diversified 8 7.5 18
Energy 8.67 7 1.33
Banks 8.33 8.33 8.33
FMCG 5.33 5 1.33
Information Technology 6.5 6 3
Metals 7.5 5.33 2.33
Petroleum and Mining 11.4 7.8 1.2
Pharma 5.4 4.6 2
Telecom 7.67 12.33 4.66
6. Share holding pattern
8a. Promoters
86
8b. FIIs
8c. Individuals
Indian companies are relatively closely held as could be evident from the high percent of
promoter holdings in most of the sectors. Higher levels of promoter holdings is a feature
widely prevalent in the Asian corporates as brought out by several studies in this regard.
Graph 19: Shareholding Pattern
Shareholding Pattern
0
10
20
30
40
50
60
70
80
90
Sectors
Perc
enta
ge
FII Holding (%) 12.67 12.2 0.01 13.29 32.02 14.06 22.34 13.76 15.79 23.94 21.93 15.58
Promoter Group Holding (%) 61.46 54.75 76.34 62.58 27.1 58.63 39.39 59.28 40.21 38.87 39.14 34.38
Metals FMCGConsume
r Durables
Petroleum&Minin
g
Financial Services
EnergyAutomob
ileTelecom
Pharmaceuticals
Information
TechnoloCement
Diversified
The sector wise share holding pattern is as below.
Table 17: Shareholding Pattern
Sector Promoters FIIs Individuals
87
Automobile 39.39 22.34 14.45
Cement 39.14 21.93 19.91
Consumer Durables 76.34 2.03 9.28
Diversified 34.38 15.58 20.12
Energy 58,63 14.06 9,57
Financial Services 27.1 32.02 8.25
FMCG 54.75 12.2 17.8
Information Technology 38.87 23.94 10.95
Metals 61.46 12.67 13.57
Petroleum and Mining 62.58 13.29 7.52
Pharma 40.21 15.79 19.73
Telecom 59.28 13.76 1.99
7. Space devoted to Corporate Governance Report
This measure is devised to assess the extent of discussion companies made in their
respective annual reports in regard to the practice of the corporate governance. It is a
tentative indicator that needs to be further examined and validated, but used in this study
provisionally to study the scope and significance of corporate governance reporting in the
annual reports of the companies. Cement, FMCG and Pharma devoted greater amount of
space for corporate governance discussion as proportion of the total aspects included in
the annual report.
Graph 20: Spaced Devoted to Corporate Governance in Annual Report
88
Space devoted to Corporate Governance in Annual Reports
02468
1012141618
Met
als
FMCG
Cons
umer
Dur
able
s
Petr
oleu
m &
Min
ing
Bank
s
Ener
gy
Aut
omob
ile
Tele
com
mun
icat
ions
Phar
mac
euti
cals
Info
rmat
ion
Tech
nolo
gy
Cem
ent
Div
ersi
fied
Sectors
%
Major aspects of the corporate governance practice pertaining to the sectors included in this
study are given below. In view of the information was sought on the basis of the
confidentiality, information regarding the corporate governance practice is placed for
sectors. Profiles of corporate governance practices of individual countries is given in a
separate section.
Table18: Sector wise Key Indicators of Corporate Governance Practice AUTOMOBILES Particulars Average No of Directors 14.33 %companies where the chairman is non executive 33 Proportion of Non Executive Directors 81 Proportion of Independent Directors 45 % of companies where the chairman is executive 67 proportion of non executive directors 72 Proportion of Independent Directors 50 Number of companies in which the chairman is Independent Director na No of Board Meetings held in FY07 6.33 No of Audit Committee Meetings held 8 Number of Investor Grievances Comm. Meetings 8 Promoter Shareholding 39.39 FII Share holding 22.34 Individual share holding 14.45 Space devoted to Corporate Governance Report 11.08# #number of pages on CG practice to total number of pages in the Annual Report.
CEMENT
89
Particulars Average No of Directors 14 %companies where the chairman is non executive 100 Proportion of Non Executive Directors 67 Proportion of Independent Directors 33.3 % of companies where the chairman is executive na proportion of non executive directors na Proportion of Independent Directors na Number of companies in which the chairman is Independent Director na No of Board Meetings held in FY07 7.33 No of Audit Committee Meetings held 6.33 Number of Investor Grievances Comm. Meetings 8 Promoter Shareholding 39.14 FII Share holding 21.93 Individual share holding 19.91 Space devoted to Corporate Governance Report 16.71
CONSUMER DURABLES Particulars Average No of Directors 9 %companies where the chairman is non executive 50 Proportion of Non Executive Directors 50 Proportion of Independent Directors 33.3 % of companies where the chairman is executive 50 proportion of non executive directors 67 Proportion of Independent Directors 33.3 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 12 No of Audit Committee Meetings held 4.5 Number of Investor Grievances Comm. Meetings 2 Promoter Shareholding 76.34 FII Share holding 2.03 Individual share holding 9.28 Space devoted to Corporate Governance Report 11.58
DIVERSIFIED INDUSTRIES Particulars Average No of Directors 14.5 %companies where the chairman is non executive na Proportion of Non Executive Directors na Proportion of Independent Directors na % of companies where the chairman is executive 100 proportion of non executive directors 62 Proportion of Independent Directors 55 Number of companies in which the chairman is Independent Director na No of Board Meetings held in FY07 8
90
No of Audit Committee Meetings held 7.5 Number of Investor Grievances Comm. Meetings 18 Promoter Shareholding 34.38 FII Share holding 15.58 Individual share holding 20.12 Space devoted to Corporate Governance Report 10.15
ENERGY Particulars Average No of Directors 11 %companies where the chairman is non executive 33.3 Proportion of Non Executive Directors 67 Proportion of Independent Directors 33.3 % of companies where the chairman is executive 33.3 proportion of non executive directors 47.6 Proportion of Independent Directors 38.1 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 8.67 No of Audit Committee Meetings held 7 Number of Investor Grievances Comm. Meetings 1.33 Promoter Shareholding 58.63 FII Share holding 14.06 Individual share holding 9.57 Space devoted to Corporate Governance Report 11.16
FINANCIAL SERVICES Particulars Average No of Directors 12.33 %companies where the chairman is non executive 66.6 Proportion of Non Executive Directors 50 Proportion of Independent Directors 61.5 % of companies where the chairman is executive 33.3 proportion of non executive directors 36.4 Proportion of Independent Directors 36.4 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 8.33 No of Audit Committee Meetings held 8.33 Number of Investor Grievances Comm. Meetings 8.33 Promoter Shareholding 27.1 FII Share holding 32.02 Individual share holding 8.25 Space devoted to Corporate Governance Report 9.55
91
FMCG Particulars Average No of Directors 9.7 %companies where the chairman is non executive 66 Proportion of Non Executive Directors 74 Proportion of Independent Directors 43 % of companies where the chairman is executive 33 proportion of non executive directors 83 Proportion of Independent Directors 50 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 5.33 No of Audit Committee Meetings held 5 Number of Investor Grievances Comm. Meetings 1.33 Promoter Shareholding 54.75 FII Share holding 12.2 Individual share holding 17.8 Space devoted to Corporate Governance Report 16
INFORMATION TECHNOLOGY Particulars Average No of Directors 11 %companies where the chairman is non executive 50 Proportion of Non Executive Directors 74 Proportion of Independent Directors 48 % of companies where the chairman is executive 50 proportion of non executive directors 76 Proportion of Independent Directors 71 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 6.5 No of Audit Committee Meetings held 6 Number of Investor Grievances Comm. Meetings 3 Promoter Shareholding 38.87 FII Share holding 23.94 Individual share holding 10.95 Space devoted to Corporate Governance Report 10.63
92
METALS Particulars Average No of Directors 12.33 %companies where the chairman is non executive 83 Proportion of Non Executive Directors 73 Proportion of Independent Directors 42 % of companies where the chairman is executive 17 proportion of non executive directors 59 Proportion of Independent Directors 50 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 7.5 No of Audit Committee Meetings held 5.33 Number of Investor Grievances Comm. Meetings 2.33 Promoter Shareholding 61.46 FII Share holding 12.67 Individual share holding 13.57 Space devoted to Corporate Governance Report 7.93
PHARMACEUTICALS
Particulars Average No of Directors 10.4 %companies where the chairman is non executive 80 Proportion of Non Executive Directors 60 Proportion of Independent Directors 42 % of companies where the chairman is executive 20 proportion of non executive directors 75 Proportion of Independent Directors 75 Number of companies in which the chairman is Independent Director 60 No of Board Meetings held in FY07 5.4 No of Audit Committee Meetings held 4.6 Number of Investor Grievances Comm. Meetings 2 Promoter Shareholding 40.21 FII Share holding 15.79 Individual share holding 19.73 Space devoted to Corporate Governance Report 14.77
93
PETROLEUM AND MINING
Particulars
Petroleum and
Mining Average No of Directors 12.6 %companies where the chairman is non executive na Proportion of Non Executive Directors na Proportion of Independent Directors na % of companies where the chairman is executive 100 proportion of non executive directors 57 Proportion of Independent Directors 41 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 11.4 No of Audit Committee Meetings held 7.8 Number of Investor Grievances Comm. Meetings 1.2 Promoter Shareholding 62.58 FII Share holding 13.29 Individual share holding 7.52 Space devoted to Corporate Governance Report 13.37
TELECOM
Particulars Telecom Average No of Directors 12 %companies where the chairman is non executive 33.3 Proportion of Non Executive Directors 80 Proportion of Independent Directors 40 % of companies where the chairman is executive 67 proportion of non executive directors 89 Proportion of Independent Directors 50 Number of companies in which the chairman is Independent Director No of Board Meetings held in FY07 7.67 No of Audit Committee Meetings held 5.33 Number of Investor Grievances Comm. Meetings 4.66 Promoter Shareholding 59.28 FII Share holding 13.76 Individual share holding 1.99 Space devoted to Corporate Governance Report 11.26
94
Chapter VII ISSUES AND IMPERATIVES Major issues in corporate governance and
measures to improve standards and compliance
India is driving major reforms in improving the corporate governance. In certain aspects it
matches even the mature economies in regard to design of effective policies aimed
towards strengthening of governance and compliance standards. It might be useful
recapitulate a few of the major trends emerging in the Indian corporate sector in regard
to corporate governance as also important issues and imperatives.
Separation of Chairman and CEO
Separation of Chairman and CEO are increasingly recognized as a best practice that the
companies should absorb. Several companies now have separate Chairman and the CEOs.
In the sample of 42 companies that this study has analysed in regard to corporate
governance practices, more than half of them have chairman separate from the chief
executive officer and this trend is rising in several companies.
An Independent Board
Given the importance of independence of the board, the scope of non executive directors
and independent directors assume great significance. This study revealed that about 65
percent of the directors are non executive and about 46 percent are independent
directors. There are three companies in which the chairman is non executive as also
independent. There is a growing trend of making the board structure more independent.
Companies with foreign shareholding in the pharmaceutical industry have non executive
and independent directors as chairmen.
Lead Independent Directors
Big corporations are now designating lead independent directors who will coordinate the
work of the independent directors as also review the progress of the company and set its
business agenda. The role of the Lead Independent Director in one of the top Indian
companies is defined as below:
95
• To preside over the meetings of Independent Directors
• To ensure that there is adequate and timely flow of information to Independent
Directors
• To liaise between the Chairman and Managing Director, the Management and
Independent Directors
• To preside over meetings of the Board and Shareholders when the Chairman and
Managing Director is not present or where he is an interested party
• To perform such other duties as may be delegated to the Lead Independent
Director by the Board/Independent Directors.
It can be seen that companies are beginning to give more weightage to the scope and
functions of the independent directors and in this process identifying a Lead Independent
Director, who could be a catalyst in deriving the best from this process.
Some companies have more than one Lead Independent Directors with different directors
looking at different aspects of the governance and growth of the companies. For instance,
in one company, one Independent Director each is vested with the responsibilities of the
driving agenda for the Board, improving board processes, corporate strategy, financial and
internal controls, risk management and compliance and one independent director
identified as the Chief Ombudsman for the Whistle Blower Policy of the company.
Independent Directors
Independent Directors are the major instrument of the corporate governance in the
modern corporates. Many companies, excepting a few public sector have complied with
the requirement in regard to proportion of the representation of the independent
directors in the boards. Though big corporates find good quality independent directors
with relative ease, the same is emerging as a major challenge for the mid and small cap
companies who appear to be facing sizeable problem in finding right number of directors
with right qualities and qualifications. At present, nominee directors are treated as
independent directors, but SEBI is proposing not to consider nominee directors as
independent directors, in which case, the challenge becomes much tougher for a host of
companies. In view of the representation of independent directors becoming a prominent
aspect of the corporate governance, it is important that companies take this aspect with
greater focus and seriousness.
96
In March 2007, the Union Cabinet of the central government gave its approval to the
guidelines on Corporate Governance for Central Public Sector Enterprises (CPSEs) as per
which, the board of directors of a company shall have an optimum combination of
executive and non executive directors with not less than 50 percent comprising non
executive directors. On implementation, it would improve the compliance standards of
the public sector enterprises.
Board Committees
Companies are taking keen interest in constituting various subcommittees of the board in
addition to the strengthening of the board. In addition to the mandated ones such as the
audit committee and investor grievances committee and remuneration committee etc.,
companies are found to set up a wide range of sub committees as per their specific
requirements. Names of the few sub committees in the corporate analysed in the study
include; project appraisal committee, ethics committee, human resources policy
committee, investment committee, safety, health and environment committee, planning
and projects committee, contracts committee, projects evaluation committee,
establishment committee, financial management committee, marketing strategy
committee, technology committee, rural sector business committee, risk management
committee, directors committee, asset-liability management committee, special
committee for monitoring large value frauds, board management committee, credit
approval committee, customer service committee, management controls committee,
science committee, banking and organization committee, intellectual property rights
committee,
Meetings
Companies have shown good progress in respect of the number of meetings of the Board
and the Audit Committee held in a year. The number of meetings held are normally higher
than the mandatory requirement in most of the companies.
97
Periodic Evaluation of the Performance
Good governance requires periodic evaluation of the performance of the Board and Audit
Committees by an internal process or an external agency. Though big corporations take
elaborate care and processes in identification and selection of the members of the board,
not all companies have a well defined process of performance evaluation. Infosys has put
in place, where in an annual performance evaluation exercise; each non executive board
member has to make a presentation to the Board on the major contribution made by him
leading to an assessment that will determine the further scope of the members
participation in the board. Such structured processes are not evident in a large number of
companies.
Related Party Transactions
OECD defines related party transactions as those that involve between a parent company
and subsidiary, employees, an enterprise and its principal owners, management or
members of their immediate families; and affiliates (OECD Principles, IAS 24(9); FASB
Statement No.57). Related party transactions can take various forms including; transfer
pricing, asset stripping, i9nter company loans and guarantees; sale of receivables to
special purpose vehicle; leasing or licensing agreement between a parent and a subsidiary.
In view of the extensive family holding of Indian companies, doubts exist on the accuracy
and authenticity of the declarations and statements made to the board on the related
party transactions. Officials of the board secretariats of several companies expressed the
scope for further refinement and reforms in the information pertaining to related party
transactions.
Annual Reports
Annual Reports are important documents for assessing and analyzing the company
performance in regard to corporate governance standards and compliance. There is vast
improvement in the quality of content in the Annual Reports, but scope exists for
presenting the data in a manner that is easy to locate and understand. Even in respect of
the corporate governance reports, though the number of aspects on which information is
98
required to be given is uniform, companies present information in different formats
making it rather cumbersome for the readers who look at the documents of a number of
companies.
Corporate Governance Reports
Corporate Governance Reports are important part of the Annual Reports. Many companies
in addition to giving the compliance on various parameters also some times discuss the
philosophy and objectives of the corporate governance thus setting the background for the
spirit and letter of governance that is reported.
Corporate Social Responsibility
It is also found that several leading Indian companies undertake corporate social
responsibility, which they report in the annual reports in a separate section. It is
interesting to note several companies taking interest in corporate social responsibility.
Statement of the Policies
Most of the disclosures that are found in the companies annual reports are mandatory in
nature. Many companies tend to fulfill the regulatory or compliance norms rather than
taking a proactive initiative in discussing and disclosing pertinent policies and procedures
on a wide range of issues that the company deals with it.
For the purpose of an illustration a global major corporate, in its corporate governance
discussed and disclosed the following, which is not usually evident in Indian companies,
unless those like Infosys or Wipro which have global investor base or operations.
a. Board Reserves one full day per year to discuss strategic questions
b. Average duration of the Board Meetings
c. Average attendance at the Board Meeting
d. Working of the Compensation Committee.
e. Information Policy
f. Specific guidelines/ policy in regard to 1. Dealing with the people, 2.
Relationships with suppliers and customers, 3. Legal compliance, 4. Gender
equality and empowerment, 5. Health and safety, 6. Environment and public good,
99
7. Conflict of interest 8. Protection of confidential information, 9. Use of company
facilities, 10. Leading by example and 11. Buying and selling of company stock.
Promoter Holding
A recent report of the Moody’s quoted in the media showed that 17 of the 30 companies in
the Sensex are family controlled. The report observed that family controlled companies
face corporate governance challenges in the future. Family controlled companies came up
for criticism during the economic and financial crises in the South East Asia, wherein
problems accentuated because of lesser disclosure standards prevalent in family owned
firms.
Directors Training
Companies are found to disclose the importance of training for their directors and mention
the same in the corporate governance reports. While some companies explain the specific
nature of training that is usually imparted to the directors, some make a broad reference
to it. There is however no mention of the specific time spent by the directors on training.
Whistle Blower Policy
Being a non mandatory disclosure, companies mention about the Whistle Blower policy in
place, but no record of any specific activity or incidence in this regard. Some companies
put an independent director to look into the implementation of the policy
Shortcomings in Compliance
Though the design of the corporate governance framework in India is considered matching
that of the advanced countries, on aspects of enforcement and quality of supervision,
scope exists for significant improvement. Some of the observations cited in a recent
paper58 that surveyed the corporate governance in India include; though legal system
provides one of the highest levels of investor protection in the world, the reality is very
different with slow, over-burdened courts and widespread corruption; ownership is still
concentrated and family business groups continue to be the dominant business model in
58 Chakrabarti, Rajesh, Megginson, William L, Yadav Pradeep K, Corporate Governance in India, forthcoming, Journal of Applied Corporate Finance.
100
India; there is evidence of pyramiding and tunneling among Indian business groups and
signs of widespread earnings management in many firms , much of the country’s extensive
SME sector is mired in relationship based informal control and governance mechanisms.
Some of these short comings impact the disclosure standards as well. According to the
information provided by the Ministry of Corporate Affairs, almost 30000 companies came
under its scanner default in filing of annual returns for the year ended March 2006. As
mentioned earlier in this report, Securities and Exchange Board of India has initiated
adjudication proceedings against 20 companies for non compliance with the corporate
governance of which five belong to the public sector. In a statement to the Parliament,
Finance Ministry informed that 13 of the Group A companies of the Bombay Stock
Exchange have not complied with the Clause 49 stipulations. Seven of the Nifty 50
companies were found short of fulfilling corporate governance norms. At the same time,
it is important to note that things are improving at a good pace and governance
environment could see significant improvements in the near future. It is also pertinent to
note that India is not an exception to these shortcomings as these are quite general to
Asia as also several other countries.
Emerging Challenges
While corporates have been quite successful in placing effective processes that will ensure
compliance with the listing norms, several challenges exist in the governance landscape.
Though the Chairman and CEO are separated in several companies, quite often it is found
that a family member who is a non executive director is chairman and another family
member is the CEO. Such arrangements meet the compliance requirements in letter but
not in spirit. Similarly, in some it was found that meetings of several committees are
clubbed together to save on time. Though time is an important element that needs to
conserved with great care, the focus of the discussion should not be lost in trying to save
time, which might lead to a situation where committees are called in a routine manner to
fulfil the regulatory requirement. Significant improvements are required in respect to the
reporting of subsidiary company operations as also related party transactions, a general
feeling that is commonly shared by most of the practicing community on the corporate
governance. Evaluation of the performance of the Board and the sub committees in
particular the Audit Committee needs to be further strengthened and streamlined. In view
101
of the sizeable representation of the public sector enterprises in the stock market
capitalization, it becomes important to speed up the process of placing required number
of independent directors in these companies. These companies being big in size and having
significant growth, it is important that a short coming on the proportion of independent
directors should not place them in a disadvantageous position in regard to compliance
standards. Companies should endeavour to extend the range of disclosures beyond the
mandatory norms to areas such as management processes, corporate social responsibility
etc., The next round of reforms might focus on the compensation and remuneration
committees since they will assume greater significance in the background of enormous
growth of the companies and their operations extending beyond the national boundaries
entailing greater challenges for management. Some companies feel that the next round of
major discussion and disclosures will center around compensation disclosure analysis which
discusses the parameters governing the compensation for the executive directors as also
designing effective structure for executive compensation.
Looking Ahead
Corporate governance both in respect of policy and practice made quantum leap in India.
On the policy side, India has one of the best frameworks for corporate governance. On the
practice side, there is great improvement in the standards of reporting, disclosure and
compliance of companies. Given more than one hundred thousand companies registered,
of which about 5000 are listed, monitoring corporate governance in Indian companies is an
intensely challenging task.
Notwithstanding the size of numbers, improvements are evident in various aspects of
governance. This study which examined 42 companies on the governance aspects finds
that companies have complied with most of the norms of the listing agreement and some
have gone beyond in fulfilling a few more better standards.
Indian economy is experiencing unprecedented growth and receiving intense interest of
the international investing community. Indian companies can derive great benefits from
this extremely conducive environment by strengthening the company performance as also
its governance standards. International investing is increasingly governed by quality
governance as evidenced from a number of studies and it becomes imperative for Indian
102
companies to sustain the pace of reforms in corporate governance. While Clause 49 deals
with what is mandatory, good companies can go extra mile in devising effective ways of
governance that could lead to efficient markets.
Good governance is required for business growth, expansion and in pursuing global
aspirations. It is also important to bring in qualitative improvement in the corporate
environment in India that will induce other also to adopt best practices. Good corporate
governance in big companies will be a guiding force for mid and small companies to devise
effective governance frameworks that will result in further strengthening of the
governance environment. The society at large as well as the stakeholders of the
companies will the biggest beneficiaries of this outcome.
Box1: Working of the Compensation Committee The company uses several benchmarks in determining the value and the design of the various elements. The major peer group considered for the purpose of competitive practice is made up of some 15 mainly European parented fast-moving consumer goods companies. The Company’s base salaries as well as bonus and long term incentive targets generally today are at the median values of this comparator group; longer term the companies desires to be within the third quartile. Variations from this benchmark can exist as a result of special position requirements or particular experience or seniority of the incumbent. The benchmark for pension benefits is the group of the leading Swiss companies, both in the industrial and financial services sectors. Compensation benefits consist of; Base Salary: reviewed annually based upon the individual contribution and with the objective to keep it competitive against our chosen peer group Short-Term Bonus; annual bonus which is a percentage of a base salary. The objectives are set at the beginning of each year and they include collective as well as individual objectives. Collective objectives are the Nestle Group’s operational objectives such as RIG, EBIT, Capex and others. Individual objectives are determined for each member of the Executive Board. In case all objectives are reached in full, the bonus payout will correspond with the targeted level. In case of overachievement f the objectives, the payout can reach a maximum of 150 percent of the target. There is no guaranteed minimum bonus payout. Longer Term Incentives. Each year, members of the Executive Board are eligible to receive Long-Term incentives in the form of stock options under the Management Stock Option Plan (MSOP) and restricted share units under the Restricted /stock Unit Plan (RSUP). A target value is set at the time of the grant and the respective number of options and restricted stock units is then allocated to each member of the Executive Board. Grants under both plans vest following a waiting period of three years after the grant. The exercise price for the stock options corresponds to the average price of the last ten trading days preceding the grant date. Upon vesting, the options have an exercise period of four years before they expire, and the restricted stock units are made available to participants in the form of Nestle S.A shares. Other Benefits Nestle limits other benefits to a minimum. Typical elements are a car allowance (there are no company cars provide to the members of the Executives Board) and a minimal contribution towards
103
the health insurance premiums, as offered to other employees. Those Executive Board members who have been transferred from other Nestle locations can receive benefits in line with the Nestle Corporate Expatriation Policy. There are no contractual provisions concerning severance payments for members of the Executive Board. Pension Benefits Executive Board members domiciled in Switzerland are affiliated to the Nestle Pension Plan in Switzerland as all other employees. The Plan is designed as a defined contribution plan with a retirement pension objective expressed as a percentage of the base salary. This means that the pensionable earnings include the base salary, but not the variable compensation. Any part of the base salary which exceeds the ceiling prescribed y the Swiss Pension Law is covered directly by the Company. Source: Nestle India
104
CORPORATE GOVERNACE PROFILES OF COMPANY PRACTICE
105
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company ACC Limited 2 Registered Address Cement House, 121, Maharshi Karve Road, Mumbai – 400 020 3 Contacts Tel : +91 22 66654291/66654360
Fax: +91 22 66317458 Email:[email protected] Website: www.acclimited.com
4 Chairman N S Sekhsaria 5 Dy. Chairman Paul Hugentobler 6 Managing Director N L Narula 7 Company Secretary A Anjeneyan
FINANCIALS (Rs. In Mn) (Audited 01 Jan 06 to 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1875 29552 64531 58035 59350 17547 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
17027 -2543 14484 10608 12318 66 MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 202890 1315 680 16.4
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 35.15 24.28 29.55 CG COMPLIANCE BOARD MEETINGS CG Report included in the Annual Report of the Company
Yes No of Directors 15
Is the Chairman Non Executive Yes COMMITTEE MEETINGS Number of Non Executive Directors in the Board
12 Board 6 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 4 meetings
Term of the Chairman/CEO NA Investor Grievance Committee 5 meetings ACC is respected for its professional management and good business practices in the Indian corporate world. Integrity, emphasis on product quality and transparency in its dealings with all stakeholders are its core values. ACC believes that good governance generates goodwill among business partners, customers and investors, earns respect from society and brings about a consistent sustainable growth for the Company and generates competitive returns for the investors. Towards its objectives of achieving good corporate governance, it has endowed a Chair for Business Ethics at the Management Centre for Human Values, Indian Institute of Management, Kolkata.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
106
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Ambuja Cements Ltd 2 Registered Address 106, Maker Chambers III, Nariman Point, Mumbai 400 021, India 3 Contacts Tel: +91 022 6659 7300
Fax:+91 022 2284 6270 Email:[email protected] Website:www.gujaratambuja.com
4 Chairman Suresh Neotia 5 Chief Executive Officer 6 Managing Director Anil Singhvi 7 Company Secretary B L Taparia
FINANCIALS (Rs. In Mn) (Audited 01 Jul 05 – 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 3034
31872
70105 62683
63820
22468
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
21677
-3261
18416
15033
15033
10
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 219340 154 100 10.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 31.19 34 11.52 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 15 COMMITTEE MEETINGS
Is the Chairman Non Executive
Yes Board 9 meetings
Number of Non Executive Directors in the Board
5 Audit Committee 7 meetings
Number of Non Executive Directors who are Independent
5 Investor Grievance Committee 17 meetings
Term of the Chairman/CEO
NA BOARD SECRETARIAT
The company believes in transparency, empowerment, accountability, safety of people and environment, motivation, respect for law and fair business practices with all its stakeholders. These practices being followed since inception have helped the company in its sustained growth.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
107
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Bajaj Auto Limited 2 Registered Address Mumbai Pune Road, Akurdi Pune 411 035 3 Contacts Tel: +91 020 27472851 Extn. (6063), 27406063/27401380
Fax: +91 020 27407380 Email:[email protected]/[email protected] Website: www.bajajauto.com
4 Chairman Rahul Bajaj 5 Chief Executive Officer 6 Managing Director Rajiv Bajaj 7 Company Secretary J Sridhar
FINANCIALS (Rs. In Mn) (Audited 01 Apr 05 – 31 Mar 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1012
46696 87484 76679 81064 17947
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
17944 -1910 16034 11243 11233 111 MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 253150 3172 2063 19.9
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 29.79 19.42 23.18 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 16
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
11 Board 6 meetings
Number of Non Executive Directors who are Independent
8 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 17 meetings
The commitment of Bajaj Auto Limited (‘Bajaj Auto’, ‘BAL’ or ‘the Company’) to the highest standards of good corporate governance practices predates SEBI and clause 49 of the Listing Agreements. Transparency, fairness, disclosure and accountability are central to the working of the Company and its Board of Directors.
BOARD SECRETARIAT
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
108
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Bharat Petroleum Corporation Limited 2 Registered Address Bharat Bhavan, 4 & 6,Currimbhoy Road
Ballard Estate, Mumbai- 400 001 3 Contacts Tel.+91 22-22713001-04/ 22713435/3437
Fax +91 22 22642112/22161793/ 22713688 Email [email protected], [email protected] Website:www.bharatpetroleum.com
4 Chairman Ashok Sinha, CMD 5 Chief Executive Officer 6 Managing Director Ashok Sinha 7 Company Secretary N Viswakumar
FINANCIALS (Rs. In Mn) (Unaudited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 3615
109895
1088357
982049
988711
49781
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
44610
-10988
33622
23502
23502
59
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 125390 448 287 4.3
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 54.93 13.12 12.51 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 10
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 10 meetings
Number of Non Executive Directors who are Independent
3 Audit Committee 9 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee One meeting
Bharat Petroleum Corporation Ltd’s corporate philosophy on Corporate Governance has been to ensure fairness to the stakeholders through transparency, full disclosures, empowerment of employees and collective decision making.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
109
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Cipla Limited 2 Registered Address Shares Department, Cipla Ltd. Mumbai Central,
Mumbai 400 008, India 3 Contacts Tel +91 22 2308 2891/91 22 2302 5272/72/2309 5521
Fax +91 22 2307 0013/ 91 22 2300 8101 [email protected] Website www.cipla.com
4 Chairman Dr. Y K Hamied 5 Chief Executive Officer 6 Managing Directors M K Hamied, Amar Lulla 7 Company Secretary Mital Sanghvi
FINANCIALS (Rs. In Mn) (Unaudited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1555 - 36671 35721 36613 9119 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
9049 -1041 8008 6608 6608 9 MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 143260 275 160 22.8
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 39.36 16.81 25.34 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 9
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 4 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
The Company is committed to good corporate governance. The Company respects the rights of its shareholders to secure information on the performance of the Company and it is its endeavor to maximize the long term value to the shareholders of the Company.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
110
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Dr Reddys Laboratories Ltd 2 Registered Address 7-1-27, Ameerpet, Hyderabad 500 016, Andhra Pradesh, India 3 Contacts Tel +91 40 23731946/23734504
Fax +91 40 23731955/66511525 [email protected]/[email protected] Website www.drreddys.com
4 Chairman Dr. K Anji Reddy 5 Chief Executive Officer G V Prasad, VP & CEO 6 Managing Director Satish Reddy, MD & COO 7 Company Secretary V Viswanath
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 840
39133 65126
64346
66418
17716
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
16190
-3791
12399
9655
9655
61
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 102830 840 580 12.2
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 25.18 27.49 13.63 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 8
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 4 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 3 meetings
Dr.Reddy’s philosophy of corporate governance stems out from its belief that timely disclosures, transparent accounting policies, and a strong and independent Board go a long way in preserving shareholders trust while maximizing long-term corporate values.
BOARD SECRETARIAT
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
111
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Essar Steel Limited 2 Registered Address Essar House, 11 Keshavrao Khadye Marg,
Mahalaxmi, Mumbai - 400 034, Maharashtra, India 3 Contacts Tel.+91 022 66601100
Fax +91 022 66602748 [email protected]/[email protected] Website.www.essar.com
4 Chairman Shashi Ruia 5 Chief Executive Officer 6 Managing Director 7 Company Secretary N. B. Vyas
FINANCIALS (Rs. In Mn) (Unaudited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 11398
32677
90025
81964 82156
19571
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
13347
-6311
7037
4567
4339
4
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 61690 71 41 -
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 87.08 2.03 6.72 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes
No of Directors 12
Is the Chairman Non Executive
Yes
COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
10 Board 5 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee -
Essar Steel Limited believes that good Corporate Governance is essential to achieve long term corporate goals and to enhance stakeholders’ value. The Company’s philosophy on Corporate Governance envisages attainment of high level transparency, accountability and integrity in the functioning of the Company and the conduct of its business, its relationship with employees, stakeholders, creditors, customers and institutional and other lenders. The company places due emphasis on regulatory compliance.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
112
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company GlaxoSmithKline Pharmaceuticals Limited 2 Registered Address Dr Annie Besant Road, Mumbai 400 030, India 3 Contacts Tel.+91-022-2495 9595
Fax +91-022-2495 9494 [email protected] Website.www.gsk-ndia.com
4 Chairman D S Parekh 5 Chief Executive Officer 6 Managing Director Dr. H B Joshipura 7 Company Secretary A A Nadkarni
FINANCIALS (Rs. In Mn) (Audited 01 Jan 06 – 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 847
11100
16776
15529
16488
5718
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
5718
-158
5560
3617
5455
64
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 27630 694 500 17.2
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 50.67 14.64 18.28 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
Independent COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 5 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 7 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee One meeting
The Company’s philosophy of Corporate Governance is aimed at assisting the management of the Company in the efficient conduct of its business and in meeting its obligations to stakeholders, and is guided by a strong emphasis on transparency, accountability and integrity. For several years, the Company has adopted a codified Corporate Governance Charter, which is in line with the best practice, as well as meets all the relevant legal and regulatory requirements.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
113
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company HDFC Bank Limited 2 Registered Address HDFC Bank House, Senapati Bapat Marg, Lower Parel,
Mumbai 400 013 3 Contacts Tel: +91 22 56521000
Fax:+91 22 24960737 Email: [email protected] Website: www.hdfcbank.com
4 Chairman Jagdish Capoor 5 Chief Executive Officer 6 Managing Director Adiya Puri 7 Company Secretary Sanjay Dongre
Executive Vice President (Legal) & Company Secretary FINANCIALS (Rs. In Mn) (Unaudited 1 Apr 06 – 31 Mar 07)
Equity Reserves Int. Earned Total Income Operating Profit 3194
61510
68872 - 84645
28113
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
- - 28113
11435
11435
37
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 546000 1660 890 41.1
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 21.56 30.73 12.38 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 9
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
8 Board 8 meetings
Number of Non Executive Directors who are Independent
4
Audit Committee 9 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 13 meetings
HDFC encompasses the simple tenets of integrity, transparency and fairness in whatever it does. Each relationship that HDFC has, be its borrowers, depositors, agents, shareholders or other stakeholders is highly valued by the organisation. Across the organisation, HDFC has always followed an open-door policy. This not only ensures transparency, but also enables rapport building and gives employees an opportunity to freely address issues of concern.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
114
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Hero Honda Motors Limited 2 Registered Address 34, Community Centre, Basant Lok, Vasant Vihar
New Delhi – 110057, India 3 Contacts Tel: +91 11 26142451, 26144121
Fax:+91 11 2615 3913 Email: [email protected] Website:www.herohonda.com
4 Chairman Brijmohan Lall 5 Chief Executive Officer Pawan Munjal, MD & CEO 6 Managing Director Toshiaki Nakagawa, Jt. MD 7 Company Secretary llamC Kamboj
General Manager Legal & Company Secretary FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07)
Equity Reserves Gross Sales Net Sales Total Income Operating Profit 399
24301
115420
99000
100898
13629
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
13859 -1398
12461
8579
8579
43
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 148660 809 565 18.6
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 54.95 27.76 8.69 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 16
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
12 Board 5 meetings
Number of Non Executive Directors who are Independent
8 Audit Committee 8 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
Hero Honda’s philosophy of corporate governance stems from its belief that the company’s business strategy and plans should be consistent with the welfare of all its stakeholders, including shareholders. Corporate governance rests upon the four pillars of transparency, full disclosure, independent monitoring and fairness to all, especially to minority shareholders.
BOARD SECRETARIAT
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
115
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Hindalco Industries Limited 2 Registered Address Century Bhavan, 3rd floor, Dr A B Road, Worli
Mumbai 400 030, India 3 Contacts Tel. +91- 22-6662 6626
Fax +91- 22-2436 2516 / 2422 7586 [email protected] Website.www.hindalco.com
4 Chairman Kumar Mangalam Birla 5 Chief Executive Officer 6 Managing Director D Bhattacharya 7 Company Secretary Anil Malik
FINANCIALS (Rs. In Mn) (Audited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1043
123137
- 183130
186831 43851
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
41427
-6381
35046 25643
25643
26
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 238550 208 125 9.3
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 27 18.55 16.45 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 10
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 8 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee One meeting
The Aditya Birla Group is committed to the adoption of best governance practices and its adherence in the true spirit, at all times. The governance philosophy rests on the following five basic tenets; Board accountability to the Company and shareholders, strategic guidance and effective monitoring by the Board, protection of minority interests and rights, equitable treatment of all shareholders and superior transparency and timely disclosure.
BOARD SECRETARIAT
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
116
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Hindustan Petroleum Corporation Ltd 2 Registered Address Petroleum House.17, Jamshedji Tata Road
Mumbai - 400 020 3 Contacts Tel.+91 022 25963838/2286 3900/22026151
Fax +91 022 25946969/22872992 [email protected]/[email protected] Website.www.hindustanpetroleum.com
4 Chairman Arun Balakrishnan, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary N R Narayanan
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 3390
92278 1024900
939695
946806
34031
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
29433
-7782 21651
16740
16740 76
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 80560 337 223 3.9
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 51.01 23.25 NA CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
8 Board 13 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 7 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
HPCL lays special emphasis on conducting its affairs within the framework policies, internal and external regulations and in a transparent manner. Being a Government Company its activities are subject to review by several external authorities like the Comptroller & Auditor General of India (CAG), the Central Vigilance Commission (CVC), parliamentary Committees etc.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
117
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Hindustan Unilever Ltd 2 Registered Address Hindustan Unilever House,165/166, Backbay Reclamation,
Mumbai – 400020, Maharashtra, India 3 Contacts Tel.+91-022-39830000/39832567/2385
Fax +91-022-22871970 [email protected]/[email protected] Website.www.hll.com
4 Chairman Harish Manwani 5 Chief Executive Officer Douglas Baillie CEO & MD 6 Managing Director S Ravidranath MD (Foods) 7 Company Secretary Ashok K Gupta
FINANCIALS (Rs. In Mn) (Audited 01 Jan 06 – 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2207
25021
- 121034
124579
20026
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
19918
-1302
18617
15397
18554
8
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 485140 255 166 25.3
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 51.43 12.88 17.46 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 10
Is the Chairman Non Executive
Yes
COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 7 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 6 meetings
Term of the Chairman/CEO
NA/5 Investor Grievance Committee 2 meetings
At Hindustan Unilever Limited, good governance is an ongoing process, thereby ensuring truth, transparency, accountability and responsibility in all dealings with employees, shareholders, consumers and the community at large. At Hindustan Unilever, corporate governance in its widest sense, almost like a trusteeship; it is a philosophy to be professed, a value to be imbibed and an ideology to be ingrained in corporate culture.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
118
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company ICICI Bank Ltd 2 Registered Address Race Course Circle, Alkapuri, Vadodara 390 007, Gujarat 3 Contacts Tel +91 022-2653 24318/339923-27/+91 265 323418/339923-27
Fax +91 022 2653 239926/265 339926/2339926 Email [email protected] Website www.icicibank.com
4 Chairman N Vaghul 5 Chief Executive Officer K V Kamath, CEO & MD 6 Managing Director 7 Company Secretary Jyotin Mehta, GM & Co. Secretary
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Int. Earned - Total Income Operating Profit 8993
234139 250013 413638
56749
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
56749
26334
26334
31
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 1389010 1265 751 39.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals - 45.49 6.41 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 17
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 8 meetings
Number of Non Executive Directors who are Independent
12 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 12 meetings
ICICI Bank’s corporate governance philosophy encompasses not only regulatory and legal requirements, such as the terms of listing agreements with stock exchanges, but also several voluntary practices aimed at a high level of business ethics, effective supervision and enhancement of value for all stakeholders.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
119
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Indian Oil Corporation Limited 2 Registered Address Registered Office, IndianOil Bhavan, G-9, Ali Yavar Jung Marg,
Bandra East, Mumbai 400 051 3 Contacts Tel:+91 22 26427363
Fax:+91 22 26447528 Email:[email protected]/[email protected] Website:www.iocl.co.in
4 Chairman Sarthak Behuria 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Raju Ranganathan
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 11680 353519 1859676
2026927
144463
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
127033
-29703
97330
63006
81794
66
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 534360 531 370 7.4
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 82 1.93 2.72 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 14
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
7 Board 13 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 11 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 2 meetings
Indian Oil believes that good Corporate Governance practices ensure efficient conduct of the affairs of the Company and also help in maximizing value for all its stakeholders. The Company endeavors to uphold the principles and practices of Corporate Governance to ensure transparency, integrity and accountability in its functioning, which are vital to achieve its Vision of becoming a major diversified, transnational, integrated energy company.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
120
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Infosys Technologies Ltd 2 Registered Address Plot No.44 97A, Electronics City, Hosur Road, Bangalore 560 100 3 Contacts Tel +91 080 28520261/41167750
Fax+91 080 28520362 Email Parvatheesam kanchinadham/[email protected] Website www.infosys.com
4 Chairman N R Narayana Murthy, Chairman & Chief Mentor 5 Chief Executive Officer Nandan M Nilekani, CEO & MD 6 Managing Director S Gopalakrishnan, President, COO, Jt, MD and Head – Customer
Service Technology 7 Company Secretary Parvatheesam Kanchinadham, Company Secretary
and Compliance Officer FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07)
Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2860 109690
138930
142650 47630
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
47630
-5140
42490
38610
38670
69
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 1064230 2439 1745 24.7
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 16.54 32.55 19.48 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 15
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 7 meetings
Number of Non Executive Directors who are Independent
8 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
Our corporate governance philosophy is based on the following principles: Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should go beyond the law, Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose, Make a clear distinction between personal conveniences and corporate resources.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
121
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company ITC Limited 2 Registered Address Virginia House, 37, Jawaharlal Nehru Road,
Kolkatta 700 071, India 3 Contacts Tel +91 033 22889371/22880034/6426
Fax +91 033 22882358 Email [email protected]/[email protected] Website www.itcportal.com
4 Chairman Yogesh Chander Deveshwar 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Biswa Behari Chatterjee, Exe.VP & Co. Secretary
FINANCIALS (Rs. In Mn) (Audited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 3762 101356 128737
132345
44471
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
44428
-3938
40491
27743
27743
7
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 686540 195 140 23.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 37.05 12.9 15.85 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 5 meetings
Number of Non Executive Directors who are Independent
7 Audit Committee 9 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 33 meetings
Since large corporations employ a vast quantum of societal resources, ITC believes that the governance process should ensure that these resources are utilized in a manner that meets stakeholders’ aspirations and societal expectations. This belief is reflected in the Company’s deep commitment to contribute to the “triple bottom line”, namely the development, nurture and regeneration of the nation’s economic, social and environmental capital.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
122
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Larsen & Toubro Ltd 2 Registered Address L&T House, N. M. Marg, Ballard Estate, Mumbai 400 001, India. 3 Contacts Tel.+91 022 67525856
Fax.+91 022 67525858 [email protected] Website.www.larsentoubro.com
4 Chairman A M Naik, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary N Hariharan
FINANCIALS (Rs. In Mn) (Audited 1 Apr 05 – 31 Mar 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 275
45833
149938
147631
151986
15032
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
14281
-1145
13137
9424
10121
76
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 1213730 4300 1260 68.6
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 31.71 18.26 24.39 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 17
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 11 meetings
Number of Non Executive Directors who are Independent
9 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 3 meetings
The Company's philosophy on Corporate Governance is built on a rich legacy of fair and transparent governance and disclosure practices, many of which were in existence even before they were mandated by legislation. The Company's essential character revolves round values based on transparency, integrity, professionalism and accountability.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
123
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Merck Limited 2 Registered Address Merck Ltd., Shivsagar Estate, Dr. Annie Besant Road, Worli 400 018 3 Contacts Tel +91 022 66609000/24954590
Fax +91 24950307/36046 Email - Website www.merck.com/merck.co.in
4 Chairman S N Talwar 5 Chief Executive Officer 6 Managing Director Dr. M Dziki 7 Company Secretary H U Shenoy
FINANCIALS (Rs. In Mn) (Audited 01 Jan 06 – 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 169
3762
3613
3295
3607
1106
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
1106
-64
1042
679
1334
79
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 6530 500 372 10.4
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 51 1.5 22.43 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 9
Is the Chairman Non Executive
Yes and Independent
COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 6 meetings
Number of Non Executive Directors who are Independent
3 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee One meeting
BOARD SECRETARIAT Merck is committed to the adoption of the best governance practices and their adherence in the true spirit, at all times. The Company’s philosophy on Corporate Governance is to ensure that the systems and procedures which monitor compliance with laws, rules and regulations are in place in each area of its operations and the relevant information regarding the Company and its operations is disclosed, disseminated and easily available to all its stakeholders.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
124
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Mphasis Limited 2 Registered Address Bagmane Technology Park, Byrasandra, C V Raman Nagar,
Bangalore 560 093 3 Contacts Tel +91 80 40040404/4042 6000
Fax +91 80 40049999/25346760 Email [email protected] Website www.mphasis.com
4 Chairman Jaithirth Rao 5 Vice Chairman Jeroen Tas 6 Managing Director Deepak Jayant Patel 7 Company Secretary A Sivaram Nair
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 17606
17471
1908
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
1983
1983
1801
1801
9
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 61950 340 210 39.7
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 50.59 11.47 8.34 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
11 Board 10 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee -
Mphasis’ Corporate Governance is directed at the enhancement of shareholder value, keeping in mind the interests of the other stake holders, viz., clients, employees, investors, regulatory bodies, etc. The functions of the Board of Directors of the Company are well defined. Mphasis is committed to good corporate governance and has bench marked itself against global best practices.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
125
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company National Thermal Power Corporation Ltd 2 Registered Address NTPC Bhawan, SCOPE Complex, 7-Institutional Area, Lodhi Road,
New Delhi – 110003 3 Contacts Tel +91 011 24360100/24360071
Fax +91 011 24361018/24360210 Email [email protected] Website www.ntpc.co.in
4 Chairman T Sankaralingam, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary A K Rastogi
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 82455
404670
338757
366518
129485
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
110612
-20998
89614
68983
68983
8
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 1923260 240 127 25
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 89.5 7.05 7.05 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 13
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 14 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 5 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 2 meetings
NTPC believes in the philosophy that corporate governance is a key element in improving efficiency and growth as well as enhancing investor confidence and accordingly the Corporate Governance philosophy has been scripted as “As a good corporate citizen, the Company is committed to sound corporate practices based on conscience, openness, fairness, professionalism and accountability in building confidence of its various stakeholders in it thereby paving the way for its long term success.”
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
126
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Nestle India Ltd 2 Registered Address Nestle India Ltd., M-54 Connaught Circus, New Delhi 110 001 3 Contacts Tel.+91 0124 238 93 00
Fax +91 0124 238 94 11 [email protected] Website.www.nestle.com/nestle.in
4 Chairman Martial G Rolland, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary B. Murli
FINANCIALS (Rs. In Mn) (01 Jan 05 – 31 Dec 05) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 964
2577
26439
24769
25006
5458
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
5456
-568
4887
3069
3096
32
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 131670 1395 876 37.7
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 61.85 9.07 17.29 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 6
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 5 meetings
Number of Non Executive Directors who are Independent
3 Audit Committee 5 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
Nestlé India Limited, as a part of Nestlé Group, Switzerland has over the years followed best practice of Corporate Governance by adhering to practices laid down by Nestlé Group. The two most significant documents from Nestlé Group, which define the standard of behavior of Nestlé India, are “Nestlé Corporate Business Principles” and “The Nestlé Management and Leadership Principles”.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
127
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Oil & Natural Gas Corporation Ltd 2 Registered Address Jeevan Bharati Bldg., Tower II, 124 Indira Chowk, New Delhi 110
001 3 Contacts Tel .+91 11 23301000/10156/23721756
Fax +91 11 2331 6413 [email protected] Website.www.ongcindia.com
4 Chairman R S Sharma,CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary S C Setia
FINANCIALS (Rs. In Mn) (Audited 1 Apr 05 – 31 Mar 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 14259
519174
482009
479229
502779
297008
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
296539
-84573
211966
137902
144308
101
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 2649240 1253 750 16.4
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 74 8.67 2 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 14
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 12 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 7 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
The company views corporate governance in its widest sense almost like a trusteeship, a philosophy to be progressed, a value to be imbibed and an ideology to be ingrained into the corporate culture. It has been practicing corporate governance principles m The primary objective is to create and adhere to a corporate culture of conscience and consciousness, transparency and openness, fairness, accountability, propriety, equity, sustainable value creation, ethical practices, thereby creating an outperforming organization.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
128
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Ranbaxy Laboratories Limited 2 Registered Address Plot No. 90, Sector 32, Gurgaon - 122001 (Haryana), India 3 Contacts Tel.+91 0124-4135000
Fax+91 0124-4106490 [email protected] Website.www.ranbaxy.com
4 Chairman Tejindra Khanna 5 Chief Mentor & Exe VC Dr. Brian W Tempest 6 Managing Director Mahinder Mohan Singh, CEO & MD 7 Company Secretary S K Patawari
FINANCIALS (Rs. In Mn) (Unaudited 01 Jan 06 – 31 Dec 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1863
- 39736
39254
40050
6390
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
5809
-1118
4692
4091
3865
10
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 157790 459 306 22.1
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 34.86 18.49 18.97 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 14
Is the Chairman Non Executive
Yes and Independent
COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
11 Board 8 meetings
Number of Non Executive Directors who are Independent
8 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 10 meetings
Ranbaxy has always believed in a "Sound" Code of Corporate Governance, as a tool for highest standards of management and business integrity and as a result started implementing a series of voluntary initiatives as early as 1999. Some of these measures included: - Composition of the Board of Directors (eg. Majority Independent Directors). - Constitution of various Board Committees for oversight and guidance concerning key decisions and soundness of decision making processes connected with the functioning of the Company. - Timely dissemination of information to shareholders. - Code of Conduct.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
129
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Reliance Energy Ltd 2 Registered Address Reliance Energy Centre, Santacruz (East), Mumbai 400 055 3 Contacts Tel. +91 22 3009 9999
Fax +91 22 3009 9763 [email protected]/[email protected] Website.www.rel.co.in
4 Chairman Anil D Ambani 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Ramesh Shenoy
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2286 8608
68316
77745
14760
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
11630
-3032
8598
8360
8360
39
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 393490 1959 448 43.2
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 53.38 16.16 5.94 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 8
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
4 Board 5 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 5 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 5 meetings
In our commitment to practice sound governance principles, Reliance Energy is guided by the following core principles: 1. Transparency -To maintain the highest standards of transparency. 2. Disclosures -To ensure timely dissemination of all price sensitive information 3. Accountability -To demonstrate highest levels of personal responsibility 4. Compliances -To comply with all the laws and regulations 5. Ethical conduct - To conduct the affairs of the company in an ethical manner. 6. Stakeholders’ interests -To promote the interests of all stakeholders
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
130
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Reliance Industries Limited 2 Registered Address 3rd Floor, Maker Chambers - IV, 222 Nariman Point,
Mumbai – 400 021 3 Contacts Tel.+91 22 2278 5000
Fax +91 22 22042268/2278 5111 [email protected] Website.www.ril.com
4 Chairman Mukesh D Ambani, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Vinod M Ambani
FINANCIALS (Rs. In Mn) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 13940
1204310
1137700
1144210
207780
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
195460
-48990
146470
120750
120750
83
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 4110410 2844 1181 30
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 50.98 19.49 12.87 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 13
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
10 Board 9 meetings
Number of Non Executive Directors who are Independent
8 Audit Committee 5 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 3 meetings
In addition to complying with the statutory requirements, effective governance systems and practices inter alia towards transparency, disclosures, internal controls and promotion of ethics at work-place have been institutionalized. Reliance recognizes that good Corporate Governance is a continuing exercise and reiterates its commitment to pursue highest standards of Corporate Governance in the overall interest of all the stakeholders.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
131
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Satyam Computer Services Limited 2 Registered Address Mayfair Centre, 1st Floor, 1-8, 303/36, S P Road,
Secunderabad 500 003 3 Contacts Tel.+91 40 27813166/0058/3065 4343 /4211
Fax +91 40 30654343/ 27897769 [email protected] Website.www.satyam.com
4 Chairman B Ramalinga Raju 5 Chief Executive Officer 6 Managing Director B Rama Raju 7 Company Secretary G Jayaraman, Sr. VP Corp.Gov & Co. Secry
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1334
55658
64851
66684
17210
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
17051
-1484
15566
14046
14046
21
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 322750 525 402 21.3
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 8.78 46.6 8.43 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 10
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
7 Board 4 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 8 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee One meeting
Corporate Governance assumes a great deal of importance in the business life of Satyam. The driving forces of Corporate Governance at Satyam are its core values – Associate Delight, Investor Delight, Customer Delight and the Pursuit of Excellence. The Company’s goal is to find creative and productive ways of delighting its stakeholders, i.e., Investors, Customers, Associates and Society, thereby fulfilling the role of a responsible corporate representative committed to best practices.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
132
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company State Bank of India 2 Registered Address State Bank Bhawan, 8th floor, Madame Cama Road,
Mumbai-400 021 3 Contacts Tel +91 22 2202 2426
Fax +91 22 22047556 [email protected] Website. www.statebankofindia.com
4 Chairman O P Bhatt 5 Chief Executive Officer T S Bhattarcharya, MD & GE (CB) 6 Managing Director S K Bhattacharya, MD & CC & RO 7 Company Secretary Mrinal Shankar, DGM(Accounts & Compliance Department
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 5263 416919 572378 683768
143923
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
143923
66198
66198
121
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 1114620 2180 845 15.3
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 59.73 19.83 5.96 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 11
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
4 Board 9 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 10 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 meetings
The objectives can be summarized as: • To enhance shareholder value. • To protect the interests of shareholders and other stakeholders including customers, employees and society at large. • To ensure transparency and integrity in communication and to make available full, accurate and clear information to all concerned. • To ensure accountability for performance and to achieve excellence at all levels. • To provide corporate leadership of highest standard for others to emulate
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
133
CORPORATE GOVERNANCE PRACTICE Particulars Practice 1 Name of the Company Steel Authority of India Limited 2 Registered Address Ispat Bhawan, Lodi Road, New Delhi - 110 003 3 Contacts Tel.+91 11-24368104/211/25075459/24367481-86
Fax +91 11-243 67015 [email protected]/[email protected] Website.www.sail.co.in
4 Chairman S K Roongta 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Devinder Kumar, Secretary
FINANCIALS (Rs. In Mn) (Unaudited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 41304
133422
406292
353429
361942
110845
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
107402
-12382
95019
62616
62616
15
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 1142260 279 79 18
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 85.82 6.15
2
CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 22
Is the Chairman separate from CEO
Yes COMMITTEE MEETINGS
Is the Chairman Non Executive
No Board 10 meetings
Number of Non Executive Directors in the Board
13 Audit Committee 7 meetings
Number of Non Executive Directors who are Independent
11 Investor Grievance Committee -
Term of the Chairman/CEO
NA BOARD SECRETARIAT
The Corporate Governance philosophy of SAIL is to ensure transparency, disclosures and reporting that complies fully with laws, regulations and guidelines, and to promote ethical conduct throughout the organization, with the primary objective of enhancing shareholders value, while being a responsible corporate citizen. The Company is committed to conforming to the highest standards of corporate governance in the country.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
134
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Sterlite Industries India Ltd 2 Registered Address SIPCOT Industrial Complex, Madurai By Pass Road,
T V Puram P.O.,Tuticorin -628 002, Tami Nadu, India 3 Contacts Tel. +91- 461-5512262/6612591
Fax.+91- 461-2340306/2240203 [email protected] Website.www.sterlite-industries.com
4 Chairman Anil Agarwal (Non Executive Chairman) 5 Executive Vice Chairman Navin Agarwal 6 Chief Executive Officer Kuldip Kumar Kaura 7 Company Secretary
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1117
261930
243868
250685
101406
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
97615
-8039
89576
65459
63887
79
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 678670 1009 415 14.6
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 79.25 7.38 7.32 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 9
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 6 meetings
Number of Non Executive Directors who are Independent
3 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 2 meetings
The company believes in conducting its affairs in a fair and transparent manner and in maintaining the highest ethical standards in its dealings with all its constituents. It is committed to following good corporate governance practices. The company’s mission is to constantly review its systems and procedures to achieve the highest level of corporate governance in the overall interest of all the stakeholders.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
135
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Tata Motors Limited 2 Registered Address Bombay House,24 Sir Homi Mody Street, Mumbai 400 001 3 Contacts Tel.+91 022-66658282
Fax +91 022 66657799 [email protected] Website.www.tatamotors.com
4 Chairman Ratan N Tata 5 Chief Executive Officer 6 Managing Director Ravi Kant 7 Company Secretary H K Sethna
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 3854
73103
369878
324264
325796
41835
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
37777
-6881
30896
22064
22049
56
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 310930 975 616 13.6
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 33.43 19.84 11.5 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes
No of Directors 11
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
9 Board 8 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 12 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 3 meetings
As part of the Tata group, the Company’s philosophy on Corporate Governance is founded upon a rich legacy of fair, ethical and transparent governance practices, many of which were in place even before they were mandated by adopting highest standards of professionalism, honesty, integrity and ethical behavior. Through the Governance mechanism in the Company, the Board along with its Committees endeavors to strike the right balance with its various stakeholders.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
136
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Tata Power Company Ltd 2 Registered Address Bombay House, 24, Homi Mody Street,
Fort, Mumbai - 400 001, India 3 Contacts Tel.+91 022 6665 8282
Fax.+91 022 6665 8801 [email protected] Website.www.tatapower.com
4 Chairman R N Tata 5 Chief Executive Officer 6 Managing Director P R Menon 7 Company Secretary B J Shroff
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1979
52124
64773
67443
13582
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
10749
-4148
6601
7592
7592
37
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 234070 1400 483 30.6
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 33 18.96 21 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
8 Board 7 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 11 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 2 meetings
Tata Power has been practicing good governance practices even before they were mandated. “Leadership with Trust” is the principle of operation of the
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
137
Company. The Business Excellence Brand Promotion (BEBP) process includes the Tata Business Excellence Model and the Tata Code of Conduct, which form guidelines for “Leadership with Trust”. The Company has adopted all these processes formally right from inception and continuously works on them to improve business performance and enhance stakeholder trust.
CORPORATE GOVERNANCE PRACTICE Particulars Practice 1 Name of the Company Tata Steel Ltd 2 Registered Address Bombay House, 24, Homi Mody Street,Fort, Mumbai 400 001 3 Contacts Tel.+91 022 6665 8282/7289
Fax.+91 022 6665 7724 / 6665 7725 [email protected] Website.www.tatasteel.com
4 Chairman R N Tata 5 Chief Executive Officer 6 Managing Director B Muthuraman 7 Company Secretary J C Bham
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 5800
138941
274373
252133
256514
78882
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
74770
-10110
64661
43186
41656
73
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 598560 970 353 5.2
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 30.52 17.42 25.32 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 11
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
8 Board 11 Meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee -
Tata Steel believes in adopting the best practices in the areas of
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
138
Corporate Governance. Even in a fiercely competitive business environment, the Management and Employees of the Company are committed to uphold the core values of transparency, integrity, honesty and accountability which are fundamental to the Tata Group. The Company retains focus on its resources, strengths and strategies for creation and safeguarding of shareholders’ wealth and at the same time protects the interests of all its shareholders.
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE Particulars Practice 1 Name of the Company Ultratech Cement Ltd 2 Registered Address "B" Wing, 2nd floor, Ahura Centre, Mahakali Caves Road, Andheri
(East), Mumbai 400 093 3 Contacts Tel.+91 022 66917800
Fax.+91 022 66928109 [email protected] Website.www.ultratechcement.com
4 Chairman Kumar Mangalam Birla 5 Chief Executive Officer 6 Managing Director S Misra 7 Company Secretary S K Chatterjee
FINANCIALS (Rs. In Mn) (Audited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1245
16393 49108
49108
49723
14793
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
13924
-2263
11662
7823
7823
63
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 128250 1205 662 14.4
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 51.08 7.5 16.23 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
11 Board 7 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 8 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 2 meetings
The Aditya Birla Group is committed BOARD SECRETARIAT
139
to the adoption of best governance practices and their adherence in spirit. The governance philosophy rests on five basic tenets viz., Board accountability to the Company and shareholders, strategic guidance and effective monitoring by the Board, protection of minority interests and rights, equitable treatment of all shareholders as well as superior transparency and timely disclosure. The Aditya Birla Group Values - Integrity; Commitment; Passion; Seamlessness and Speed also reflect this philosophy.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Videocon Industries Ltd. 2 Registered Address 14 Kms Stone, Aurangabad-Paithan Road, Chitegaon, Tq. Paithan,
Dist. Aurangabad - 431 105 (India) 3 Contacts Tel.+91 02431-251501, 02, 03, 04
Fax.- [email protected]/[email protected] Website.www.videoconworld.com
4 Chairman Venugopal N Dhoot, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary Vinod Kumar Bohra
FINANCIALS (Rs. In Mn) (Audited 1 Oct 05 – 30 Sep 06) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2208
38476
75803 77458
12492
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
-3356 9137
8185
8188
37
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 81320 503 336 9.7
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 70.34 4.05 2.71 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 12
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
8 Board 17 meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 5 meetings
140
Term of the Chairman/CEO
NA Investor Grievance Committee -
Videocon believes that sound corporate governance is critical to enhance and retain investor’s trust. The Company’s philosophy on Corporate Governance is based on: Transparency & maintaining high disclosure levels, Accountability, Equity, Compliance with the laws in all the Countries in which the Company operates and Sustainability. The objective is to institutionalize Corporate Governance practices that go beyond adherence to the extant regulatory framework.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Videsh Sanchar Nigam Ltd (VSNL) 2 Registered Address Videsh Sanchar Bhavan, Mahatma Gandhi Road, Fort
Mumbai 400 001 3 Contacts Tel.+91-022-66504357
Fax- Email. [email protected] Website. www.vsnl.in
4 Chairman Subodh Bhargava 5 Chief Executive Officer Srinath Narasimham, MD & CEO 6 Managing Director 7 Company Secretary Satish Ranade
FINANCIALS (Rs. In Mn) (Audited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2850
86112
88566
12990
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
11554
-7830
3724
930
17
0.54
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 167440 600 342 34.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 76.23 2.83 2.56 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 11
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
10 Board 9 Meetings
Number of Non Executive Directors who are Independent
4 Audit Committee 9 Meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 4 Meetings
141
The Company believes that total business risk elimination is never possible but can be minimized by consistently developing and following the best practices of Corporate Governance. The Company is installing new state-of-the art systems including integrated financial accounting and budgeting systems and through a systematic process of training and development has increased the quality of its personnel. Fairness in words, actions and deeds with all stakeholders are the pillars of corporate governance philosophy of the Company.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Whirlpool of India Limited 2 Registered Address Plot No.A – 4, MIDC Ranjangaon, Taluka Shirur,
District Pune 419204, India 3 Contacts Tel.+91-0129-2232381, 2234071-73, 2234046-49
Fax.+91-0129-2233283 [email protected] Website.www.whirlpool.com
4 Chairman Mark Hu 5 Chief Executive Officer 6 Managing Director Arvind Uppal 7 Company Secretary Ravi Sabharwal
FINANCIALS (Rs. In Mn) (Audited 1 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 1269
132
16222
14806
14968
634
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
471
-344
127
130
-53
-2
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 4910 52 23 203.7
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 82.33 0.01 15.86 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 6
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
3 Board 7 meetings
Number of Non Executive Directors who are Independent
2 Audit Committee 4 meetings
Term of the NA Investor Grievance Committee 4 meetings
142
Chairman/CEO Whirlpool’s philosophy Corporate
governance is based on the foundation of enduring Values. Over the years, the core Values of the company have not changed. These Values are the guidelines in all transactions and relations. That is the Spirit of Whirlpool and they call it the Spirit of Winning…. On to Leadership…. Sustainable and profitable. It tries to stretch and achieve that which seems beyond our grasp..
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Wipro Limited 2 Registered Address Doddakanneli, Sarjapur Road, Bangalore 560 035 3 Contacts Tel.+91 080 28440011
Fax.+91 080 28440214/28440256 Email- Website.www.wipro.com
4 Chairman Azim H Premji 5 Chief Executive Officer 6 Managing Director 7 Company Secretary V Ramachandran
FINANCIALS (Rs. In Mn) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 2918
90250
136796
139527
35432
Gross Profit Depreciation Profit Before Tax
Profit After Tax
Net Profit EPs
35360
-3598
31762
28421
28421
20
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 743810 690 425 23.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 79.58 5.14 7.58 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes
No of Directors 7
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
6 Board 5 meetings
Number of Non Executive Directors who are Independent
6 Audit Committee 6 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee
4 meetings
143
Wipro was the pioneers/early adopters of some of the key governance practices in India. It instituted stock ownership in 1984, constituted in 1986, the sub-committees of the Board of Directors for Audit, and Compensation and benefits. On the disclosure front, it presented consolidated financial statements in 1983, the first year in which we established subsidiary company for carrying on our business, and followed it up with reporting on Segmental Business Results. Corporate Governance in Wipro has four layers, namely, 1.Governance by Shareholders, 2. Governance by Board of Directors, 3. Governance by Sub-committee of Board of Directors, and 4. Governance of the management process.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Britannia Industries Limited 2 Registered Address 5/1A, Hungerford Street, Kolkata - 700 017, West Bengal. 3 Contacts Tel.+91 033 2287 2439/ 2287 2057
Fax.+91 033 2287 2501 [email protected]/[email protected], Website.www.britannia.co.in
4 Chairman Nusli N Wadia 5 Chief Executive Officer 6 Managing Director Vanita Bali 7 Company Secretary V. Madan
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 239 2900 23841 22663 22951 1595 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
1478 -260 1218 1105 1051 43.97 MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 36520 1780 1030 25.9
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 50.96 14.64 18.67 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 13
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
12 Board 4 meetings
Number of Non Executive Directors who are Independent
5 Audit Committee 4 meetings
Term of the Chairman/CEO
NA/5 Investor Grievance Committee 24 meetings
BOARD SECRETARIAT
144
Our Company considers good corporate governance a pre-requisite for meeting the needs and aspirations of its holders and other stakeholders in the company and firmly believes it can be achieved by maintaining transparency in its dealings, integrity and strict regulatory compliance. And with this view the corporate governance report contains relevant disclosure about the Board, Board committees as also on the financial and stock performance.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Bharati Airtel Limited 2 Registered Address Qutab Ambience, H-5/12, Mehrauli Road, New Delhi 110 030 3 Contacts Tel. +91 11 41666000-07
Fax. +91 11 41666011-12 [email protected] Website.www.bharatiairtel.in
4 Chairman Sunil Bharti Mittal 5 Chief Executive Officer Manoj Kohli (CEO & President) 6 Managing Director Sunil Bharati Mittal 7 Company Secretary Vijaya Sampath, Group Gen. Counsel & Co. Secretary
FINANCIALS (Rs. In Mn) (Audited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 184202 185321 75526 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
73037 -26191 46846 41165 41102 - MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 1887560 1149 527 40.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 45.36 25.41 0.69 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 18
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
16 Board 4 meetings
Number of Non Executive Directors who are Independent
9 Audit Committee 4 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee 10 meetings
BOARD SECRETARIAT
145
Corporate governance refers to a combination of law, regulation, compliances and adoption of certain mandatory practices voluntarily by the board and company that enables an organization to perform efficiently and ethically, generate long term wealth and value for all its stakeholders and respect the interests of society as a whole, besides attracting the best talent and raise capital and funding optimally.
Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Mahanagar Telephone Nigam Ltd. (MTNL) 2 Registered Address Jeevan Bharti Building, Tower 1, 12th Floor, 124 Connaught Circus,
New Delhi 110 001 3 Contacts Tel.+91 11 23742212/3326
Fax.+9111 23314243 [email protected] Website.www.mtnl.net.in
4 Chairman R S P Sinha, CMD 5 Chief Executive Officer 6 Managing Director 7 Company Secretary S C Ahuja
FINANCIALS (Rs. In Mn) (Unaudited 01 Apr 06 – 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit - 49234 55307 14908 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
14887 -6803 8085 5274 6431 10.21 MARKET STATISTICS
MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio (%) 121500 194 124 19.5
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 56.25 13.04 2.71 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes No of Directors 7
Is the Chairman Non Executive
No COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
4 Board 10 meetings
Number of Non Executive Directors who are Independent
1 Audit Committee 3 meetings
Term of the Chairman/CEO
NA Investor Grievance Committee -
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The company's philosophy on
corporate governance en-compasses achieving the balance between shareholders interest and corporate goals through the efficient conduct of its business and meeting its stakeholder’s obligation in a manner that is guided by transparency, accountability and integrity.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
CORPORATE GOVERNANCE PRACTICE
Particulars Practice 1 Name of the Company Jindal Steel & Power Ltd. 2 Registered Address 28, Najafgarh Road, New Delhi 110 015 3 Contacts Tel. +91 113058 9739-40
Fax +91 11 3058 9755 Email. – Website.www.jindalstreelpower.com
4 Chairperson Savitri Jindal 5 Chief Executive Officer Naveen Jindal Er. Vice Chairman & MD 6 Managing Director Vikrant Gujral Vice Chairman & CEO 7 Company Secretary S Ananthakrishnan
FINANCIALS (Rs. In Mn) (Audited 31 Mar 07) Equity Reserves Gross Sales Net Sales Total Income Operating Profit 154 35198 35488 14314 Gross Profit Depreciation Profit
Before Tax Profit After Tax
Net Profit EPs
-3365 9448 7030 7030
MARKET STATISTICS MarketCap (Rs. In Mn) Price High (Rs.) Price Low (Rs.) PE Ratio(%) 273650 9220 1780 34.2
SHARE HOLDING PATTERN (%) Promoters FIIs Individuals 59.084 24.49 10.04 CG COMPLIANCE BOARD CG Report included in the Annual Report of the Company
Yes
No of Directors 10
Is the Chairman Non Executive
Yes COMMITTEE MEETINGS
Number of Non Executive Directors in the Board
5 Board 5 meetings
Number of Non Executive Directors who are Independent
3 Audit Committee 5 meetings
Term of the Chairman/CEO
NA/5 Investor Grievance Committee 4 Meetings
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Corporate Governance in Jindal Steel is adopted as a value system for ensuring efficient working and proper conduct of the business and affairs of the Company with a view to put the available resources at optimum use, increase operational efficiency and enhance shareholders’ wealth. Company’s Corporate Governance Philosophy is equity, fairplay, judicious utilization of resources, responsiveness towards stakeholders such as shareholders, lenders, customers, vendors, employees, society’s needs, empowerment of human resource, preserving natural heritage, strengthening administrative structure, its systems, policies and procedures.
BOARD SECRETARIAT Does the company has a Chief Compliance Officer
Yes
Is the Chief Compliance Officer same as the Company Secretary
Yes
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ANNEXURES
149
List of Annexures
Pariculars Page No. 1. Objectives of Corporate Governance 154
2. Corporate Governance Assessment and Policy Recommendations for India 163
3. Questionnaire for Performance Evaluation of the Audit Committees 167
4. Ownership of Global Corporations 172
5. Total Value of listed corporate assets under family control 173
6. Indexes based on Corporate Governance 174
7. Index of Corporate Governance Codes in Various Countries 177
8. Best Practices in Practice Country Comparisons- 183
India China, Brazil and Malaysia
9. Overview of the Functions of Audit Committees in Selected Companies 191
10. Differences between US and Indian Corporate Governance 223
11. Evolution of Corporate Governance 224
12. Indices of Regulation of Securities Markets 226
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Annexure- 1 Objectives of Corporate Governance
SAIL The Corporate Governance philosophy of SAIL is to ensure transparency, disclosures and reporting that complies fully with laws, regulations and guidelines, and to promote ethical conduct throughout the organization, with the primary objective of enhancing shareholders value, while being a responsible corporate citizen. The Company is committed to conforming to the highest standards of corporate governance in the country. It recognizes that the Board is accountable to all shareholders and that each member of the Board owes his/her first duty for protecting and furthering the interest of the Company. Tata Steel Tata Steel believes in adopting the best practices in the areas of Corporate Governance. Even in a fiercely competitive business environment, the Management and Employees of the Company are committed to uphold the core values of transparency, integrity, honesty and accountability which are fundamental to the Tata Group. The Company retains focus on its resources, strengths and strategies for creation and safeguarding of shareholders’ wealth and at the same time protects the interests of all its shareholders.
Hindalco The Aditya Birla Group is committed to the adoption of best governance practices and its adherence in the true spirit, at all times. Its governance practices stems from an inherent desire to improve and innovate and reflects the culture of trusteeship that is deeply ingrained in value system and forms part of the strategic thought process. The governance philosophy rests on the following five basic tenets;
• Board accountability to the Company and shareholders, • strategic guidance and effective monitoring by the Board, • protection of minority interests and rights, • equitable treatment of all shareholders and • Superior transparency and timely disclosure.
Jindal Steel Corporate Governance in Jindal Steel is adopted as a value system for ensuring efficient working and proper conduct of the business and affairs of the Company with a view to put the available resources at optimum use, increase operational efficiency and enhance shareholders’ wealth. Company’s Corporate Governance Philosophy is equity, fairplay, judicious utilization of resources, responsiveness towards stakeholders such as shareholders, lenders, customers, vendors, employees, society’s needs, empowerment of human resource, preserving natural heritage, strengthening administrative structure, its systems, policies and procedures. This is continuous process which evolves over a period of time and undergoes changes to suit the changing times and needs of the business, society and the state. Essar Steel Essar Steel Limited believes that good Corporate Governance is essential to achieve long term corporate goals and to enhance stakeholders’ value. The Company’s philosophy on Corporate Governance envisages attainment of high level transparency, accountability and integrity in the functioning of the Company and the conduct of its business, its relationship with employees, stakeholders, creditors, customers and institutional and other lenders. The company places due emphasis on regulatory compliance.
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Sterlite The company believes in conducting its affairs in a fair and transparent manner and in maintaining the highest ethical standards in its dealings with all its constituents. It is committed to following good corporate governance practices. The company’s mission is to constantly review its systems and procedures to achieve the highest level of corporate governance in the overall interest of all the stakeholders. HLL At Hindustan Unilever Limited, good governance is an ongoing process, thereby ensuring truth, transparency, accountability and responsibility in all dealings with employees, shareholders, consumers and the community at large. At Hindustan Unilever, corporate governance in its widest sense, almost like a trusteeship; it is a philosophy to be professed, a value to be imbibed and an ideology to be ingrained in corporate culture. Corporate governance goes much beyond mere compliance; it is not a simple matter of creating checks and balances (although we also engage in that!). It is in fact a continuous process of realizing the Company's objectives with a view to make the most of every opportunity. It involves leveraging its resources and aligning its activities to consumer need, shareholder benefit and employee growth. Thereby the company succeeds in delighting its stakeholders while minimizing risks. The primary objective is to create and adhere to a corporate culture of conscientiousness and consciousness, transparency and openness. The Company aims to develop capabilities and identify opportunities that best serve the goal of value creation, thereby creating an outstanding organization. Nestle Nestlé India Limited, as a part of Nestlé Group, Switzerland has over the years followed best practice of Corporate Governance by adhering to practices laid down by Nestlé Group. The two most significant documents from Nestlé Group, which define the standard of behaviour of Nestlé India, are “Nestlé Corporate Business Principles” and “The Nestlé Management and Leadership Principles”. Nestlé India’s business objective and that of its management and employees is to manufacture and market the Company’s products in such a way as to create value that can be sustained over the long term for consumers, shareholders, employees, business partners and the national economy. Nestlé India is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and ethical values of its management and employees. In addition to compliance with regulatory requirements, Nestlé India endeavors to ensure that highest standards of ethical and responsible conduct are met throughout the organization. Britannia Company considers good corporate governance a pre-requisite for meeting the needs and aspirations of its holders and other stakeholders in the company and firmly believes it can be achieved by maintaining transparency in its dealings, integrity and strict regulatory compliance. And with this view the corporate governance report contains relevant disclosure about the Board, Board committees as also on the financial and stock performance. Whirlpool Whirlpool’s philosophy on Corporate Governance is based on the foundation of enduring Values. Over the years, the core Values of the company have not changed. These Values are the guidelines in all transactions and relations. That is the Spirit of Whirlpool and they call it the Spirit of Winning…. On to Leadership…. Sustainable and profitable. It tries to stretch and achieve that which seems beyond our grasp. It envisages attainment of the highest levels of transparency, accountability and equity in all facets of its operations and its interaction with its stakeholders including Shareholders, Employees, Lenders and the Government. Whirlpool believes in implementing the philosophy of corporate governance in letter and spirit.
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Videocon Videocon believes that sound corporate governance is critical to enhance and retain investor’s trust. The Company’s philosophy on Corporate Governance is based on: 1. Transparency & maintaining high disclosure levels. 2. Accountability. 3. Equity. 4. Compliance with the laws in all the Countries in which the Company operates. 5. Sustainability. The objective is to institutionalize Corporate Governance practices that go beyond adherence to the extant regulatory framework. In fact, our corporate structure, business and disclosure practices are aligned to our Corporate Governance philosophy. HPCL HPCL lays special emphasis on conducting its affairs within the framework policies, internal and external regulations and in a transparent manner. Being a Government Company its activities are subject to review by several external authorities like the Comptroller & Auditor General of India (CAG), the Central Vigilance Commission (CVC), parliamentary Committees etc. At the apex level is the HPCL Board of Directors (The Board). The Board has constituted several sub-committees, such as the Committee of Functional Directors (CFD), the Audit Committee, the Investment Committee, the HR Committee, the Investor Grievance Committee, etc. BPCL Bharat Petroleum Corporation Ltd’s corporate philosophy on Corporate Governance has been to ensure fairness to the stakeholders through transparency, full disclosures, empowerment of employees and collective decision making. Indian Oil Indian Oil believes that good Corporate Governance practices ensure efficient conduct of the affairs of the Company and also help in maximizing value for all its stakeholders. The Company endeavors to uphold the principles and practices of Corporate Governance to ensure transparency, integrity and accountability in its functioning, which are vital to achieve its Vision of becoming a major diversified, transnational, integrated energy company. With the adoption of the following policies, the Company has further enhanced its Governance structure: (a) Code of Conduct for Directors and senior management personnel, (b) Code of Conduct for prevention of insider trading and (c) Policy on risk assessment and minimizing procedures. Reliance Oil Over the years, governance processes and systems have been strengthened at Reliance. In addition to complying with the statutory requirements, effective governance systems and practices inter alia towards transparency, disclosures, internal controls and promotion of ethics at work-place have been institutionalized. Reliance recognizes that good Corporate Governance is a continuing exercise and reiterates its commitment to pursue highest standards of Corporate Governance in the overall interest of all the stakeholders. For implementing the Corporate Governance practices, Reliance has a well defined policy framework consisting of the following: • Reliance’s values and commitments policy • Reliance’s code of ethics • Reliance’s business policies • Reliance’s policy for prohibition of insider trading • A detailed programme of ethics management
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State Bank of India State Bank of India is committed to the best practices in the area of corporate governance, in letter and in spirit. The Bank believes that good corporate governance is much more than complying with legal and regulatory requirements. Good governance facilitates effective management and control of business, maintaining a high level of business ethics and optimizing the value for all its stakeholders. The objectives can be summarized as: • To enhance shareholder value. • To protect the interests of shareholders and other stakeholders including customers,
employees and society at large. • To ensure transparency and integrity in communication and to make available full, accurate
and clear information to all concerned. • To ensure accountability for performance and to achieve excellence at all levels. • To provide corporate leadership of highest standard for others to emulate ICICI ICICI Bank’s corporate governance philosophy encompasses not only regulatory and legal requirements, such as the terms of listing agreements with stock exchanges, but also several voluntary practices aimed at a high level of business ethics, effective supervision and enhancement of value for all stakeholders. HDFC HDFC encompasses the simple tenets of integrity, transparency and fairness in whatever it does. Each relationship that HDFC has, be its borrowers, depositors, agents, shareholders or other stakeholders is highly valued by the organisation. Across the organisation, HDFC has always followed an open-door policy. This not only ensures transparency, but also enables rapport building and gives employees an opportunity to freely address issues of concern. The Board of Directors fully supports and endorses corporate governance practices in accordance with the provisions of Clause 49 of the listing agreements. The Corporation has complied with the mandatory requirements of the said Clause and listed below is the status with regard to the same. NTPC NTPC believes in the philosophy that corporate governance is a key element in improving efficiency and growth as well as enhancing investor confidence and accordingly the Corporate Governance philosophy has been scripted as under: “As a good corporate citizen, the Company is committed to sound corporate practices based on conscience, openness, fairness, professionalism and accountability in building confidence of its various stakeholders in it thereby paving the way for its long term success.” Tata Power Tata Power has been practicing good governance practices even before they were mandated. “Leadership with Trust” is the principle of operation of the Company. The Business Excellence Brand Promotion (BEBP) process includes the Tata Business Excellence Model and the Tata Code of Conduct, which form guidelines for “Leadership with Trust”. The Company has adopted all these processes formally right from inception and continuously works on them to improve business performance and enhance stakeholder trust. The Company will continue to focus its energies and resources in creating and safeguarding of shareholders’ wealth, and at the same time, protect the interests of all its stakeholders. Reliance Energy In our commitment to practice sound governance principles, Reliance Energy is guided by the following core principles.: 1. Transparency To maintain the highest standards of transparency in all aspects of our interactions and dealings. 2. Disclosures To ensure timely dissemination of all price sensitive information and matters of interest to our stakeholders. 3. Accountability To demonstrate highest levels of personal responsibility and continually affirm that employees are responsible to themselves for the pursuit of excellence. 4. Compliances
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To comply with all the laws and regulations as applicable to the company. 5. Ethical conduct To conduct the affairs of the company in an ethical manner. 6. Stakeholders’ interests To promote the interests of all stakeholders including of customers, shareholders, employees, lenders, vendors, governments and the community. Tata Motors As part of the Tata group, the Company’s philosophy on Corporate Governance is founded upon a rich legacy of fair, ethical and transparent governance practices, many of which were in place even before they were mandated by adopting highest standards of professionalism, honesty, integrity and ethical behavior. Through the Governance mechanism in the Company, the Board along with its Committees endeavors to strike the right balance with its various stakeholders. The Corporate Governance philosophy has been further strengthened with the implementation, a few years ago, by the Company of the Tata Business Excellence Model, the Tata Code of Conduct applicable to the Company, its directors and employees. The Company is in full compliance with the requirements of Corporate Governance under Clause 49 of the Listing Agreement with the Indian Stock Exchanges. With the listing of the Company’s Depositary Programme on the New York Stock Exchange, the Company is also compliant with US regulations as applicable to Foreign Private Issuers (non-US listed companies) which cast upon the Board of Directors and the Audit Committee, onerous responsibilities to improve the Company’s operating efficiencies. Risk management and internal control functions have been geared up to meet the progressive governance standards. Bajaj Auto The commitment of Bajaj Auto Limited (‘Bajaj Auto’, ‘BAL’ or ‘the Company’) to the highest standards of good corporate governance practices predates SEBI and clause 49 of the Listing Agreements. Transparency, fairness, disclosure and accountability are central to the working of the Company and its Board of Directors. Hero Honda Hero Honda’s philosophy of corporate governance stems from its belief that the company’s business strategy and plans should be consistent with the welfare of all its stakeholders, including shareholders. Corporate governance rests upon the four pillars of transparency, full disclosure, independent monitoring and fairness to all, especially to minority shareholders. Dr.Reddy Dr.Reddy’s philosophy of corporate governance stems out from its belief that timely disclosures, transparent accounting policies, and a strong and independent Board go a long way in preserving shareholders trust while maximizing long-term corporate values. Keeping in view the Company’s size and complexity in operations, Dr. Reddy’s corporate governance framework is based on the following main principles: • Appropriate composition and size of the Board, with each Director bringing in key expertise in different areas. • Proactive flow of information to the members of the Board and Board Committees to enable effective discharge of their fiduciary duties. • Ethical business conduct by the management and employees. • Full-fl edged systems and processes for internal controls on all operations, risk management and financial reporting; • Timely and accurate disclosure of all material operational and financial information to the stakeholders. Cipla The Company is committed to good corporate governance. The Company respects the rights of its shareholders to secure information on the performance of the Company and it is its endeavor to maximize the long term value to the shareholders of the Company.
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Merck Merck is committed to the adoption of the best governance practices and their adherence in the true spirit, at all times. The Company’s philosophy on Corporate Governance is to ensure that the systems and procedures which monitor compliance with laws, rules and regulations are in place in each area of its operations and the relevant information regarding the Company and its operations is disclosed, disseminated and easily available to all its stakeholders. Ranbaxy Ranbaxy has always believed in such a "Sound" Code of Corporate Governance, as a tool for highest standards of management and business integrity and as a result started implementing a series of voluntary initiatives as early as 1999. Some of these measures included: - Composition of the Board of Directors (eg. Majority Independent Directors). - Constitution of various Board Committees for oversight and guidance concerning key
decisions and soundness of decision making processes connected with the functioning of the Company.
- Timely dissemination of information to shareholders. - Code of Conduct. GlaxoSmithkline The Company’s philosophy of Corporate Governance is aimed at assisting the management of the Company in the efficient conduct of its business and in meeting its obligations to stakeholders, and is guided by a strong emphasis on transparency, accountability and integrity. For several years, the Company has adopted a codified Corporate Governance Charter, which is in line with the best practice, as well as meets all the relevant legal and regulatory requirements. All Directors and employees are bound by Codes of Conduct that sets out the fundamental standards to be followed in all actions carried out on behalf of the Company. Infosys Over the years, the Board has developed corporate governance guidelines to help fulfill corporate responsibility to various stakeholders. This ensures that the Board will have the necessary authority and practices in place, to review and evaluate our operations when required. Further, it allows the Board to make decisions that are independent of the Management. Our corporate governance philosophy is based on the following principles: • Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should go beyond the law. • Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose. • Make a clear distinction between personal conveniences and corporate resources. • Communicate externally, in a truthful manner, about how the Company is run internally. • Comply with the laws in all the countries in which the Company operates. • Have a simple and transparent corporate structure driven solely by business needs. • Management is the trustee of the shareholders’ capital and not the owner. Wipro Wipro was the pioneers/early adopters of some of the key governance practices in India. It instituted stock ownership in 1984, constituted in 1986, the sub-committees of the Board of Directors for Audit, and Compensation and benefits. On the disclosure front, it presented consolidated financial statements in 1983, the first year in which we established subsidiary company for carrying on our business, and followed it up with reporting on Segmental Business Results. Corporate Governance in Wipro has four layers, namely, 1. Governance by Shareholders, 2. Governance by Board of Directors, 3. Governance by Sub-committee of Board of Directors, and 4. Governance of the management process Satyam
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Corporate Governance assumes a great deal of importance in the business life of Satyam. The driving forces of Corporate Governance at Satyam are its core values – Associate Delight, Investor Delight, Customer Delight and the Pursuit of Excellence. The Company’s goal is to find creative and productive ways of delighting its stakeholders, i.e., Investors, Customers, Associates and Society, thereby fulfilling the role of a responsible corporate representative committed to best practices. Mphasis MphasiS’ Corporate Governance is directed at the enhancement of shareholder value, keeping in mind the interests of the other stake holders, viz., clients, employees, investors, regulatory bodies, etc. The functions of the Board of Directors of the Company are well defined. The Company has taken various steps including setting up of various sub-committees of the Board to oversee the functions of the Management. MphasiS is committed to good corporate governance and has bench marked itself against global best practices. ACC ACC is respected for its professional management and good business practices in the Indian corporate world. Integrity, emphasis on product quality and transparency in its dealings with all stakeholders are its core values. ACC believes that good governance generates goodwill among business partners, customers and investors, earns respect from society and brings about a consistent sustainable growth for the Company and generates competitive returns for the investors. Towards its objectives of achieving good corporate governance, it has endowed a Chair for Business Ethics at the Management Centre for Human Values, Indian Institute of Management, Kolkata. Ultratech The Aditya Birla Group is committed to the adoption of best governance practices and their adherence in spirit. The governance philosophy rests on five basic tenets viz., Board accountability to the Company and shareholders, strategic guidance and effective monitoring by the Board, protection of minority interests and rights, equitable treatment of all shareholders as well as superior transparency and timely disclosure. The Aditya Birla Group Values - Integrity; Commitment; Passion; Seamlessness and Speed also reflect this philosophy. Gujarat Ambuja The company believes in transparency, empowerment, accountability, safety of people and environment, motivation, respect for law and fair business practices with all its stakeholders. These practices being followed since inception have helped the company in its sustained growth. ITC ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth-generating capacity. Since large corporations employ a vast quantum of societal resources, ITC believes that the governance process should ensure that these resources are utilized in a manner that meets stakeholders’ aspirations and societal expectations. This belief is reflected in the Company’s deep commitment to contribute to the “triple bottom line”, namely the development, nurture and regeneration of the nation’s economic, social and environmental capital. ITC's Corporate Governance structure, systems and processes are based on two core principles: (i) Management must have the executive freedom to drive the enterprise forward without undue restraints, and (ii) This freedom of management should be exercised within a framework of effective accountability. L&T The Company's philosophy on Corporate Governance is built on a rich legacy of fair and transparent governance and disclosure practices, many of which were in existence even before they were mandated by legislation. The Company's essential character revolves round values based on transparency, integrity, professionalism and accountability. At the highest level, the Company continuously endeavours to improve upon these aspects and adopts innovative approaches for leveraging resources, converting opportunities into achievements through proper empowerment and motivation, fostering a healthy growth and development of human resources. Bharti Airtel
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Corporate governance refers to a combination of law, regulation, compliances and adoption of certain mandatory practices voluntarily by the board and company that enables an organization to perform efficiently and ethically, generate long term wealth and value for all its stakeholders and respect the interests of society as a whole, besides attracting the best talent and raise capital and funding optimally. The principals of corporate governance practices in Bharti Airtel Ltd. are based on the following broad principals: • Transparency in disclosure and communication of relevant financial and operational
information in timely manner; • Accountability, supported by robust internal processes of management oversight and
control for monitoring of performance and evaluation of risk; • Integrity and ethics in our dealings with all stakeholders; • Balancing the enforcement and protection of the rights of all stakeholders, thus creating
wealth and value in the long term; • Independence of directors in reviewing and approving corporate strategy, major business
plans and activities as well as senior management appointments; • Well-defined corporate structure that establishes checks and balances and delegates
decision making to appropriate levels in the organization. VSNL VSNL has evolved from the only ILD player in India to a multi-national corporation having its presence felt across the globe. Today, VSNL being one of the leaders in the global ILD market, the challenge lies in designing a model addressing the specific and unique needs of geographies and yet strengthening and aligning the overall business objectives and goals. The Company believes that total business risk elimination is never possible but can be minimized by consistently developing and following the best practices of Corporate Governance. To this end, the Company focuses on developing and implementing higher standards of accountability to enable optimum returns to all stakeholders. The Company is installing new state-of-the art systems including integrated financial accounting and budgeting systems and through a systematic process of training and development has increased the quality of its personnel. Fairness in words, actions and deeds with all stakeholders are the pillars of corporate governance philosophy of the Company. Corporate Governance in substance rather than form is what the Company believes in and actively implements. To ensure this, a high level Corporate Governance Council has been formed to ensure that the best practices of Corporate Governance are adopted. MTNL The company's philosophy on corporate governance encompasses achieving the balance between shareholders interest and corporate goals through the efficient conduct of its business and meeting its stakeholder’s obligation in a manner that is guided by transparency, accountability and integrity. ONGC The company views corporate governance in its widest sense almost like a trusteeship, a philosophy to be progressed, a value to be imbibed and an ideology to be ingrained into the corporate culture. It has been practicing corporate governance principles much before it became mandatory. They maintain that to be successful it must maintain global standards of corporate conduct towards it stakeholders. It views to translate opportunities into reality. The primary objective is to create and adhere to a corporate culture of conscience and consciousness, transparency and openness, fairness, accountability, propriety, equity, sustainable value creation, ethical practices, thereby creating an outperforming organization. To that end, your company has always focused on good corporate governance which is the key driver of sustainable corporate growth and long term value creation.
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Annexure- 2 Corporate Governance Assessment and Policy Recommendations for India
World Bank, 2004 I. The Rights of Shareholders 1. Basic shareholder rights : OBSERVED • Shares traded through a stock exchange are held in dematerialized form in the two depositories: National Securities Depository and Central Depository Services. • Registration in a depository is proof of ownership. • Companies must maintain a register of shareholders or outsource this function to a share transfer agent. • Shares traded through stock exchanges are transferred through book entry at the depositories. • Cash settlement occurs at designated clearing banks of stock exchange clearing houses. Clearance/settlement occurs in DVP2 on T+2. • Novation exists at National Stock Exchange (NSE), but not Stock Exchange, Mumbai (BSE). • Guarantee funds have largely eliminated settlement risk. Central Bank plans to introduce real time gross settlement in 2004. • Annual and half yearly accounts are mailed to shareholders; quarterly accounts are published in newspapers and posted on web pages of issuers and stock exchanges. • Companies must file memorandum, articles of association and periodic financial information with a Registrar of Companies (ROC). Investors can access this information for nominal fee (about USD 1). • Usually, directors are proposed by board and elected by shareholders. Shareholders can propose candidates up to fourteen days before AGM [annual general meeting], but shareholders seldom use this right. • Board proposes dividend, and AGM approves it. Policy Recommendations: N.A 2. Rights to participate in fundamental decisions: OBSERVED • Certain fundamental corporate decisions are the exclusive power of AGM and require 75 percent majority: • changing registered office; • authorizing capital increases; • waiving pre-emptive rights; buying back shares; • amending articles of association; • delisting; • acquisitions, disposals, mergers and takeovers; • changes to company business or objectives; • making loans and investments beyond limits prescribed under CA Section 372A, • authorizing board to: sell or lease major assets; borrow money in excess of paid-up capital and free reserves, and (iii) Appoint sole selling agents and apply to the court for the winding up of company. Policy Recommendations: The provision dealing with the selling or leasing of major assets should be further refined to avoid any abuse. 3. Shareholders’ AGM rights: OBSERVED • AGM mandatory, according to Companies Act (CA). • 21 day AGM notice (meeting place, time, agenda) sent to all shareholders. • In case of special business, agenda must set out material facts, including nature of concern or interest of any director or manager. • Some companies reportedly hold AGMs in remote locations. • Quorum is five shareholders. If quorum is not met after half an hour, meeting is dissolved if called by shareholders, or postponed for one week if called by board. • Shareholders may vote in person or proxy. • CA allows postal voting for fundamental situations. • Any shareholder may apply to Company Law Board (CLB) to call AGM. • Shareholders with 10 percent of paid-up voting capital can call EGM [exceptional general
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meeting]. • Shareholders can vote by show of hands or demand poll, if they own at least 10 percent of voting rights. Policy Recommendations: N.A 4. Disproportionate control disclosure: LARGELY OBSERVED • No nominee accounts. • Shareholder agreements need not be disclosed to company/shareholders. • Prevalence of complex cross-holdings across family or business groups still fails to provide a fully transparent picture for shareholders. Policy Recommendations: Shareholder agreements should be disclosed 5. Markets for corporate control should be allowed to function: OBSERVED • SEBI [Securities and Exchange Board of India] Takeover Code has been successfully tested in 25 + hostile bids. •Takeover Code requires anyone whose holdings cross 15 percent threshold to make offer for at least 20 percent more of shares. Policy Recommendations: N.A 6. Cost/benefit to voting: MATERIALLY NOT OBSERVED • Pension funds seldom exercise voting rights; instead exert influence through nominee directors on the board of their portfolio companies. Policy Recommendations: - Regulators should consider introducing an obligation that institutional investors acting in a fiduciary capacity adopt and disclose their corporate governance and voting policy. - Regulators should also disclose to the public how they manage material conflicts of interest that may affect the exercise of their corporate governance rights. - Shareholder activism among retail investors should be encouraged. II. Equitable Treatment of Shareholders 1. All shareholders should be treated equally: PARTIALLY OBSERVED • Shareholders can apply [to] the CLB, SEBI or the company “Grievance Committee” for redress. Derivative and class action suits exist. • Doubts persist about the effectiveness of legal remedies in practice. Policy Recommendations: - Depository receipt contracts should provide owners with same rights to vote as are accorded to holders of underlying shares. - Consider strengthening regulators’ enforcement power to offset backlog and delays of court procedures. 2. Prohibit insider trading PARTIALLY OBSERVED • Insider trading is a criminal offense, but enforcement is problematic. • Senior management must disclose to board potential conflicts of interest. • Directors must disclose share dealings beyond certain threshold. Policy Recommendations: - Implement SEBI’s initiative of a unique client code for each investor. - There should be greater cooperation between NSE and BSE on surveillance. - Publish share trading by directors and senior management in the newspaper. - Successfully prosecute one insider trading case to enhance perception of market integrity. 3. Board/Mgrs. disclose interests PARTIALLY OBSERVED • Reportedly, misuse of corporate assets and abuse in related party transactions remain problems. Policy Recommendations: - While audit committees should pre-vet related party transactions, ultimate responsibility of judging whether a related party transaction is in the best interest of the company should
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remain with the board. III. Role of Stake holders in Corporate Governance 1. Stakeholder rights respected OBSERVED • Board is required to discuss material issues regarding stakeholders. Policy Recommendations: N.A 2. Redress for violation of rights PARTIALLY OBSERVED • Redress can be sought through civil and high courts; however, there are long delays and backlogs. Policy Recommendations: 3. Performance enhancement: OBSERVED • SEBI has issued detailed guidelines on the issue of stock options. Policy Recommendations: Closely follow the international debate on good practices regarding the treatment of stock options. 4. Access to information: OBSERVED • Relevant information is posted on company and stock exchange websites, but quality of info varies among companies. Policy Recommendations: N.A IV. Disclosure and Transparency 1. Disclosure standards: LARGELY OBSERVED • Companies must send annual report to shareholders, stock exchanges, DCA [Department of company Affairs] and ROC; content regulated by statute. • Disclosure does not extend to level of ultimate beneficiary and structure of business groups. • Quality of financial reporting improving, but stock exchanges lack sufficient resources to ensure compliance and rely heavily on auditors. Policy Recommendations: SEBI and stock exchanges need to cooperate more closely to effectively monitor and enforce compliance with listing agreement. Steps must be taken to clarify division of responsibilities among stock exchanges, SEBI and DCA to avoid unintentional regulatory overlap and potential conflicts. 2. Standards of accounting & audit LARGELY OBSERVED • Quality of financial disclosure determined by DCA, SEBI and ICAI [Institute of Chartered Accountants of India]. • ICAI says India conforms with ISA [International Standards of Auditing]. • Judicial delays diminish deterrence factor of some penalties. Policy Recommendations: Significantly enhance fines to act as credible deterrents. 3. Independent audit annually PARTIALLY OBSERVED • Auditors can provide consulting services to the company they audit up to the level of the audit fee, and fees disclosed in the annual report. • Disciplinary proceedings can be lengthy. Policy Recommendations: - Recommendations of Naresh Chandra Committee on Corporate Audit and Governance are included in pending legislation, which should go forward. - Consider different options to subject auditors to an auditor oversight body that operates in the public interest and that is not under the control of the auditing profession. 4. Fair & timely dissemination: OBSERVED • Dissemination channels include direct mailing, company websites, the stock exchange, and press announcements. • Printing/distribution of annual report to all shareholders and necessity of publishing accounts of all subsidiaries add greatly to issuer costs
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Policy Recommendations: Give shareholders option to decline full annual report in lieu of summary, whose content would be regulated by SEBI. V. Responsibilities of the Board 1. Acts with due diligence, care: LARGELY OBSERVED • Unitary board structure. • Basic fiduciary duties are not spelled out in legislation, but embedded in sparse existing jurisprudence. Policy Recommendations: - The fiduciary obligations should be clearly spelled out in the legal or regulatory framework. - Have same standards of care for executive and independent directors, with few exceptions. - Provide directors with access to training. 2. Treat all shareholders fairly: LARGELY OBSERVED • Board members have a fiduciary obligation to treat shareholders fairly. • Shareholders can appeal to SEBI or the courts At least 2/3 of board rotational. Policy Recommendations: - Have DFIs [development finance institutions] nominate expert independent directors on their behalf. - Maximum term of independent directors should be capped. 3. Ensure compliance w/ law: OBSERVED • The company secretary ensures the board complies with its statutory duties and obligations. Policy Recommendations: N.A 4. The board should fulfill certain key functions: LARGELY OBSERVED • There is no rule vesting the responsibility of overseeing the process of disclosure and communication with the board. Small companies practice “box-ticking.” Policy Recommendations: - Consider consulting shareholders with regard to general compensation policy for senior management, rather than individual packages. - The department in charge of corporate communication should have a direct reporting line to the board. - Clearly-defined board procedures are needed to allow board to effectively exercise its oversight function on risk management. 5. The board should be able to exercise objective judgment: PARTIALLY OBSERVED • Audit and remuneration committees are common. • Audit committee has three members, all non-executive and a majority of them independent. • Director may have membership on 15 boards and ten committees and may chair five committees. Policy Recommendations: - Given that multiple board memberships by one person can interfere with performance of directors, companies and shareholders should consider desirability of such a situation. - Consider special training and certification program for audit committee members. - Adequate across-the-board compensation for independent directors will help increase supply of high quality candidates and ensure sufficient time is devoted to their responsibilities. - Compliance with the audit committee requirement should be monitored closely by regulators. 6. Access to information: OBSERVED • Clause 49 mandates information to be placed before the board; it is sufficient to inform directors about firm’s financial/non-financial situation. Policy Recommendations: N.A
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Annexure - 3 Audit Committee
Questionnaire for Performance Evaluation Self assessment of the audit committee is an important aspect of the corporate governance practice. A typical check list of the self evaluation process as designed by the audit firm Deloitte & Touche is given below for the purpose of illustration and general guidance. When completing the performance evaluation, the following process may be employed:
• Select a coordinator and establish a timeline for the evaluation process. • Audit committee members should complete the form as a self evaluation. The audit
committee should also identify those individuals who interact with the audit committee members and who can provide feedback.
• Select the appropriate rating that most closely reflects the audit committee’s performance related to each practice.
• Provide completed evaluations to the evaluation coordinator for consolidation into a summarize document.
For each of the following statements, select a number between 1 and 5, with 1 indicating that you strongly disagree, and 5 indicating that you strongly agree with the statement. Select 0 if you do not have enough knowledge or information to rank the organization’s audit committee on a particular statement. 0 1 2 3 4 5 5 strongly agree: 1 strongly disagree Composition and Quality 1. Potential audit committee members are identified with explicit consideration being given to the candidate’s qualifications for serving on the audit committee. 2. Sources acting independent of management (e.g. independent board members assisted by an outside search firm) have been utilized to identify qualified audit committee members. 3. Audit committee members have the appropriate qualifications to meet the objectives of the audit committee’s charter, including appropriate financial literacy. 4. Audit committee members have differing perspectives due to a diversity of experiences and backgrounds. 5. The audit committee demonstrates integrity, credibility, trustworthiness, willingness to actively participate, ability to constructively handle conflict, interpersonal skills, and proactiveness. 6. The audit committee demonstrates appropriate industry knowledge. 7. Members of the audit committee meet all applicable independence requirements. 8. The audit committee reviews its charter annually to determine whether its responsibilities are adequately described and recommends any changes to the board for approval. 9. The audit committee monitors compliance with corporate governance regulations and guidelines. 10. The audit committee has participated in a continuing education program to enhance its members’ understanding of relevant auditing, accounting, regulatory, and industry issues. 11. New audit committee members are provided with an orientation program to educate them on the company, their responsibilities, and the company’s financial reporting and accounting practices. 12. The leadership of the audit committee chair is effective 13. The audit committee, in conjunction with the nominating committee (or its equivalent) as appropriate, creates a succession/rotation plan for audit committee members, including the audit committee chair Understanding the Business, including Risks
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14. The audit committee considers the pressures on management that may impact the quality of financial reporting (e.g. earnings targets, compensation plans, and performance measures). 15. The audit committee considers the significant risks faced by the company. Examples include (but are not limited to): • Regulatory and legal requirements • Concentrations (e.g. suppliers and customers) • Market and competitive trends • Financing/liquidity needs • Financial exposures • Business continuity • Company reputation • Financial strategy execution 16. The audit committee understands and approves the process implemented by management to effectively identify, assess, and respond to the organization’s key risks. 17. The audit committee understands and approves management’s fraud risk assessment and has an understanding of identified fraud risks. 18. Management provides the audit committee with reports that include benchmarking information (comparing the company’s financial performance and ratios with industry competitors/peers) with explanations for areas that differ significantly. Process and Procedures 19. The audit committee reports its proceedings and recommendations to the board after each committee meeting. 20. The audit committee dedicates appropriate time and resources to execute its responsibilities. 21. The audit committee participates in the development of a calendar to ensure that responsibilities are met. 22. Audit committee members have the option to influence their meeting agendas in order to address emerging issues. 23. Audit committee meetings are conducted in an effective manner, with time being spent primarily on significant issues. 24. The audit committee chair encourages input on the meeting agenda from the committee, management, the internal auditor, the independent auditor, and the other board of directors. 25. The audit committee sets clear expectations and provides feedback to the full board concerning the competency of the organization’s CFO and senior financial management. 26. The audit committee has input into the succession planning process for the CFO. 27. The agenda and related information (e.g. prior meeting minutes, press releases, financial statements, etc.) are circulated in advance of meetings to allow audit committee members sufficient time to study and understand the information. 28. The written materials provided to audit committee members are appropriately balanced (i.e. relevant and concise). 29. The audit committee meetings are held at least quarterly. 30. The audit committee maintains adequate minutes of each meeting. 31. The audit committee, together with the compensation committee, regularly reviews management incentive plans to consider whether the incentive process is appropriate. 32. The audit committee meets periodically with the company’s disclosure committee (committee responsible for reviewing the company’s disclosure procedures). 33. The audit committee respects the line between oversight and management of the financial reporting process. 34. Audit committee members come to meetings well prepared.
Communication and Information 35. The level of openness between the audit committee and relevant parties (other board members, management, internal audit, and external audit) is appropriate. 36. For matters that require specialized expertise, the audit committee engages external parties as appropriate.
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37. The audit committee receives and analyzes information from management on significant industry trends, analyst estimates and variations from budget. 38. Audit committee members periodically visit company locations to conduct on-site meetings with key members of management. Oversight of Financial Reporting Process, Including Internal Controls The audit committee considers the quality and appropriateness of financial accounting and reporting. 40. The audit committee considers the transparency of disclosures. 41. The audit committee reviews the company’s significant accounting policies. 42. The audit committee has a process for the review of significant issues prior to quarterly and annual earnings releases (e.g. with management and the independent auditors). 43. The audit committee understands and approves the process used by management to identify and disclose related-party transactions. 44. The audit committee has a process to review earnings releases (including pro forma or non-GAAP information, and other financial information or earnings guidance). management’s discussion and analysis), proxies and other filings, as appropriate, before issuance and provides comments to management and independent auditors as applicable. 46. The audit committee reviews the processes related to financial statement certifications made by the CEO and CFO. 47. The audit committee receives sufficient information to assess and understand management’s process to evaluate the organization’s system of internal controls (e.g. financial reporting and disclosure controls,operation controls, and compliance controls). 48. The audit committee oversees the organization’s external financial reporting and internal control over financial reporting. 49. The audit committee understands and gives appropriate consideration to the internal control testing conducted by management, the internal auditors, and independent auditors to assess t he process of detecting internal control issues or fraud. 50. The audit committee believes that management’s scope of internal control testing adequately supports its internal control assessment (as required by Section 404 of the Sarbanes-Oxley Act). 51. If management’s assessment of internal controls resulted in the identification of significant deficiencies or material weaknesses, plans to address these issues are reviewed, evaluated and monitored by the audit committee. 52. The audit committee makes inquiries of the appropriate parties (independent auditor, internal auditor and management) on the depth of experience and sufficiency of the company’s accounting and finance staff. 53. The audit committee reviews the management recommendation letters written by the auditors (external and internal) and monitors the process to determine that all significant matters raised are addressed. 54. The audit committee ensures that management takes action to achieve resolution when there are instances of repeat comments from auditors, particularly for those related to internal controls. 55. Adjustments to the financial statements that resulted from the audit process are reviewed by the audit committee, regardless of whether they were recorded by management. 56. The audit committee is consulted when management is seeking a second opinion on an accounting or auditing matter. Oversight and Audit Functions The audit committee understands the coordination of work between the auditors (external and internal). 58. The audit committee regularly reviews the adequacy of the internal audit function (e.g. the charter, audit plan, budget, compliance, and number, quality and continuity of staff). 59. The audit committee oversees the role of the internal audit director from selection to termination (e.g. appointment, evaluation, compensation and retention). 60. The audit committee provides feedback to the internal audit director at least annually. 61. The internal audit reporting lines established with the audit committee promote an atmosphere where significant issues that might involve management will be brought to the attention of the audit committee.
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62. The audit committee appropriately considers internal audit reports, management’s responses, and improvement actions. 63. The audit committee oversees the role of the independent auditors from selection to termination (e.g. appointment, oversight, evaluation, retention, and pre-approval of services). 64. The audit committee considers the external audit plan and provides recommendations as appropriate. 65. The audit committee reviews the appropriateness of the audit fees paid to the independent auditor. 66. The audit committee comprehensively reviews management’s representation letters to the independent auditors (including making inquiries about any difficulties obtaining the representations). 67. The audit committee has an effective process to evaluate the independent auditor’s qualifications and performance. 68. The audit committee pre-approves all services (audit and non-audit) provided by the independent auditor. 69. The audit committee considers the scope of non-audit services provided by the independent auditor in determining the auditor’s independence. 70. The audit committee reviews other professional services that relate to financial reporting (e.g. consulting, legal and tax strategy services) provided by outside consultants. 71. The audit committee monitors the process to determine that the independent auditor’s partners are rotated in accordance with applicable rules. 72. The audit committee has private executive sessions with management, internal audit and external audit, which result in candid discussion of pertinent issues. Overall Ethhics and Compliance Culture Audit committee members are notified of communications received from agencies (e.g. governmental or regulatory) relating to areas of alleged violations or areas of non-compliance. 74. The audit committee oversees management’s procedures for enforcing the company’s code of conduct. 75. The audit committee determines that there is a senior level person designated as specifically responsible for knowing and understanding relevant legal and regulatory requirements. 76. The audit committee oversees the process in place to address: - the risks of noncompliance with applicable regulations - conflicts of interest - violations of the code of ethical conduct. 77. The audit committee oversees the organization’s whistleblower process and reviews the log of incoming calls. 78. The audit committee oversees procedures designed to prohibit retaliation against whistleblowers. Monitoring Activities 79. An annual performance evaluation of the audit committee is conducted and the findings are presented to the full board. 80. Matters identified from the audit committee self-assessment that require follow-through are resolved. 81. The company provides the audit committee with sufficient funding to fulfill its objectives. Overall Assessment 82. What is your overall evaluation of the performance of the audit committee? (Scale of 1 to 5, 5 being the highest):0 1 2 3 4 5
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Annexure – 4 Ownership of Global Corporations
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Annexure – 5 Total Value of Listed Corporate Assets Under Family Control
Country/ Economy
No. of corporations
surveyed
Share of total market
capitalization (%)
Per cent family
owned (20 per cent + control)
State-owned
(Per cent)
Total Value of listed corporate
assets that families control
(%) Top 5
families Top 10 families
Hong Kong, China
330 78 66.7 1.4 26.2 32.1
Indonesia 178 89 71.5 8.2 40.7 57.7 Malaysia 238 74 67.2 13.4 17.3 24.8 Philippines 120 82 44.6 2.1 42.8 52.5 Singapore 221 96 55.4 23.5 19.5 26.6 Republic of Korea
345 76 48.4 1.6 29.7 26.8
Taiwan Province of China
141 66 48.2 2.8 14.5 18.4
Thailand 167 64 61.6 8.0 32.2 46.2 Source : Finance Asia, Vol5; Issue 4, February 2001, page 27, quoted in a paper by Cheung, Stephen Y.L., and Chan Bob Y, 2004, Corporate Governance in Asia, Asia Pacific Development Journal, Vol 11, No.
2, December 2004
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Annexure – 6 Indexes based on Corporate Governance
The World Bank’s corporate governance assessments reveal growing awareness around the world of the importance of corporate governance. Almost all the countries assessed are undertaking reforms to bring their legal and regulatory frame-works into compliance with the Organization for Economic Co-operation and Development’s (OECD) principles of corporate governance. Quantifying the risk of corporate governance across international markets has also posed a challenge for investors trying to deal with the issue. Setting up of corporate governance indexes and exchanges would be such a reform. This not only provides natural incentive to companies complying with good corporate governance but also provides a platform for small and medium sized enterprises. Below mentioned are some of the major indexes observing corporate governance as the threshold for its listings: Novo Mercado In 2001, BOVESPA, the Sau Paulo Stock Exchange launched Novo Mercado, a separate listing segment for companies that adhere to good corporate governance. It accounts for almost 15% of the number of companies traded in Brazil, and contributes 43% of the market capitalization, and has out-performed the general market index by more than 100% since June, 2001. It is a special listing segment that demands timely compliance to the set of rules and laws that are more than what is required by any other listings. The establishment of Novo Mercado promotes socially responsible business community and fosters growth in the Brazilian market. The stock exchange is reserved only for well governed companies and organizations promoting interests of minority shareholders and adoption of ethics and values in the business community. Listing in Nova Mercado requires the following: • Public share offerings have to use mechanisms to favor capital dispersion and broader retail
access. • Maintenance of a minimum free float, equivalent to 25% of the capital. • Same conditions provided to majority shareholders in the disposal of the Company’s Control will
have to be extended to all shareholders. • Establishment of a two-year unified mandate for the entire Board of Directors, which must have
five members at least, of which at least 20% (twenty percent) shall be Independent Members. • Disclosure of annual balance sheet, according to standards of the US GAAP or IFRS. • Improvements in quarterly reports, such as the requirement of consolidated financial
statements and special audit revision. • Obligation to hold a tender offer by the economic value criteria, in case of delisting or
cancellation of registration as publicly-held company. • Compliance with disclosure rules in trades involving securities issued by the company in the
name of controlling shareholders. • Some of these obligations must be approved at the General Shareholders Meetings and included
in the corporate bylaws These listing regulation help increase shareholder's rights and enhance the quality of information commonly disclosed by companies. Additionally, the Market Arbitration Panel for conflict resolution between investors and companies offers a safer, faster and specialized alternative to investors. Apart from this, BOVESPA has also designed Special Corporate Governance Levels; Level 1 and Level 2, based on the conduct of companies, managers and controlling shareholders considered as important for valuation of shares and other assets issued by the company.
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FTSE ISS Corporate Governance Index FTSE is an independent company owned by The Financial Times and the London Stock Exchange. FTSE indices are used extensively by investors world-wide such as consultants, asset owners, asset managers, investment banks, stock exchanges and Brokers. The FTSE ISS Corporate Governance Index is a collaboration of FTSE and Institutional Shareholder Services (ISS), the premier corporate governance ratings agency. The FTSE ISS Corporate Governance Index is a series based on the companies which have good corporate governance record. It comprises of six regional and country equity indices covering 24 developed countries as defined by the FTSE Global Equity Index Series. The underlying idea is to assist investors by rating the performance of the companies on the basis of its corporate governance practices. The index is primarily managed and constantly reviewed by the FTSE Index Board. The Advisory committee supports the Index by determining the listing criteria. FTSE ISS Corporate Governance Rating is mainly derived on the basis of the below mentioned five governance themes: - Board structure and independence: The composition and processes of the board and the
structure of key standing committee are examined. - Equity Structure: This involves evaluation of the company’s capital structure and existing anti
takeover devices. - Compensation system for executive and non executive directors: This involves evaluation of the
existing rewarding schemes and practices for directors. - Independence and integrity of the audit process: This evaluates the composition of the audit
committee and the audit process. - Executive and non-executive stock ownership: The balance between the ownership and
shareholder interests is measured. The FTSE ISS Corporate Governance Indices includes the following: - FTSE ISS Developed Corporate Governance Index - FTSE ISS Europe Corporate Governance Index - FTSE ISS Euro Corporate Governance Index - FTSE ISS Japan Corporate Governance Index - FTSE ISS UK Corporate Governance Index - FTSE ISS US Corporate Governance Index Governance Metrics International Governance Metrics International (GMI) is an independent rating and research agency founded in April 2002. It analyzes the corporate governance practices of publicly traded companies. It prepares exhaustive reports and rates the company’s overall governance profile on the basis of its Board Accountability, Financial Disclosure and Internal controls, Shareholder rights, Executive compensation, Market for control and Ownership Base and Corporate Behavior and CSR Issues. All companies on the GMI list are re-rated and reviewed on a quarterly basis GMI Ratings are extensively used by corporations, law and accounting firms, proxy solicitors, insurance underwriters, central banks, regulatory agencies and other institutional investors and fund managers. Apart from rating and research, GMI is also engaged in providing advisory services on corporate governance issues to a diverse client base including stock exchanges, regulatory bodies and other institutional investors. Conclusion
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Corporate Governance indexes are helping the investors seeking devices that fulfill their demand for good governance. It was even revealed in a study that investors are ready to pay 18% more for shares of a well governed company. Moreover, well managed and governed companies are outpacing other companies in getting investments especially after scams like ENRON. However, the value for good governance is never immediate. But it definitely ensures long term profitability.
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Annexure – 7 Index of Corporate Codes
In Various Countries Country Corporate Governance Codes Argentina - Código de Mejores Prácticas de Gobierno de las Organizaciones
para la República Argentina - January 2004 Australia - Revised Corporate Governance Principles and Recommendations 2
August 2007 - Principles of Good Corporate Governance and Best Practice Recommendations March 2003 - Corporate Governance: A guide for fund managers and corporations 1 December 2002 - Horwath 2002 Corporate Governance Report 2002 - Corporate Governance: A Guide for Investment Managers and Corporations July 1999 - Corporate Governance - Volume One: in Principle June 1997 - Corporate Governance - Volume Two: In Practice June 1997 - AIMA Guide & Statement of Recommended Practice (Corporate Governance Statements by Major ASX Listed Companies) June 1995 - Bosch Report 1995
Austria - Austrian Code of Corporate Governance (as amended in January 2006) January 2006 - Austrian Code of Corporate Governance (as amended on 22 February 2005) 22 February 2005 - Austrian Code of Corporate Governance November 2002
Bangladesh - The Code of Corporate Governance for Bangladesh March 2004 Belgium - Code Buysse: Corporate governance for non-listed companies 21
September 2005 - Belgian Corporate Governance Code 9 December 2004 - Draft Belgian Corporate Governance Code 18 June 2004 - Director's Charter January 2000 - Guidelines on Corporate Governance Reporting 18 November 1999 - Corporate governance for Belgian listed companies (The Cardon Report) December 1998 - Corporate Governance - Recommendations January 1998
Brazil - Code of Best Practice of Corporate Governance 30 March 2004 - Recomendações sobre Governança Corporativa June 2002 - Code of Best Practice of Corporate Governance 8 May 1999
Bulgaria - Bulgarian National Code For Corporate Governance 10 October 2007
Canada - Corporate Governance: Guide to Good Disclosure (January 2006) January 2006 - Corporate Governance: A guide to good disclosure December 2003 - Corporate Governance Policy–Proposed New Disclosure Requirement and Amended Guidelines 26 March 2002 - Beyond Compliance: Building a Governance Culture (Saucier Report) November 2001 - Five Years to the Dey June 1999 - Building on Strength: Improving Governance and Accountability in Canada's Voluntary Sector February 1999 - Where Were The Directors? Guidelines for Improved Corporate Governance in Canada (The Toronto Report) December 1994
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China - Provisional Code of Corporate Governance for Securities
Companies 15 January 2004 - The Code of Corporate Governance for Listed Companies in China 7 January 2001
Commonwealth - CACG Guidelines: Principles for Corporate Governance in the Commonwealth November 1999
Comparative studies - Comparative Study of Corporate Governance Codes relevant to the European Union and its Member States 27 March 2002 - International Comparison of Board "Best Practices" - Investor Viewpoints 2001 - International Comparison of Corporate Governance: Guidelines and Codes of Best Practice in Developed Markets 2001 - International Comparison of Corporate Governance: Guidelines and Codes of Best Practice in Developing and Emerging Markets 2000
Cyprus - Cyprus Corporate Governance Code (2nd edition, March 2006) March 2006 - Addendum of the Corporate Governance Code November 2003 - Corporate Governance Code 24 September 2002
Czech Republic - Corporate Governance Code based on the OECD Principles (2004) June 2004 - Revised Corporate Governance Code (Based on OECD Principles 2001) February 2001
Denmark - Revised Recommendations for Corporate Governance in Denmark 15 August 2005 - Report on Corporate Governance in Denmark December 2003 - The Nørby Committee’s report on Corporate Governance in Denmark 6 December 2001 - Guidelines on Good Management of a Listed Company (Corporate Governance) 29 February 2000
Estonia - Corporate Governance Recommendations 1 January 2006 Finland - Improving Corporate Governance of Unlisted Companies January
2006 - Corporate Governance Recommendations for Listed Companies December 2003
France - Recommandations sur le gouvernement d'entreprise March 2004 - The Corporate Governance of Listed Corporations October 2003 - Promoting Better Corporate Governance In Listed Companies 23 September 2002 - Vienot II Report July 1999 - Recommendations on Corporate Governance 9 June 1998 - Vienot I Report June 1995
Germany - German Corporate Governance Code as amended 14 June 2007 14 June 2007 - Amendment to the German Corporate Governance Code - The Cromme Code (June 2006) 12 June 2006 - Amendment to the German Corporate Governance Code - The Cromme Code (June 2005) 2 June 2005 - Corporate Governance Code for Asset Management Companies 27 April 2005 - Amendment to the German Corporate Governance Code - The Cromme Code (May 2003) 21 May 2003 - The German Corporate Governance Code (The Cromme Code) 26 February 2002 - Baums Commission Report (Bericht der Regierungskommission Corporate Governance) 10 July 2001 - German Code of Corporate Governance (GCCG) 6 June 2000 - Corporate Governance Rules for German Quoted Companies January 2000
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- DSW Guidelines June 1998 - Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (KonTraG) 5 March 1998
Greece - Principles of Corporate Governance 24 July 2001 - Principles on Corporate Governance in Greece: Recommendations for its Competitive Transformation October 1999
Hong Kong - Hong Kong Code on Corporate Governance 19 November 2004 - Model Code for Securities Transactions by Directors of Listed Companies: Basic Principles June 2001 - Corporate Governance Disclosure in Annual Reports March 2001 - Code of Best Practice February 1999
Hungary - Corporate Governance Recommendations February 2002 Iceland - Guidelines on Corporate Governance 16 March 2004 India - Report of the Kumar Mangalam Birla Committee on Corporate
Governance February 2000 - Draft Report of the Kumar Mangalam Committee on Corporate Governance September 1999 - Desirable Corporate Governance in India - A Code April 1998
Indonesia - Code of Good Corporate Governance 2006 January 2007 - Code for Good Corporate Governance April 2001 - Code for Good Corporate Governance March 2000
Ireland - Corporate Governance Code (Codice di Autodisciplina) 14 March 2006 - Handbook on Corporate Governance Reports February 2004 - Corporate Governance Code (il Codice di Autodisciplina delle società quotate rivisitato) July 2002 - Report & Code of Conduct (The Preda Code) October 1999 - Testo Unico sulle disponsizioni in materia di intermediazione February 1998
Jamaica - Code on Corporate Governance (Final) 25 October 2006 - Code of Corporate Governance (Second draft) 6 October 2005 - Proposed Code on Corporate Governance 20 January 2005
Japan - Principles of Corporate Governance for Listed Companies 16 April 2004 - Revised Corporate Governance Principles 26 October 2001 - Report of the Pension Fund Corporate Governance Research Committee, Action Guidelines for Exercising Voting Rights June 1998 - Corporate Governance Principles: A Japanese view 30 October 1997 - Urgent Recommendations Concerning Corporate Governance September 1997
Kenya - Principles for Corporate Governance in Kenya 2002 - Sample Code of Best Practice for Corporate Governance 2002
Latin America - Latin American Corporate Governance White Paper 2003 Latvia - Principles of Corporate Governance and Recommendations on their
Implementation 27 December 2005 Lebanon - Corporate Governance Code for Small and Medium Enterprises
(SMEs) 13 June 2006 Lithuania - Corporate Governance Code for the Companies listed on the
National Stock Exchange of Lithuania 23 April 2003 Luxembourg - The Ten Principles of Corporate Governance of the Luxembourg
Stock Exchange April 2006 Macedonia - White Paper on Corporate Governance in South-Eastern Europe
June 2003 Malaysia - Malaysian Code on Corporate Governance (Revised 2007) 1 October
2007 - Malaysian Code on Corporate Governance March 2000
Malta - Principles of Good Corporate Governance: Revised Code for Issuers of Listed Securities 3 November 2005
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- Principles of Good Corporate Governance for Public Interest Companies 3 November 2005 - Principles of Good Corporate Governance 1 October 2001
Mexico - Código de Mejores Prácticas Corporativas July 1999 New Zealand - Corporate Governance in New Zealand: Principles and Guidelines -
A Handbook for Directors, Executives and Advisers 16 March 2004 - Corporate Governance in New Zealand: Principles and Guidelines 16 February 2004 - Corporate Governance Principles 6 November 2003 - Corporate Governance in New Zealand: Consultation on Issues and Principles Background Reference 5 September 2003 - Corporate Governance in New Zealand: Consultation on Issues and Principles Questionnaire 3 September 2003
Nigeria - Code of Corporate Governance for Banks in Nigeria Post Consolidation 1 March 2006
Norway - The Norwegian Code of Practice for Corporate Governance 28 November 2006 - The Norwegian Code of Practice for Corporate Governance (Revised 2005) 8 December 2005 - The Norwegian Code of Practice for Corporate Governance 7 December 2004
OECD - OECD Guidelines on Corporate Governance of State-Owned Enterprises September 2005 - Draft Guidelines on Corporate Governance of State-owned Enterprises 20 December 2004 - OECD Principles of Corporate Governance 22 April 2004 - Draft Revised Text: OECD Principles of Corporate Governance January 2004 - OECD Principles of Corporate Governance May 1999
Pakistan - Code of Corporate Governance (Revised) 28 March 2002 - Stock Exchange Code of Corporate Governance 4 March 2002
pan-Europe - Euroshareholders Corporate Governance Guidelines 2000 February 2002 - EASD Principles and Recommendations May 2000 - Corporate Governance Guidelines 2000 February 2000 - Sound business standards and corporate practices: A set of guidelines September 1997 - Corporate Governance in Europe June 1995
Peru - Principios de Buen Gobierno para las Sociedades Peruanas July 2002 - Perú: Código de Buen Gobierno Corporativo para Empresas Emisoras de Valores November 2001
Poland - Best Practices in Public Companies 2005 29 October 2004 - Best Practices in Public Companies in 2002 4 July 2002 - The Corporate Governance Code for Polish Listed Companies (The Gdańsk Code) 15 June 2002
Portugal - Proposal on the Corporate Governance Code 3 April 2007 - White Book on Corporate Governance in Portugal February 2006 - Recommendations on Corporate Governance November 2003 - CMVM Regulation Nº 11/2003: Corporate Governance 2003 - CMVM Regulation No 07/2001: Corporate Governance December 2001 - Recommendations on Corporate Governance November 1999
Romania - Corporate Governance Code in Romania 24 June 2000 Russia - The Russian Code of Corporate Conduct 4 April 2002 Singapore - Code of Corporate Governance 2005 14 July 2005
- Proposed Revisions to the Code of Corporate Governance December 2004 - Code of Corporate Governance 21 March 2001
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Slovakia - Corporate Governance Code (Based on the OECD Principles) September 2002
Slovenia - Corporate Governance Code (Amended 5 February 2007) 5 February 2007 - Corporate Governance Code 14 December 2005 - Corporate Governance Code 18 March 2004
South Africa - King Report on Corporate Governance for South Africa - 2002 (King II Report) March 2002 - King I Report 24 November 1994
South Korea - Code of Best Practice for Corporate Governance September 1999 Spain - Code of Ethics for Companies April 2006
- Draft Unified Code of Recommendations for the Good Governance 16 January 2006 - IC-A: Principles of Good Corporate Governance December 2004 - Decálogo del Directivo May 2004 - The Aldama report 8 January 2003 - Código de Buen Gobierno 26 February 1998 - Círculo de Empresarios October 1996
Sri Lanka - Draft rules on Corporate Governance for Listed Companies July 2006
Sweden - Swedish Code of Corporate Governance Report of the Code Group 16 December 2004 - Swedish Code of Corporate Governance A Proposal by the Code Group 21 April 2004 - The NBK Recommendations February 2003 - Corporate Governance Policy 26 October 2001
Switzerland - Governance in Family Firms December 2006 - Swiss Code of Best Practice for Corporate Governance: 25 June 2002 - Corporate Governance Directive 1 June 2002
Taiwan - Taiwan Corporate Governance Best-Practice Principles 2002 2002 Thailand - The Principles of Good Corporate Governance For Listed
Companies 2006 March 2006 - Code of Best Practice for Directors of Listed Companies October 2002 - Best Practice Guidelines for Audit Committee 23 June 1999 - The SET Code of Best Practice for Directors of Listed Companies 19 January 1998
The Netherlands - SCGOP Handbook of Corporate Governance 2004 2004 - The Dutch corporate governance code (the Tabaksblat Code) 9 December 2003 - Draft Corporate Governance Code 1 July 2003 - SCGOP Handbook of Corporate Governance August 2001 - Government Governance; Corporate governance in the public sector, why and how? 2 November 2000 - Peters Report & Recommendations, Corporate Governance in the Netherlands 27 July 1997
The Philippines - ICD Code of Proper Practices for Directors 30 March 2000 The World - ICGN Statement on Global Corporate Governance Principles 8 July
2005 - Enhancing Corporate Governance for Banking Organisations September 1999 - ICGN Statement on Global Corporate Governance Principles 9 July 1999
Trinidad and Tobago - Corporate Governance Guideline May 2006 Turkey - Corporate Governance Principles June 2003 Ukraine - Ukrainian Corporate Governance Principles 3 June 2003 United Kingdom - The Combined Code on Corporate Governance June 2006
- Good practice suggestions from the Higgs Report June 2006
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- Internal Control: Revised Guidance for Directors on the Combined Code October 2005 - Pension Scheme Governance - fit for the 21st century: A Discussion Paper from the NAPF July 2005 - Good Governance: The Code of Governance for the Voluntary and Community Sector June 2005 - Corporate Governance: A Practical Guide 24 August 2004 - The Combined Code on Corporate Governance 23 July 2003 - Audit Committees - Combined Code Guidance (the Smith Report) January 2003 - The Higgs Report: Review of the role and effectiveness of non-executive directors January 2003 - The Responsibilities of Institutional Shareholders and Agents - Statement of Principles 21 October 2002 - The Hermes Principles 21 October 2002 - Review of the role and effectiveness of non-executive directors (Consultation Paper) 7 July 2002 - Code of Good Practice January 2001 - The Combined Code: Principles of Good Governance and Code of Best Practice May 2000 - Hermes Statement on International Voting Principles 13 December 1999 - The KPMG Review Internal Control: A Practical Guide October 1999 - Internal Control : Guidance for Directors on the Combined Code (Turnbull Report) September 1999 - Hampel Report (Final) January 1998 - Greenbury Report (Study Group on Directors' Remuneration) 15 July 1995 - Cadbury Report (The Financial Aspects of Corporate Governance) 1 December 1992
USA - Asset Manager Code of Professional Conduct November 2004 - Final NYSE Corporate Governance Rules 3 November 2003 - Restoring Trust - The Breeden Report on Corporate Governance for the future of MCI, Inc. August 2003 - Commission on Public Trust and Private Enterprise Findings and Recommendations: Part 2: Corporate Governance 9 January 2003 - Corporate Governance Rule Proposals 1 August 2002 - Principles of Corporate Governance May 2002 - Core Policies, General Principles, Positions & Explanatory Notes 25 March 2002 - Principles of Corporate Governance: Analysis & Recommendations 2002 - Report of the NACD Blue Ribbon Commission on Director Professionalism 2001 - TIAA-CREF Policy Statement on Corporate Governance March 2000 - Global Corporate Governance Principles 1999 - Statement on Corporate Governance September 1997
Annexure – 8 Best Practices in Practice
Country Comparisons India China, Brazil and Malaysia
Best Practice 1.Proxy voting: Firms are encouraged to allow proxy voting India: Shareholders can appoint a proxy. A proxy can demand a poll and cast his vote but
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cannot speak at the meeting. The notice convening the meeting must state that shareholders can appoint a proxy China: Proxy voting is allowed. (Code, CL) Malaysia: A member of a company entitled to attend and vote at a meeting of the company, or at a meeting of any class of members of the company, shall be entitled to appoint another person or persons as his proxy to attend and vote instead of the member at the meeting. A proxy appointed to attend and vote instead of a member shall also have the same right as the member to speak at the meeting, but unless the articles otherwise provide: (a) a proxy shall not be entitled to vote except on a poll; (b) a member shall not be entitled to appoint a person who is not a member as his proxy unless that person is an advocate, an approved company auditor or a person approved by the Registrar in a particular case; (c) a member shall not be entitled to appoint more than two proxies to attend and vote at the same meeting; and (d) where a member appoints two proxies the appointments shall be invalid unless he specifies the proportions of his holdings to be represented by each proxy. A proxy shall be entitled to vote on a show of hands on any question at any general meeting.(LR Section 7.20) Where a member of the company is an authorized nominee as defined under the Securities Industry Act 1991, it may appoint at least one proxy in respect of each securities account it holds with ordinary shares of the company standing to the credit of the said securities account. (LR Section 7.22) Brazil: Proxy voting is allowed (CL Arts. 118, 126). 2. One share one vote principle: “One share on vote” should be a threshold requirement for new issues. India: All shares are equal within one class. Shares with different voting rights or dividend can be issued as long as shareholders approve the issue and such shares do not exceed 25% of total share capital. (Companies Rule 2001 – issue of share capital with different voting rights or dividends) China: At shareholders’ meetings, each share that a shareholder holds is entitled to one vote (CL). A company has no voting rights on its own shares it holds. (CL) Malaysia: On a poll each member shall have one vote in respect of each share held by him and where all or part of the share capital consists of stock or units of stock each member shall have one vote in respect of the stock or units of stock held by him which is or are or were originally equivalent to one share. (CA Section 147) Brazil: Each common share carries the right to one vote in a meeting. Although restrictions on total number of votes of each shareholder are permitted (CL Art. 110). For companies founded pre-October 31, 2001, 2/3rds of capital could be non-voting; and post that date, or to older companies going public, only 50% (CL Art. 15). CVM: With respect to certain key decisions no voting restrictions should apply and each share should carry the right to one vote (III.1). All companies should comply with the 50% maximum; those already above should not issue any more non-voting shares (III.7). Bovespa: With respect to certain key decisions no voting restrictions should apply and each share should carry the right to one vote (Level 2). All shares must be voting (Novo Mercado). IBGC Companies should consider having voting stock only (1.01). 3. Meeting notice and Agenda: Meeting notice and agenda should be sent to shareholders within a reasonable amount of time prior to meetings India: Companies are required to hold an Annual General Meeting (AGM) every year. (Sec. 166 of CA). Notice for such meeting should be sent to shareholders 21 days in advance. (Sec. 171 of CA) China: Meeting notice should be given to each shareholder 20 days in advance. Meeting notice for a temporary shareholders’ meeting should be given to each shareholder 15 days in advance. (CL). Malaysia: The notices convening meetings shall specify the place, day and hour of the meeting,
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and shall be given to all shareholders at least 14 days before the meeting or at least 21 days before the meeting where any special resolution is to be proposed or where it is an annual general meeting. Any notice of a meeting called to consider special business shall be accompanied by a statement regarding the effect of any proposed resolution in respect of such special business. At least 14 days’ notice or 21 days’ notice in the case where any special resolution is proposed or where it is the annual general meeting, of every such meeting shall be given by advertisement in at least 1 nationally circulated Bahasa Malaysia or English daily newspaper and in writing to each stock exchange upon which the company is listed. (LR Section 7.17) Brazil: Law: Meeting notice of publicly held companies should be given to each shareholder 15 days in advance for a meeting and 8 days in advance for an adjourned meeting. The CVM may, upon request by a shareholder in a publicly held company, increase notice time by 15 days (CL Art. 124). CVM: Where complex issues are involved, notice should be at least 30 days in advance. If a company has a foreign depositary receipts program, notice should be at least 40 days in advance (I.2). Bovespa: Agenda should be included at the time of meeting notice (Level 1 and above). IBGC Shareholders should be notified of regular annual meeting by the last day of the fiscal year (1.04.02). 4. Special Meetings: Minority shareholders should be able to call special meetings with some minimum threshold of the outstanding shares India: Shareholder controlling 10% of voting rights or paid-up capital can call for a special or Extraordinary General Meeting (EGM). (Sec.169 of CA) China: Shareholders holding at least 10% of a company’s stocks can make a request for an interim shareholders’ meeting also know as a ‘temporary meeting.’ (CL) Malaysia: Two or more members holding not less than one-tenth of the issued share capital or, if the company has not a share capital, not less than five per centum in number of the members of the company or such lesser number as is provided by the articles may call a meeting of the company. (CA Section 145) Brazil: Law: Shareholders holding at least 5% of the company’s capital can call a meeting plus matters to be discussed if they have previously requested a meeting but the meeting was not called (CL Art. 123). 5. Treatment of foreign shareholders: Foreign shareholders should be treated equally with domestic shareholders India: Foreign Institutional Investors (FIIs) must register with SEBI to participate in the market. Investments and returns are freely repatriable, except in the case of 22 specified items which attract the condition of dividend balancing and/or where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchanging neutrality, etc China: Shares are categorized based on ownership. Foreign owners (except for a QFII or a strategic investor under the Strategic Investment Measures) cannot buy class A shares. Malaysia: Every company shall have at least two directors, who each has his principal or only place of residence within Malaysia. (CA Section 122) Brazil: N.A 6. Conflicts between shareholders: Mechanisms Should be designed whereby a majority of minority shareholders can trigger an arbitration procedure to resolve conflicts between minority and controlling shareholders India: Companies are required to create a ‘Shareholders/Investors Grievance Committee’ under the chairmanship of a non-executive director to look into the redressing of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non receipt of declared dividends etc. (SEBI Code, Clause 49) China: If the procedure for convening or the method of voting at a shareholders’ meeting, shareholders’ general meeting or meeting of the board of directors violates laws, administrative regulations, or the company’s articles of association, or if the substance of a
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resolution breaches the company’s articles of association, a shareholder may, within 60 days, request that the People's Court revoke such board or shareholder resolution that violates their rights. (CL) Malaysia: No provision Brazil: Law: The by-laws of the company may establish that disputes between shareholders be submitted to an arbitration panel (CL Art. 109). Bovespa: Must submit disputes by shareholders to arbitration panel (Level 2 and above). 7. Quorum: Should not be set too high or too low. Suggested level would be about 30% and should include some independent non-majority-owning shareholders India: Quorum is set at five persons for a public company and two for other companies. (Sec. 174 of CA) China: No provisions Malaysia: Two members of the company, personally present shall be a quorum. (CA Section 147). Brazil: Law: Shareholders representing 25% voting capital (for meetings to amend by-laws, 2/3rds), adjourned meeting, none (CL Arts 125, 135). Certain types of extraordinary resolutions require a majority of representing 50% of voting shares is required (CL Art. 136). 8. Definition of independence: Cannot have a business or personal relationship with the management or company, and cannot be a controlling shareholder such that independence, or appearance of independence, is jeopardized India: An independent director is a non-executive director who: (i)aside from director’s remuneration, does not have any material pecuniary relationship or transactions with the company, its promoters, management or subsidiaries which may affect the independence of judgment, (ii) is not related to the promoter or a person in management on the board or one level below the board, (iii) has not been an executive for the past three years, (iv) is not or has not been a partner in the past three years of a statutory or internal audit firm or a firm providing consulting services to the company, (v) is not a material supplier, service provider or customer or a lessor or lessee of the company which may affect independence of the director, (vi) is not a substantial (owning 2% or more of voting rights) shareholder of the company. (SEBI Code, Clause 49) All pecuniary relationship/transactions of non-executive directors should be disclosed in the annual report. (SEBI Code, Clause 49) China: Cannot have any posts in the company or its affiliated enterprises, cannot maintain (both business and social) relationship with the company and its major shareholders that might undermine objective judgment, cannot be a shareholder who holds more than 1% of the outstanding shares of the company or is among the top 10 largest shareholders of the company, and cannot hold a position in a unit that holds more than 5% of outstanding shares or ranks as one of the 5 largest shareholders of the company. There is a one-year look back period on these requirements. (Guideline) Malaysia: Without limiting the generality of the foregoing, an independent director is one who - is not an executive director of the company or related company - has not been within the last 2 years an officer of the Corporation - is not a major shareholder in the company - is not a relative of any executive director, officer or major shareholder of the company - is not acting as a nominee or representative of any executive director or major shareholder of said company - has not been engaged as a professional adviser by the said company under such circumstances as prescribed by the Exchange or is not presently a partner, director or major shareholder, as the case may be, of a firm or corporation which provides professional advisory services to the said company under such circumstances as prescribed by the Exchange - has not engaged in any transaction with the said Company under such circumstances as prescribed by the Exchange is not presently a partner, director, or major shareholder, as the case may be, of a firm or company which has engaged in any transaction with the said company under such circumstances as prescribed by the Exchange.
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(LR Section Definitions) Brazil: IBGC: No ties at all with company except for some shares, not a supplier, not a relative of company director or manager (2.16). 9. Share of independent directors: At least one-third of the board should be non-executive, a majority of whom should be independent India: The number of independent directors is dependent on whether the Chairman is an executive or non-executive director. In the case of a non-executive chairman, at least one-third of the board should be comprised of independent directors and in the case of an executive chairman; at least half of the board should be comprised of independent directors. (SEBI Code, Clause 49) China: By end-June 2003, at least 1/3 of the board members were required to be independent directors (Code) Malaysia: An applicant must ensure that at least 2 directors or 1/3rd of the board of directors of the applicant, whichever is higher, are independent directors. (LR Section 3.14). The board should include a balance of executive directors and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board’s decision making. (Code Part 1.A.II) To be effective, independent non-executive directors need to make up a least one third of the membership of the board. (Code Part 2.AA.III) Brazil: Law: A maximum of 1/3 of board members may serve as members of the executive board, but no restrictions regarding company officers who are not executive board members (CL Art. 143). CVM: “As many board members as possible” should be independent” (II.1). IBGC : “Most” directors should be independent (2.10) 10. Frequency and record of meetings: For large companies, board meetings every quarter, audit committee meetings every 6 months. Minutes of meetings should become part of public record India: The Board shall meet at least four times a year, with a minimum time gap of three months between any two meetings. (SEBI Code, Clause 49) China: The board should hold meetings at least twice a year. A shareholder representing one-tenth or more of the voting rights or one-third or more of directors or supervisory board members may call for a temporary meeting of the board of directors. (CL) Minutes/records of meetings should be properly maintained. Malaysia: The board should meet regularly, with due notice of issues to be discussed and should record its conclusions in discharging its duties and responsibilities. (Code Part 2.AA.XIV). The Committee considered that stipulating a minimum figure for bard meetings to be unpractical. However, it is difficult to imagine how a board is in control of the company if it meets less than four times. We recommend instead that the directors should be required to disclose the number of board meetings held a year and the details of the attendance of each individual director to enable shareholders to evaluate the commitment of a particular director to the affairs of the company. (Code Section 4.44) Every company shall cause – (a) minutes of all proceedings of general meetings and of meetings of its directors and of its managers, if any, to be entered in books kept for that purpose within fourteen days of the date upon which the relevant meeting was held; and (b) those minutes to be signed by the chairman of the meeting at which the proceedings were had or by the chairman of the next succeeding meeting. (CA Section 156) The books containing the minutes of proceedings of any general meeting shall be kept by the company at the registered office of the company, and shall be open to the inspection of any member without charge. (CA Section 157) Brazil: Law: At least one shareholder meeting must be held within first quarter following end of financial year. Minutes of meetings that contain resolutions designed to affect 3rd parties become part of public record (CL Arts. 132, 142). 11. Nomination and Election of directors: Should be done by nomination committee chaired by an independent director. Minority shareholders should have mechanism for putting forward directors at Annual General Meeting (AGM) and Extraordinary General Meeting
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(EGM). India: No specific provision mandating the creation of a board-level nominating committee. The directors of the Board are appointed by the company in the Annual General Meeting. (Sec.255 of CA) At the time of appointment of a new director or the re-appointment of a director, shareholders must be provided with a brief résumé of the director, nature of his expertise in specific functional areas and names of companies in which the person also holds other directorships. (SEBI Code, Clause 49) China: Should be done by nomination committee chaired by an independent director. (Code) Shareholders who independently or jointly hold more than 1% of the shares issued by the company may nominate independent directors at the shareholders’ meeting. (Guideline) Malaysia: The actual decision as to who shall be nominated should be the responsibility of the full board after considering the recommendations of a nominating committee that is composed exclusively of non-executive directors, the majority of whom are independent. The committee should consider candidates proposed by the CEO and, within the bounds of practicability, by any other senior executive, director or shareholder (Code Part 2.AA.VIII). Brazil: Law Directors are elected by a majority of voting capital. Separate director elections for minority shareholders representing at least 15% of shares with voting rights, 10% of preferred shares with restricted/no voting rights, at any meeting (CL Art. 141). 12. Term limits for independent directors : For large companies, re-election should be every 3 years with specified term limits India: Unless the Articles of a Company provide for the retirement of all directors at every AGM, not less than one-third directors have to be appointed by the company at the AGM (Sec 255 of CA) China: Each term should not exceed 3 years (CL). Re-election is allowed but the consecutive term should not exceed 6 years (Guideline) Malaysia: An election of directors shall take place each year. All directors shall retire from office once at least in each 3 years, but shall be eligible for re-election. (LR Section 7.28). All directors should be required to submit themselves for re-election at regular intervals and at least every three years. (Code, Part 1.A.V.) Brazil: Law: Each term should not exceed 3 years, with re-election permitted (CL Art. 140). CVM: Terms should be 1 year, and concurrent, with possibility of reelection. (II.1). IBGC: Each term should be short, preferably for no longer than a year (2.11). 13. Board Committees: The board should set up 3 essential committees: nomination, compensation and audit. India: Every board is required to have an audit committee and a shareholder grievance committee. The board of directors is required to consider the CEO’s remuneration. Creation of a separate remuneration committee is a non mandatory requirement in Clause 49 of SEBI’s listing requirements. In practice, however, most boards of large companies have an audit, remuneration and nomination committee. China: The board may establish specialized committees on: corporate strategy, nomination, remuneration/appraisal, and audit. Committees should be chaired by an independent director and independent directors should constitute the majority of each committee. (Guideline) Malaysia: Boards should appoint remuneration committees, consisting wholly or mainly of non-executive directors, to recommend to the board the remuneration of the executive directors in all its forms, drawing from outside advice as necessary. (Code Part 2.AA.XXIV) The board of every company should appoint a committee of directors composed exclusively of non executive directors, a majority of whom are independent, with the responsibility for proposing new nominees for the board and for assessing directors on an on-going basis. (Code Part 2.AA.VIII) The board should establish an audit committee of at least three directors, a majority of whom are independent. The Chairman of the audit committee should be an independent non-executive director. (Code Part 2.BB.I) Brazil: Law: There must be a statutory audit committee. (CL Art. 161). CVM: The Board should establish a committee on relations with auditors (II.2). IBGC: There should be nomination, compensation, and audit committees (2.04).
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14. Formal Evaluation of Board members: For large companies, nomination committee must review directors ahead of formal re-election at AGM India: N A China: Evaluation of directors should be conducted by the board or its remuneration/appraisal committee. Evaluation of independent directors should be conducted through a combination of self-review and peer review. (Code) Malaysia: The board should implement a process to be carried out by the nominating committee annually for assessing the effectiveness of the board as a whole, the committees of the board and for assessing the contribution of each individual director. (Code Part 2.AA.X.) Brazil: IBGC: There should be a formal appraisal each year of the Board and its members (2.09). 15. Immediate disclosure of information that affects share prices, including major asset sale or pledges: Any material information that could affect share prices should be disclosed through stock exchange. Material information includes acquisition/disposal of assets, board changes, related-party deals, ownership changes, directors’ shareholdings, etc India: Every company is required to appoint a compliance officer who is responsible for setting policies, procedures, monitoring adherence to the rules for the preservation of ‘price sensitive information’ to prevent insider trading. (SEBI Insider Trading Regulation, 2002) There should be a separate section on Corporate Governance in the annual report to shareholders. Non-compliance with any mandatory requirements and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. (SEBI Code, Clause 49). China: In addition to disclosing mandatory information, a company shall also disclose voluntarily and in a timely manner all other information that may have a material effect on the decisions of shareholders and stakeholders, and shall ensure equal access to information for all shareholders. (Code) Malaysia: A listed issuer must adhere to the following 6 specific policies concerning disclosure, which are as follows: - immediate disclosure of material information; - thorough public dissemination; - clarification, confirmation, or denial of rumors or reports; - response to unusual market activity; - unwarranted promotional disclosure activity; and insider trading. (LR Section 9.02) Information is considered material if it is reasonable expected to have a material effect on the price, value or market activity of any of the listed issuer’s securities; or the decision of a holder of securities of the listed issuer or an investor determining his choice of action. (LR Section 9.03) Immediate disclosure is required for, among others: - the entry into a joint venture agreement of merger; - the acquisition or loss of a contract, franchise or distribution rights; - a change in management; - the commencement of or the involvement in litigation and any material development arising there from; - the commencement of arbitration proceedings or proceedings involving alternative dispute resolution methods; - the purchase or sale of an asset; - a change in capital investment plans; - the making of a tender offer for another company’s securities; - the occurrence of an event of default on interest and/or principal payments in respect of loans; - a change in general business direction; - a change of intellectual property rights; - the entry into a memorandum of understanding; or - the entry into any call or put option or financial futures contract. (LR Section 9.04) Brazil: NA
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16. Procedures for information release: Through local exchanges, and as best practice, through company website India: Information such as quarterly results and presentations made by companies to analysts shall be put on the company’s website, or shall be sent in such a form as to enable the stock exchange on which the company is listed to put it on its website. (SEBI Code, Clause 49) China: Disclosed information by a listed company shall be easily comprehensible. Companies shall ensure economical, convenient, and speedy access to information through various means, such as the Internet. (Code) Malaysia: Any public disclosure of material information must be made by an announcement first to the Exchange or simultaneously to the Exchange, the press and newswire services. (LR Section 9.08) Brazil: NA 17. Remuneration of directors: Should be disclosed in annual report. All major compensation schemes, including stock options, should be fully disclosed and subject to shareholder approval India: All fees/compensation paid to non-executive directors are fixed by the Board of Directors and require previous approval of shareholders in the Annual General Meeting. The shareholder’s resolution should specify the limits for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate. (SEBI Code, Clause 49) China: The board should report, at shareholders’ meetings, the performance evaluation and compensation of directors and disclose such information. (Code) A company shall regularly disclose to its shareholders information about remunerations obtained by the directors, supervisors, and senior managers from the company. (CL) Malaysia: The remuneration of directors of the listed issuer for the financial year must be included in the annual report in the following manner: - the aggregate remuneration of directors with categorization into appropriate components distinguishing between executive and non-executive directs and - the number of directors whose remuneration falls in each successive band of RM50,000 distinguishing between executive and non-executive directors. (LR Appendix 9C) The company’s annual report should contain details of the remuneration of each director. (Code, Part 1.B.III) Brazil: Law: All remuneration of any type, including benefits and allowances, to be determined by shareholder meeting (CL Art. 152). 18. Investor Relations: Should have an investor relations program. India: No specific provisions China: The secretary of the board of directors is responsible for providing/explaining publicly-disclosed information to investors. (Code) Malaysia: The Board of Directors is responsible for developing and implementing an investor relations program or shareholder communications policy for the company. (Code Part 2.AA.I) Brazil: Law: There must be an officer of relations with investors, who is responsible for the disclosure of periodic and relevant information to the CVM(CVM Inst. 202). IBGC: There should be a company spokesman, who can be the manager of investor relations (2.20). 19. National/ International GAAP: Identify accounting standard used. Comply with local practices and use consolidated accounting (annually) for all subsidiaries in which sizable ownership exists India: India materially conforms to the International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA). (ICAI and Companies Act) China: Companies should establish an accounting system in accordance with the relevant national statutes, regulations, and the stipulations of the finance authority under the State Council. (CL) Malaysia: The Malaysian Accounting Standard Board (MASB), along with the Financial Reporting Foundation (FRF), is responsible for the accounting framework in Malaysia and complies with IAS and requires consolidated accounting to be used for financial statements. Brazil: Law: Generally accepted accounting principles (CL Art. 177). Consolidated accounting
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required when more than 30% of the company’s net worth is represented by controlled companies (CL Art. 249). CVM: Either IAS or US GAAP standards. (VI.6). Bovespa: Same (Level 2 and above). 20. Audit Committee: For large firms, must be chaired by qualified independent director with a financial background India: The audit committee shall have minimum three directors as members, with two-thirds of the members being independent. (SEBI Code, Clause 49) All members of the audit committee should be financially literate and at least one member shall have accounting or related financial management expertise. (SEBI Code, Clause 49) China: Must be chaired by an independent director. The majority of the committee members should be independent directors. (Code) At least one independent director on the committee must be an accounting professional. (Code) Malaysia: An applicant must establish an audit committee comprising a majority of independent directors. (LR Section 3.15) At least one member of the audit committee must: - be a member of the Malaysian Institute of Accountants; - or have at least 3 years’ working experience and either - have passed the examinations specified in Part I of the 1st Schedule of the Accountants Act 1967 or - be a member of one of the associations of accountants specified in Part II of the 1st Schedule of the Accountants Act 1967; or - fulfills such other requirements as prescribed by the Exchange. (LR 15.10) The members of an audit committee shall elect a chairman from among their number who shall be an independent director. (LR Section 15.11) The board should establish an audit committee of at least three directors, a majority of whom are independent. The Chairman of the audit committee should be an independent non-executive director. (Code Part 2.BB.I) Brazil: Law: Statutory audit board limited to persons with no position in competing company, no conflicts with the company, no member of an administrative body or employee of the company or controlled company in the same group, or any spouse or relative (up to the third degree) of the company. Members must have a university degree or 3 years’ experience as a member of the administration or audit board of a company (CL Arts. 147, 162) Source: Institutional of International Finance. CVC: Good Practice Code;Bovespa: Listing Rules;IBGC: Best Practices Code;TOM: Malaysia Code on Takeovers and Mergers’: Bursa Malaysia Securities Berhad Listing Requirements; SEBI: Securities and Exchange Commission of India
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Annexure – 9
Overview of the Functions of the Audit Committees in Selected Companies
ACC Limited The Audit Committee acts as a link between the statutory and internal auditors and the Board of Directors. It addresses itself to matters pertaining to adequacy of internal controls, reliability of financial statements/other management information, adequacy of provisions for liabilities, and whether the audit tests are appropriate and scientifically carried out and that they were aligned with the realities of the business, adequacy of disclosures, compliance with all relevant statutes and other facets of Company’s operations that are of vital concern to the Company. In particular, the role of the Audit Committee includes the following: • review of Management discussion and analysis of financial condition and results o operations; • statement of significant related party transactions; • reviewing with the statutory and internal auditors the adequacy of internal controls and steps
to be taken for strengthening the areas of weaknesses in internal controls.; • review the appointment, terms of remuneration and removal of the Chief Internal Auditor; • review the Company’s financial reporting process and the disclosure of its financial information
to ensure that the financial statements are correct, sufficient and credible.; • recommending the appointment, reappointment and removal of the Statutory Auditors, fixing
of audit fees and approval for payment of fees for any other services rendered by the Auditors; • reviewing with the management, the quarterly/annual financial statements before submission
to the Board for approval, with particular reference to:- a. matters required to be included in the Director’s Responsibility Statement which forms
a part of the Directors’ Report pursuant to Clause (2AA) of Section 217 of the Companies Act, 1956,
b. changes, if any, in accounting policies and practices and reasons for the same, c. major accounting entries involving estimates based on the exercise of judgments by
management, d. significant adjustments made in the financial statements arising out of audit findings, e. compliance with listing and other legal requirements relating to financial statements, f. disclosure of any related party transactions, g. qualifications in the draft audit report.
• reviewing the operations and financial statements of Subsidiary Companies; • reviewing, with the management, performance of statutory and internal auditors, adequacy of
internal audit function including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit;
• discussion with internal auditors any significant findings and follow up thereon; • reviewing the findings of any internal investigations by the internal auditors and management’s
response on matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board;
• discussion with Statutory Auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern;
• look into the reasons for substantial defaults in payment to depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors;
• review any other area which may be specified under the Listing Agreement, Companies Act, other statutes, rules and regulations as amended from time to time;
• to carry out any other function as mentioned in the terms of reference of the Committee
In fulfilling the above role, the Audit Committee has powers to investigate any activity within its terms of reference, to seek information from employees and to obtain outside legal and professional advice.
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Bajaj Auto Bajaj Auto set up its audit committee in 1987. Since then, the company has been reviewing and making appropriate changes in the composition and working of the committee from time to time to bring about greater effectiveness, and comply with various requirements under the Companies Act, 1956 and clause 49 of the listing agreement. The Company Secretary acted as the secretary to the audit committee. The terms of reference of the audit committee are extensive and go beyond what is mandated in clause 49 of the listing agreement and section 292A of The Companies Act, 1956. Subsidiary companies During the year, the audit committee reviewed the financial statements (in particular, the investments made) of each unlisted Indian subsidiary company – Bajaj Auto Holdings Ltd. (BAHL), Bajaj Allianz General Insurance Company Ltd. (BAGICL) and Bajaj Allianz Life Insurance Company Ltd. (BALICL). Minutes of the board meetings of these subsidiary companies were regularly placed before the board of Bajaj Auto. So too was a statement of the significant transactions and arrangements entered into by these subsidiary companies. Disclosures A summary statement of transactions with related parties was placed periodically before the audit committee during the year. Suitable disclosures have been made in the financial statements, together with the management’s explanation in the event of any treatment being different from that prescribed in accounting standards. At its meeting of 16 July 2005, the board laid down procedures to inform it of the Company’s risk assessment and �inalization procedures. These would be periodically reviewed to ensure that management identifies and controls risk through a properly defined framework. There were no public issues, right issues, preferential issues etc. during the year. Bharat Petroleum BPC took the initiative to introduce Corporate Governance in the organization during the year 1996 itself, by constituting the Audit Compliance Committee. The said Committee was reconstituted and renamed as the Audit Committee in the year 2000 and the role, powers and functions of the Audit Committee were specified and approved by the Board. The terms of reference of the Audit Committee cover all matters specified in Clause 49 of the Listing Agreement with Stock Exchanges. The role and responsibilities of the Committee include the following:- 1. Overseeing the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statements are correct, sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the Statutory Auditor and the fixation of audit fees. 3. Approval of payment to Statutory Auditors for any other services rendered by them. 4. Reviewing, with the management, the Annual Financial Statements before submission to the
Board for approval, with particular reference to:
a. Matters required, to be included in the Director’s Responsibility Statement and in the Board’s report in terms of Clause (2AA) of Section 217 of the Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the same c. Major accounting entries involving estimates based on the exercise of judgment by
management d. Significant adjustments made in the financial statements arising out of audit findings e. Compliance with listing and other legal requirements relating to financial statements f. Disclosure of any related party transactions g. Qualifications in the draft audit report 5. Reviewing, with the management, the Quarterly Financial Statements before submission to the Board for approval 6. Reviewing, with the management, the performance of the Statutory and Internal Auditors and
adequacy of the internal control systems. 7. Reviewing the adequacy of the Internal Audit function, if any, including the structure of the
Internal Audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
8. Discussing with the Internal Auditors any significant findings and follow up thereon.
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9. Reviewing the findings of any internal investigations by the Internal Auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board.
10. Discussing with the Statutory Auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
11. Looking into the reasons for substantial defaults in the payments to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors.
12 Defining the significant related party transactions 13. Carrying out any other function as mentioned in the terms of reference of the Audit
Committee. Britannia The role and terms of reference of the Audit Committee were revised and enlarged by the Board on 31st May 2006, which is in accordance with amended Clause 49 of the Listing Agreement and Section 292A of the Companies Act, 1956.The Audit Committee also reviews the management discussion and analysis, statement of related party transactions, management letters and the response thereto by the management. Internal Control Systems and Adequacy The Company has an adequate system of internal controls which ensures proper safeguarding of assets, maintaining proper accounting records and reliable financial information. An external independent firm carries out the internal audit of the Company’s operations and reports its findings to the Audit Committee on a regular basis. Internal Audit also evaluates the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness through periodic reporting. The Company has a code of business conduct for all employees and a clearly articulated and internalized delegation of financial authority. These authority levels are periodically reviewed by management and modifications, if any, are surfaced to the Audit Committee and Board for approval. The Audit Committee also reviews the risk management framework that was established last year.
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Cipla Limited The Audit Committee was constituted on 4th September 2000 in compliance with the requirements of Clause 49 of the Listing Agreement. The Committee discharges such duties and functions generally indicated in Clause 49 of the Listing Agreement with the Stock Exchanges and such other functions as may be specifically delegated to the Committee by the Board from time to time. GlaxoSmithKline Pharmaceuticals Ltd The terms of reference of this Committee are wide enough to cover the matters specified for audit committees under Clause 49 of the Listing Agreements, as well as in Section 292A of the Companies Act, 1956, and are as follows: a) Oversight of the Company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statements are correct, sufficient and credible; b) to review with Management the financial statements at the end of a quarter, half year and the
annual financial statements before submission to the Board for approval, focusing particularly on:
6. matters required to be included in the Director’s Responsibility
Statement which form part of the Board’s report in terms of clause (2AA) of Section 217of the Companies Act, 1956;
(ii) changes, if any, in accounting policies and practices and reasons for the same; (iii) major accounting entries involving estimates based on the exercise of judgment by
management; (iv) significant adjustments made in the financial statements arising out of audit findings;
7. compliance with listing and other legal requirements relating to financial statements;
(vi) disclosure of any related party transactions; and (vii) qualifications in the draft audit report. c) to consider the appointment or re-appointment of the statutory auditors, the audit fee, any
questions of resignation or dismissal and payment to statutory auditors for any other services rendered by them;
d) to discuss with the statutory auditors before the audit commences, about the nature and scope of the audit as well as post-audit discussion to ascertain any area of concern (in absence of management wherever necessary);
e) reviewing with management the performance of statutory and internal auditors, adequacy of the internal control systems and discuss the same periodically with the statutory auditors, prior to the Board making its statement thereon;
f) reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit;
g) discussion with internal auditors on any significant findings and follow up thereon; h) reviewing the findings of any internal investigation by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board;
i) to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors;
j) to review the functioning of the Whistle Blower mechanism, in case the same is existing; k) to review the external auditors’ audit reports and presentations and management’s response
thereto; l) to ensure co-ordination between the internal and external auditors, and to request internal
audit to undertake specific audit projects, having informed management of their intentions; m) to consider any material breaches or exposure to breaches of regulatory requirements or of
ethical codes of practice to which the Company subscribes, or of any related codes, policies and procedures, which could have a material effect on the financial position or contingent liabilities of the Company;
n) to review policies and procedures with respect to directors’ and officers’ expense accounts, including their use of corporate assets, and consider the results of any review of these areas by the internal auditors or the external auditors;
o) to consider other topics, as defined by the Board;
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p) to review the following information:
8. Management discussion and analysis of financial condition and results of operations;
ii) Statement of significant related party transactions (as defined by the audit committee), submitted by management;
iii) Management letters/letters of internal control weaknesses issued by the statutory auditors; iv) Internal audit reports relating to internal control weaknesses; and
9. The appointment, removal and terms of remuneration of the Chief Internal Auditor.
HDFC Bank Limited The terms of reference of the Audit Committee are in accordance with Clause 49 of the Listing Agreement entered into with the Stock Exchanges in India, and interalia includes the following: a) Overseeing the Bank’s financial reporting process and ensuring correct, adequate and credible
disclosure of financial information; b) Recommending appointment and removal of external auditors and fixing of their fees; c) Reviewing with management the annual financial statements before submission to the Board
with special emphasis on accounting policies and practices, compliance with accounting standards and other legal requirements concerning financial statements;
d) Reviewing the adequacy of the Audit and Compliance functions, including their policies, procedures, techniques and other regulatory requirements; and
e) Any other terms of reference as may be included from time to time in clause 49 of the listing agreement. The Board has also adopted a charter for the audit committee in connection with certain United States regulatory standards as the Bank’s securities are also listed on New York Stock Exchange
Hero Honda Motors Ltd The genesis of Hero Hondas committee can be traced back to the Audit Sub committee, constituted in 1987. Since then it has been dealing with matters prescribed by the Board of Directors on a case by case basis. In general, the primary role/objective of the Audit Committee is to review the financial statements of the Company, strengthen internal controls and look into all transactions having monetary implications on the functioning of the Company. The nomenclature, constitution and terms of reference of the Committee were revised on January 16, 2001 and an Audit Committee was set up as per the provisions of the Section 292A of the Companies Act, 1956 and Clause 49 f the Listing Agreement of the Stock Exchanges. The members of the Committee have adequate knowledge in the filed of finance, accounting and law. The role and terms of reference of the Audit Committee includes the following. • Overseeing the Company’s financial reporting process and disclosure of its financial information to ensure that the financial statements are correct, sufficient and credible. • Recommending the appointment, re-appointment, replacement and removal of the statutory auditor, fixation of audit fees and approving payments for any other services. • Reviewing with the management the annual financial statements with primary focus on matters required to be included in the Directors’ Responsibility Statement, changes, if any in accounting policies and practices and reasons thereof, compliance with accounting standards and guidelines of stock exchanges, major accounting entries, qualifications in draft audit reports, related party transactions and the going concern assumption. • Reviewing with the management, the quarterly financial statements before submission to the board for approval. • Compliance with Stock Exchanges and legal requirements concerning financial statements. • Reviewing the adequacy of internal control systems and the internal audit function and reviewing the company’s financial and risk management policies. • Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control system of a material nature and reporting the matter to the Board. • Reviewing reports furnished by the internal auditors, discussion with internal auditors on any significant findings and ensuring suitable follow up thereon.
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• Discussing with external auditors before the audit commences of the nature and scope of audit. Also post audit discussion to ascertain any area of a concern. • Directors overseas traveling expenses. • Review of foreign exchange exposure. Hindalco Industries Ltd The Company has an Audit Committee at the Board level which acts as a link between the management, the statutory and internal auditors and the Board of Directors and oversees the financial reporting process. The Audit Committee is endowed with the following powers: 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 it considers necessary. The role of the audit committee includes the following: 1. Oversight 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. 2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. 3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. 4. Reviewing, with the management, the annual financial statements before submission to the board for approval with particular reference to:
a. Matters required, to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956. b. Changes, if any, in accounting policies and practices and reasons for the same c. Major accounting entries involving estimates based on the exercise of judgment by management. d. Significant adjustments made in the financial statements arising out of audit findings. e. Compliance with listing and other legal requirements relating to financial statements. f. Disclosure of any related party transactions. g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval. 6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems. 7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditor, if any. 12. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. The Audit Committee reviews the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the statutory auditors; 4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee.
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Hindustan Petroleum Corporation Ltd The terms of reference of the Audit Committee are as provided under the Companies Act, 1956 and other applicable regulations. The scope of the Audit Committee includes the following: • Reviewing with the Management the annual financial statements before submission to the Board. • Reviewing with the Management, Statutory Auditors and Internal Auditors, the adequacy of internal control systems. • Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit. • Discussion with internal auditors on any significant findings and follow up thereon. • Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board. • Reviewing the Company’s financial and risk management policies. ICICI Bank Ltd The Audit Committee provides direction to the audit function and monitors the quality of internal and statutory audit. The responsibilities of the Audit Committee include the following: • overseeing the financial reporting process to ensure fairness, sufficiency and credibility of
financial statements, • recommendation of appointment and removal of central and branch statutory auditors and
chief internal auditor and fixation of their remuneration, • approval of payment to statutory auditors for other services rendered by them, • review of functioning of Whistle Blower Policy, • review of the quarterly and annual financial statements before submission to Board, • review of the adequacy of internal control systems and the internal audit function, • review of compliance with the inspection and audit reports and reports of statutory auditors, • review of the findings of internal investigations, • review of statement of significant related party transactions, • review of management letters/letter of internal control weaknesses issued by statutory
auditors, • discussion on the scope of audit with external auditors and examination of reasons for
substantial defaults, if any, in payment to stakeholders. The Committee provides direction to the internal audit function and monitors the quality of internal and statutory audit. The Committee is also empowered to appoint/oversee the work of any registered public accounting firm, establish procedures for receipt and treatment of complaints received regarding accounting and auditing matters, engage independent counsel as also provide for appropriate funding for compensation to be paid to any firm/advisors. Indian Oil Corporation Ltd The Audit Committee has been constituted in line with the provisions of Clause-49 of the Listing Agreement and also meets the requirements of Section 292A of the Companies Act, 1956. The members of the Audit Committee have requisite financial and management expertise. The terms of reference of the Audit Committee cover all matters specified under Clause-49 of the Listing Agreement of the Stock Exchanges, which inter alia includes the following: • Overseeing the Company’s financial reporting process and disclosure of financial information to
ensure that the financial statements are correct, sufficient and credible; • Reviewing with the management the annual financial statements before submission to the
Board; • Reviewing with the management and statutory and internal auditors, the adequacy of internal
control systems; • Discussing with internal auditors any significant findings and follow-up on such issues; • Discussion with statutory auditors, before the audit commences, on the nature and scope of
audit, as well as having post-audit discussion to ascertain any area of concern; • Reviewing the Company’s financial and risk management policies. Infosys Technologies Ltd
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Primary objective of the audit committee The primary objective of the audit committee (the committee) of Infosys Technologies Limited is to monitor and provide effective supervision of the management’s financial reporting process with a view to ensure accurate, timely and proper disclosures, and transparency, integrity and quality of financial reporting. The committee oversees the work carried out in the financial reporting process by the management, the internal auditors and the independent auditor, and notes the processes and safeguards employed by each. Responsibilities of the audit committee • Provide an open avenue of communication between the independent auditor, internal auditor,
and the Board of Directors (BoD). • Meet at least four times every year, or more frequently as circumstances require. The audit
committee may ask members of the management or others to attend meetings and provide pertinent information as necessary.
• Confirm and assure the independence of the independent auditor and objectivity of the internal auditor.
• Appoint, compensate and oversee the work of the independent auditor (including resolving disagreements between management and the independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or related work.
• Review and pre-approve all related party transactions in the Company. For this purpose, the committee may designate a member who shall be responsible for pre-approving related party transactions
• Review with the independent auditor the co-ordination of audit efforts to assure completeness of coverage, reduction of redundant efforts, and the effective use of all audit resources.
• Consider and review the following with the independent auditor and the management:
10. The adequacy of internal controls including computerized information system controls and security, and
(ii) Related findings and recommendations of the independent auditor and internal auditor, together with the management’s Responses
• Consider and, if deemed fit, pre-approve all non-auditing services to be provided by the
independent auditor to the Company. For the purpose of this clause, “non-auditing services” shall mean any professional services provided to the Company by the independent auditor, other than those provided to the Company in connection with an audit or a review of the financial statements of the Company and includes (but is not limited to): Bookkeeping or other services related to the accounting records of financial statements of the Company Financial information system design and implementation Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
• Review and discuss with the management and the independent auditor, the annual audited financial statements and quarterly audited / Unaudited financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, prior to filing the Company’s Annual Report on Form 20-F and quarterly results on Form 6-K, respectively, with the SEC.
• Direct the Company’s independent auditor to review before filing with the SEC, the Company’s interim financial statements included in quarterly reports on Form 6-K, using professional standards and procedures for conducting such reviews.
• Coduct a post-audit review of the financial statements and audit findings, including any significant suggestions for improvements provided to the Management by the independent auditor.
• Review before release, the unedited quarterly operating results in the Company’s quarterly earnings release.
• Oversee compliance with the requirements of the SEC and SEBI, as the case may be, for disclosure of auditors’ services and audit committee members, member qualifications and activities.
• Review, approve and monitor the code of ethics that the Company plans for its senior financial officers.
• Review management’s monitoring of compliance with the Company’s standards of business conduct and with the Foreign Corrupt Practices Act.
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• Review, in conjunction with the counsel, any legal matters that could have a significant impact on the Company’s financial statements.
• Oversee and review, at least annually, the Company’s risk management policies, including its investment policies.
• Review the Company’s compliance with employee benefit plans. • Oversee and review the Company’s policies regarding information technology and management
information systems. • If necessary, institute special investigations with full access to all books, records, facilities and
personnel of the Company. • As appropriate, obtain advice and assistance from outside legal, accounting or other advisors. • Review its own charter, structure, processes and membership requirements. • Provide a report in the Company’s proxy statement in accordance with the rules and regulations
of the SEC. • Establish procedures for receiving, retaining and treating complaints received by the Company
regarding accounting, internal accounting controls or auditing matters and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
• Consider and review the following with the Management, internal auditor and the independent auditor: S
(i) Significant findings during the year, including the status of previous audit recommendations A
(ii) Any difficulties encountered during audit work including any restrictions on the scope of activities or access to required information, and
(iii) Any changes required in the planned scope of the internal audit plan
• Report periodically to the BoD on significant results of the foregoing activities. Composition of the audit committee The committee shall consist solely of ‘independent’ directors
11. NASDAQ Rule 4200 and ii) the rules of the Securities and Exchange Commission) of the Company and shall be comprised of a minimum of three directors.
Each member will be able to read and understand fundamental financial statements, in accordance with the NASDAQ National Market Audit Committee requirements. They should be diligent, knowledgeable, dedicated, interested in the job and willing to devote a substantial amount of time and energy to the responsibilities of the committee, in addition to BoD responsibilities. At least one of the members shall be a “Financial Expert” as defined in Section 407 of the Sarbanes-Oxley Act. The members of the committee shall be elected by the BoD and shall continue until their successors are duly elected. The duties and responsibilities of a member are in addition to those applicable to a member of the BoD. In recognition of the time burden associated with the service and, with a view to bringing in fresh insight, the committee may consider limiting the term of the audit committee service, by automatic rotation or by other means. One of the members shall be elected as the chairperson, either by the full BoD or by the members themselves, by majority vote. Relationship with independent and internal auditors • The committee has the ultimate authority and responsibility to select, evaluate, and, where
appropriate, replace the independent auditor in accordance with the law. All possible measures must be taken by the committee to ensure the objectivity and independence of the independent auditor. These include:
(i) Reviewing the independent auditors’ proposed audit scope, approach and independence
(ii) Obtaining from the independent auditor periodic formal written statements delineating all relationships between the auditor and the Company consistent with applicable regulatory requirements and presenting this statement to the BoD
(iii) Actively engaging in dialogue with the auditors with respect to any disclosed relationships or services that may impact their objectivity and independence and /
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or recommend that the full BoD take appropriate action to ensure their independence
(iv) Encouraging the independent auditor to have open and frank discussions on their judgments about the quality, not just the acceptability, of the Company’s accounting principles as applied in its financial reporting. This includes such issues as the clarity of the Company’s financial disclosures, and degree of aggressiveness or conservatism of the Company’s accounting principles and underlying estimates, and other significant decisions made by the management in preparing the financial disclosure and audited by them.
(v) Carrying out the attest function in conformity with U.S. GAAS, to perform an interim financial review as required under Statement of Auditing Standards 71 of the American Institute of Certified Public Accountants and also discuss with the committee or its chairman, and an appropriate representative of Financial Management and Accounting, in person or by telephone conference call, the matters described in SAS 61, Communications with the Committee as amended by SAS 90 Audit Committee Communication prior to the Company’s filing of its Form 6-K (and preferably prior to any public announcement of financial results), including significant adjustments, management judgment and accounting estimates, significant new accounting policies, and disagreements with management, and Reviewing reports submitted to the audit committee by the independent auditor in accordance with the applicable SEC requirements.
• The internal auditors of the Company are in the best position to evaluate and report on the
adequacy and effectiveness of the internal controls. Keeping in view the need for the internal auditors’ independence from the management to remain objective, a formal mechanism should be created to facilitate confidential exchanges between the internal auditors and the committee, regardless of irregularities or problems. The work carried out by each of these auditors needs to be assessed and reviewed with the independent auditor and appropriate recommendations made to the BoD.
Disclosure requirements • The committee charter should be published in the Annual Report once every three years and
also whenever any significant amendment is made to the charter. • The committee shall disclose in the Company’s Annual Report whether or not, with respect to
the concerned fiscal year: The management has reviewed the audited financial statements with the committee, including a discussion of the quality of the accounting principles as applied, and significant judgments affecting the Company’s financial statements The independent auditors have discussed with the committee their judgments of the quality of those principles as applied and judgments referred to above under the circumstances. The members of the committee have discussed among themselves, without the management or the independent auditor being present, the information disclosed to the committee as described above The committee, in reliance on the review and discussions conducted with the management and the independent auditor pursuant to the requirements above, believes that the Company’s financial statements are fairly presented in conformity with Generally Accepted Accounting Principles (GAAP) in all material respects, and The committee has satisfied its responsibilities in compliance with its charter.
• The committee shall secure compliance that the BoD has affirmed to the NASD / Amex Stock Exchange on the following matters, as required in terms of the relevant NASD / Amex rules:
(ii) Composition of the committee and independence of committee members (iii) Disclosures relating to non-independent members Financial literacy and financial
expertise of members, and (iv) Review of the committee charter.
• The committee shall report to shareholders as required by the relevant rules of the U.S. Securities and Exchange Commission (SEC).
Meetings and reports • The committee shall meet at least four times a year.
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• The committee will meet separately with the CEO and the CFO of the Company at such times as are appropriate to review the financial affairs of the Company. The audit committee will meet separately with the independent auditors and internal auditor of the Company, at such times as it deems appropriate (but not less than quarterly) to fulfill the responsibilities of the audit committee under this charter.
• In addition to preparing the report in the Company’s proxy statement in accordance with the rules and regulations of the SEC, the committee will summarize its examinations and recommendations to the Board of Directors as may be appropriate, consistent with the committee’s charter.
Delegation of authority The committee may delegate to one or more designated embers of the committee the authority to pre-approve audit and permissible non-audit services, provided such re-approval decision is presented to the full audit committee at its scheduled meetings. Definitions • Independent member To be ‘independent’, members should have no relationship with the Company that may interfere with the exercise of their independence from the management and the Company. The following are not considered independent:
6. A director who is employed by the Company or any of its affiliates for the current year or in the past five years
(ii) A director who has been a former partner or employee of the independent auditor who worked on the Company’s audit engagement in the current year or in the past five years. (iii) A director who accepts any compensation from the Company or any of its affiliates in excess of $60,000 during the previous fiscal year, other than compensation for Board service, benefits under a tax-qualified retirement plan, or non-discretionary compensation in the current year or in the past five years (Iv) A director who is a member of the immediate family of an individual who is, or has been, in the past three years, employed by the Company or any of its affiliates as an executive officer. “Immediate family” includes a person’s spouse, parents, children, siblings, mother-in-law, father-inlaw, brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who resides in such person’s home.
7. A director who is a partner in, or a controlling shareholder or an executive officer of, any for-profit business organization to which the Company made, or from which the Company received, payments (other than those arising solely from investments in the Company’s securities) that exceed 5% of the Company’s or business organization’s consolidated gross revenues for that year, or $200,000, whichever is more, in the past five years
(vi) A director who is employed as an executive of another entity such that any of the Company’s executives serve on that entity’s compensation committee for the current year or in the past five years, and
8. A shareholder owning or controlling 20% or more of the Company’s voting securities
• Financial expert For purposes of this Item, an “audit committee financial expert” is an individual with the following attributes:
9. An understanding of generally accepted accounting principles and financial statements
(ii) The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves (iii) Experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience in actively supervising one or more persons engaged in such activities; (iv) An understanding of internal control over financial reporting, and
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(v) An understanding of audit committee functions. The individual shall have acquired such attributes through:
10. Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions
(ii) Experience in actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions
11. Experience in overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements, or
12. Other relevant experience. Audit committee attendance during fiscal 2007 Four audit committee meetings were held during the year. These were held on April 13, 2006; July 11, 2006; October 10, 2006 and January 10, 2007. During the year, the audit committee held two conference calls on April 4, 2006 and July 7, 2006. 1.3 Audit committee report for the year ended March 31, 2007 Each member of the committee is an independent director, according to the definition laid down in the audit committee charter, and Clause 49 of the Listing Agreement with the relevant Indian stock exchanges. The management is responsible for the Company’s internal controls and the financial reporting process. The independent auditors are responsible for performing an independent audit of the Company’s financial statements in accordance with the generally accepted auditing standards, and for issuing a report thereon. The committee’s responsibility is to monitor these processes. The committee is also responsible for overseeing the processes related to the financial reporting and information dissemination. This is to ensure that the financial statements are true, fair, sufficient and credible. In addition, the committee recommends to the Board the appointment of the Company’s internal and independent auditors. In this context, the committee discussed with the Company’s auditors, the overall scope and plans for the independent audit. The management represented to the committee that the Company’s financial statements were prepared in accordance with Generally Accepted Accounting Principles. The committee discussed with the auditors, in the absence of the management (whenever necessary), the Company’s audited financial statements including the auditors’ judgments about the quality, not just the applicability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. The committee also discussed with the auditors other matters required by the Statement on Auditing Standards No.1 (SAS 61) – Communication with Audit Committees as amended and the Sarbanes Oxley Act of 2002. Relying on the review and discussions conducted with the management and the independent auditors, the audit committee believes that the Company’s financial statements are fairly presented in conformity with Generally Accepted Accounting Principles in all material aspects. The committee has also reviewed the internal controls put in place to ensure that the accounts of the Company are properly maintained and that the accounting transactions are in accordance with prevailing laws and regulations. In conducting such reviews, the committee found no material discrepancy or weakness in the internal control systems of the Company. The committee also reviewed the financial and risk management policies of the Company and expressed its satisfaction with the same. The company’s auditors provided to the committee the written disclosures required by Independence Standards Board Standard No. 1 – ‘Independence Discussions with Audit Committees’, based on which the committee discussed the auditors’ independence with both the management and the auditors. After review, the committee expressed its satisfaction on the independence of both the internal and the statutory auditors. Moreover, the committee considered whether any non-audit services provided by the auditors’ firm could impair the auditors’ independence, and concluded that there were no such services provided. The committee secured compliance on the affirmation of the Board of Directors to the NASDAQ stock exchange, under the relevant rules of the exchange on composition of the committee and independence of the committee members, disclosures relating to non-independent members, financial literacy and financial expertise of members, and a review of the audit charter. Based on the committee’s discussion with the management and the auditors and the committee’s review of the representations of the management and the report of the auditors to the committee, the committee has recommended the following to the Board of Directors:
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1. The audited financial statements prepared as per Indian GAAP of Infosys Technologies Limited for the year ended March 31, 2007, be accepted by the Board as a true and fair statement of the financial status of the Company 2. The audited consolidated financial statements prepared as per Indian GAAP of Infosys Technologies Limited and its subsidiaries for the year ended March 31, 2007 be accepted by the Board as a true and fair statement of the financial status of the group, and 3. The audited financial statements prepared as per U.S. GAAP, and to be included in the Company’s Annual Report on Form 20-F, for the fiscal year ended March 31, 2007 be filed with the U.S. Securities and Exchange Commission. The committee has recommended to the Board the re-appointment and fees of BSR & Co., Chartered Accountants, as the statutory auditors of the Company for the fiscal year ending March 31, 2008, and that the necessary resolutions for appointing them as auditors be placed before the shareholders. The committee has also recommended to the Board, the appointment of KPMG, India, as independent auditors of the Company for the U.S. GAAP financial statements, for the financial year ending March 31, 2008.The committee recommended the appointment of internal auditors to review various operations of the Company, and determined and approved the fees payable to them. The committee has also issued a letter in line with recommendation No. 9 of the Blue Ribbon Committee on audit committee effectiveness, which is to be provided in the Financial statements prepared in accordance with U.S. GAAP section of the Annual Report on Form 20-F. In conclusion, the committee is sufficiently satisfied that it has complied with its responsibilities as outlined in the Audit committee charter. ITC Limited The Audit Committee of the Board, inter alia, provides reassurance to the Board on the existence of an effective internal control environment that ensures: • efficiency and effectiveness of operations, both domestic and overseas; • safeguarding of assets and adequacy of provisions for all liabilities; • reliability of financial and other management information and adequacy of disclosures; • compliance with all relevant statutes.
The Audit Committee is empowered, pursuant to its terms of reference, inter alia, to: • investigate any activity within its terms of reference and to seek any information it requires
from any employee; • obtain legal or other independent professional advice and to secure the attendance of outsiders
with relevant experience and expertise, when considered necessary. The role of the Committee includes the following: (a) Overseeing the Company’s financial reporting process and the disclosure of its financial information to ensure that the financial statements are correct, sufficient and credible; (b) Recommending the appointment and removal of external auditors, fixation of audit fee and approval of payment of fees for any other services rendered by the auditors; I Reviewing with the management the financial statements before submission to the Board, focusing primarily on: – Any changes in accounting policies and practic
13. – Major accounting entries based on exercise of judgement by manageme
14. – Qualifications in draft audit repor 15. – Significant adjustments arising out of aud 16. – The going concern assumpti 17. – Compliance with Accounting Standards
– Compliance with Stock Exchange and legal requirements concerning financial statements – Related party transactions; (d) Reviewing with the management, external and internal auditors, the adequacy of internal control systems and the Company’s statement on the same prior to endorsement by the Board; (e) Reviewing the adequacy of the internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit; Larsen & Toubro Ltd
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The Audit Committee is responsible for • Overseeing the Company’s financial reporting process and disclosure of its financial information • Recommending the appointment of the Statutory Auditors and fixation of their remuneration • Reviewing and discussing with the Statutory Auditors and the Internal Auditor about internal control systems • Reviewing the adequacy and independence of the Internal Audit function, and observations of the Internal Auditor • Reviewing major accounting policies and practices and adoption of applicable Accounting Standards • Reviewing major accounting entries involving exercise of judgment by the management • Disclosure of contingent liabilities • Reviewing, if necessary, the findings of any internal investigations by the Internal Auditors and reporting the matter to the Board • Reviewing the risk management mechanisms of the Company • Reviewing of compliance with Listing Agreement and various other legal requirements concerning financial statements and related party transactions • Reviewing the Quarterly and Half yearly financial results and the Annual financial statements before they are submitted to the Board of Directors • Reviewing the operations, new initiatives and performance of the business divisions • Looking into the reasons for substantial defaults in payments to depositors, debenture holders, shareholders (in case of nonpayment of declared dividends) and creditors, if any. Mphasis Ltd The primary functions of the Audit Committee, as per its Charter, are to provide assistance to the Board of Directors in fulfilling their oversight responsibility to the shareholders, potential shareholders, the investment community and others relating to: • overseeing processes ensuring the integrity of the Company’s financial statements; • overseeing processes for the management of enterprise risks; • overseeing processes for compliance with laws and regulations: • overseeing process by which anonymous complaints pertaining to financial or commercial matters are received and acted upon (whistleblower mechanism); • enquiring into reasons for default in honouring obligations to creditors and members; • reviewing the process for entering into related party transactions and related disclosures; and • satisfying itself regarding the conformance of CEO’s remuneration, expense reimbursements and use of Company assets with terms of his employment and Company’s rules and policies. Nestle India Ltd The Audit Committee consists of a Vice Chairman, who chairs the Committee, and a minimum of two other members of the Board, excluding the Chairman/CEO. At least one member must be a financial expert. The powers and duties of the Audit Committee are established in the Audit Committee Charter, which is approved by the Board. In discharging its responsibilities, it has unrestricted access to the Company’s management, books and records. It is free to appoint outside counsel. The Audit Committee supports the Board of Directors in its supervision of financial control through a direct link to KPMG (external auditors) and the Nestlé Group Audit (corporate internal auditors). The Audit Committee’s main duties include the following: • to discuss Nestlé’s internal accounting procedures • to make recommendations to the Board of Directors regarding the nomination of external
auditors to be appointed by the shareholders • to discuss the audit procedures, including the proposed scope and the results of the audit t • to keep itself regularly informed on important findings of the audits and of their progress • to oversee the quality of the internal and external auditing • to present the conclusions on the approval of the Financial Statements to the Board of
Directors. The Audit Committee regularly reports to the Board on its findings and proposes appropriate actions. The responsibility for approving the annual Financial Statements remains with the Board of Directors. National Thermal Power Corporation Ltd The constitution, quorum, scope, etc. of the Audit Committee is in line with the Navratna Guidelines, the Companies Act, 1956 and provisions of Listing Agreement.
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Scope of Audit Committee 1. Discussion with Auditors periodically about internal control systems and the scope of audit including observations of the auditors. 2. Reviewing, with the management, the quarterly and half-yearly financial statements before submission to the Board for approval. 3. Ensure Compliance of Internal Control Systems. 4. Oversight 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. 5. Noting appointment and removal of external auditors. Recommending the fixation of audit fee of external auditors and also approval for payment for any other services. 6. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to: a. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956; b. Changes, if any, in accounting policies and practices and reasons for the same; c. Major accounting entries involving estimates based on the exercise of judgment by management; d. Significant adjustments made in the financial statements arising out of audit findings; e. Compliance with listing and other legal requirements relating to financial statements; f. Disclosure of any related party transactions; g. Qualifications in the draft audit report. 7. Reviewing, with the management, performance of statutory and internal auditors, the adequacy of internal control systems and suggestion for improvement of the same. 8. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 9. Discussion with internal auditors any significant findings and follow up there on. Review of internal audit observations outstanding for more than two years. 10. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board. 11. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as ell as have post-audit discussion to ascertain any area of concern. 12. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors. 13. Review of Observations of C&AG including status of Government Audit paras. 14. To review the functioning of the Whistle Blower mechanism. 15. Investigation into any matter in relation to the items specified above or referred to it by the Board. Ranbaxy Laboratories Ltd The Audit Committee has been constituted as per (Promoter) 292 A of the Companies Act, 1956, and the guidelines set out in the Listing Agreements with the Stock Exchanges. The terms of reference inclu–e - • Overseeing financial reporting processes. • Reviewing periodic financial results, financial statements and adequacy of internal control systems. • Approving internal audit plans and reviewing efficacy of the function. • Discussion and review of periodic audit reports and • Discussions with external auditors about the scope of audit including the observations of the auditors. Reliance Energy Ltd The audit committee of Reliance Energy was set up way back in May 1986. Currently, the committee consists of all the four independent directors of the company. All the directors have good knowledge of finance, accounts and company law. The chairman of the committee, a chartered accountant, was formerly the executive director (finance) of Life Insurance Corporation of India and has accounting and related financial management expertise. The committee held five meetings during the year. The audit committee also advises the management on the areas where internal audit can be improved. The minutes of the meetings of the audit committee are placed
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before the board. The terms of reference of the audit committee are in accordance with all the items listed in clause 49 (II) (D) and (E) of the listing agreement as follows: i Overseeing of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial information is correct, sufficient and credible. ii Recommending the appointment, reappointment and replacement/removal of statutory auditor
and fixation of audit fee iii Approve payment for any other services by statutory auditors iv Reviewing with management the annual financial statements before submission to the board,
focusing primarily on; a. Matters required, to be included in the director’s responsibility statement included in the
report of the board of directors b. Any changes in accounting policies and practices c. Major accounting entries based on exercise of judgment by management d. Qualifications in draft statutory audit report. e. Significant adjustments arising out of audit. f. Compliance with listing and other legal requirements concerning financial statements g. Any related party transactions v Reviewing with the management the quarterly financial statements before submission to the
board for approval. vi Reviewing with the management, external and internal auditors, the adequacy of internal
control systems. vii Reviewing the adequacy of internal audit function, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
viii Discussion with internal auditors any significant findings and follow up thereon. ix Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.
x Discussion with statutory auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
xi To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors.
xii To review the functioning of the Whistle Blower mechanism, in case the same is existing. xiii Carrying out any other function as is mentioned in the terms of reference of the audit
committee. xiv Review the following information: a Management discussion and analysis of financial condition and results of operations; b Internal audit reports relating to internal control weaknesses; c Management letters / letters of internal control weaknesses issued by statutory / internal
auditors; d Statement of significant related party transactions; and e The appointment, removal and terms of remuneration of the Chief internal auditor shall
be subject to review by the Audit Committee.
18. Audit Committee has the following poweri) to investigate any activity within its terms of reference.
ii) to seek any information from any employee. iii)to obtain outside legal and professional advice. iv)to secure attendance of outsiders with relevant expertise, Steel Authority of India Ltd The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing the financial reports; the Company’s systems of internal controls regarding finance, accounting and legal compliance that management and the Board have established; and the Company’s auditing, accounting and financial reporting process generally. The Audit Committee reviews reports of the Internal Auditors, meets Statutory Auditors and discusses their findings, suggestions and other related matters and reviews major accounting policies followed by the Company. The Audit Committee reviews with management, the quarterly and annual financial statements before their submission to the Board. With the revision in Terms of
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Reference of the Audit Committee, it has started reviewing Management Discussion and Analysis of financial condition and results of operations; Statement of Significant Related Party Transactions (as defined by the Audit Committee) submitted by management; Management letters/letters of internal control weaknesses issued by the Statutory Auditors; Internal Audit Reports relating to internal control weaknesses etc. Internal Control Systems The Company has an adequate system of internal controls for achieving the following business objectives of the Company: • Efficiency of operations. • Protection of resources. • Accuracy and promptness of financial reporting. • Compliance with laid down policies and procedures. • Compliance with laws and regulations. In MEL, Internal Audit Department reviews, evaluates and appraises the various systems; procedures/policies lay down by the Company and suggest meaningful and useful improvements. It helps management to accomplish its objectives by bringing a systematic and disciplined approach to improve the effectiveness of management towards good corporate governance. The Internal Audit is subjected to overall control environment supervised by Board Level Audit Committee, providing independence to the Internal Audit function, emphasizing transparency in the systems and internal controls. Annual Audit Plans are based on identification of key-risk areas with thrust on system/process so as to achieve cost reduction in overall operation of the Company. The Internal Audit system is supplemented by well-documented policies, guidelines and procedures and regular reviews are being carried out by our Internal Audit Department. The reports containing major IA observations are periodically submitted to the management and Audit Committee of the MEL Board. State Bank of India The Audit Committee of the Board (ACB) was constituted on 27th July 1994 and last re-constituted on the 1st October 2006. The ACB functions as per RBI guidelines and complies with the provisions of Clause 49 of the Listing Agreement to the extent that they do not violate the directives/guidelines issued by RBI. Composition & Attendance during 2006-07 In terms of Reserve Bank of India guidelines, the ACB has six members of the Board of Directors, including two whole time Directors, two official Directors (nominees of GOI and RBI), and two non-official, non-executive Directors, both of whom are Chartered Accountants. Meetings of the ACB are chaired by a non-executive Director. The quorum requirements as per RBI guidelines are complied with meticulously. Details of composition and attendance during the year are as under. Table-9 gives the attendance at each meeting. Functions of ACB
(a) ACB provides direction as also oversees the operation of the total audit function in the Bank, which implies t�inalizationion, operationalisation and quality control of internal audit and inspection within the Bank, and follow-up on the statutory/external audit of the Bank and inspection by RBI.
(b) ACB reviews the internal inspection/audit functions in the Bank – the system, its quality and effectiveness in terms of follow-up. It reviews the inspection reports of specialized and extra large branches and all branches with unsatisfactory ratings. It also, especially, focuses on the follow-up of:
• Inter-branch adjustment accounts •Unreconciled long outstanding entries in inter-bank accounts and nostro/vostro accounts
• Arrears in balancing of books at various branches • Frauds • All other major areas of housekeepinI(c) It obtains and reviews half-yearly reports from the
Compliance Department in the Bank. (d) ACB follows up on all the issues raised in the Long Form Audit Reports of the Statutory
Auditors. It interacts with the external auditors befor�inalizationsation of the quarterly/half yearly/ annual financial accounts and reports.
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During the year, ten meetings of ACB (Table 9) were held to review the various matters connected with the internal control, systems and procedures and other aspects as required in terms of RBI guidelines. A formal ‘Audit Charter’ or ‘Terms of Reference’ laid down by the Central Board, incorporating the requirements under Clause-49 in addition to those under RBI guidelines, is in place. Sterlite Industries (India) Limited The Company had constituted an Audit Committee in accordance with the requirements of Section 292A of the Companies Act, 1956 and Clause 49 of the Listing Agreement entered with the stock exchanges. The terms of reference/powers stipulated by the Board to the Audit Committee, as contained under Clause 49 of the Listing Agreement are as follows: A. The Audit Committee shall have the following powers– 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 it considers necessary. B. The role of the Audit Committee shall include the following:
1. Oversight 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. 2. Recommending to the Board, the appointment, reappointment and, if required, the replacement or removal of Statutory Auditors and fixation of audit fees. 3. Approval of payment to Statutory Auditors for any other services rendered by the Statutory Auditors. 4. Reviewing with the management, the annual financial statements before submission to the Board for approval, with particular reference to:- • Matters required to be included in the Directors’ responsibility statement to be included in
the Directors’ report in terms of sub-section (2AA) of Section 217 of the Companies Act, 1956.
• Changes, if any, in accounting policies and practices and reasons for the same. • Major accounting entries involving estimates based on the exercise of judgment by
management. • Significant adjustments made in the financial statements arising out of audit findings. • Compliance with listing and other legal requirements relating to financial statements. • Disclosure of related party transactions. • Qualifications in draft audit report. 5. Reviewing with the management, the quarterly financial statements, before submission to the Board for approval. 6. Reviewing with the management the performance of Statutory and Internal auditors and adequacy of internal control systems. 7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department reporting structure, coverage and frequency of internal audit. 8. Discussion with Internal auditors any significant findings and follow up thereon. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board. 10. Discussion with Statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. 12.To review the functioning of the Whistle Blower Mechanism. 13. Carrying out such other function as may be specifically referred to the Committee by the Board of Directors and/or other Committees of Directors of the Company 14. To review the following information: The management discussion and analysis of financial condition and results of operations;
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• Statement of significant related party transactions (as defined by the Audit Committee), submitted by management;
• Management letters / letters of internal control weaknesses issued by the Statutory Auditors;
• Internal audit reports relating to internal control weaknesses; and • The appointment, removal and terms of remuneration of internal audi.
19. 15. Reviewing the financial statements and in particular the investments made by the unlisted subsidiaries of the Company.
Tata Motors Ltd The Audit Committee of Directors comprises of 3 independent Directors, all of whom are financially literate and have relevant finance and/or audit exposure. The quorum of the Committee is two members or one-third of its members, whichever is higher. The composition of the Audit Committee and attendance at its meetings is as follows: The Committee meetings are held at the Company’s Corporate Headquarters or at its plant locations and are usually attended by the Managing Director, the Executive Director, the Chief Internal Auditor, the Statutory Auditor and the Cost Auditor. The Business and Operation Heads are invited to the meetings, as required. The Company Secretary acts as the Secretary of the Audit Committee. The Internal Audit unction headed by the Chief Internal Auditor, reports to the Audit Committee to ensure its independence. The Committee relies on the expertise and knowledge of management, the internal auditors and the independent Statutory Auditor in carrying out its oversight responsibilities. It also uses external expertise, if required. Management is responsible for the preparation, presentation and integrity of the Company’s financial statements including consolidated statements, accounting and financial reporting principles. Management is also responsible for internal control over financial reporting and all procedures are designed to ensure compliance with accounting standards, applicable laws and regulations as well as for objectively reviewing and evaluating the adequacy, effectiveness and quality of the Company’s system of internal control. Deloitte Haskins & Sells (Deloitte), the Company’s independent Statutory Auditor, is responsible for performing an independent audit of the Financial Statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in India. The Committee functions according to its Charter that defines its powers, scope and role in accordance with the Companies Act 1956, listing requirements and US regulations applicable to the Company and is reviewed from time to time. Whilst, the full Charter is available on the Company’s website, given below is a gist of the scope of the Audit Commie:
20. a. Reviewing the quarterly financial statements before submission to the Board, focusing primarily on:
• Any changes in accounting policies and practices and reasons for the change; • Major accounting entries involving estimates based on exercise of judgment by
Management; • Qualifications in draft audit report; • Significant adjustments arising out of audit; • Compliance with accounting standards; • Analysis of the effects of alternative GAAP methods on the financial statements; • Compliance with listing and other legal requirements concerning financial statements • Disclosure of related party transactions; • Review Reports on the Management Discussion and Analysis of financial condition, results of
Operations and the Directors’ Responsibility Statement; • Overseeing the Company’s financial reporting process and the disclosure of its financial
information, including earnings press release, to ensure that the financial statements are correct, sufficient and credible;
• Disclosures made under the CEO and CFO certification to the Board and investors. b. Reviewing with the management, external auditor and internal auditor, adequacy of internal control systems and recommending improvements to the management. c. Recommending the appointment/removal of the statutory auditor, fixing audit fees and approving non-audit/ consulting services provided by the statutory auditors’ firms to the Company and its subsidiaries; evaluating auditors’ performance, qualifications and independence.
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d. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, coverage and frequency of internal audit, appointment, removal, performance and terms of remuneration of the chief internal auditor. e. Discussing with the internal auditor and senior management significant internal audit findings and follow-up thereon. f. Reviewing the findings of any internal investigation by the internal auditor into matters involving suspected fraud or irregularity or a failure of internal control systems of a material nature and report the matter to the Board. g. Discussing with the external auditor before the audit commences, the nature and scope of audit, as well as conduct post-audit discussions to ascertain any area of concern. h. Reviewing the Company’s financial and risk management policies. i. Reviewing the effectiveness of the system for monitoring compliance with laws and regulations. j. Initiating investigations into the reasons for substantial defaults in payments to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors. k. Reviewing the functioning of the Whistle-Blower mechanism which is an extension of the Tata Code of Conduct. l. Reviewing the financial statements and investments made by subsidiary companies. The Committee has also adopted a policy for Approval of Services to be rendered by the independent statutory Auditor and its affiliates to the Company and its subsidiaries for ensuring auditor’s independence and objectivity. The said policy as also the Whistle Blower policy have also been extended to the Company’s subsidiaries. During the year, the Committee reviewed audit reports that highlighted over 580 control improvements covering operational, financial and compliance areas. Key Management personnel presented their risk mitigation plan to the Committee. It also reviewed the internal control system in subsidiary companies, status on compliance of its obligations under the Charter and confirmed that it fulfilled its duties and responsibilities. The Committee through self-assessment evaluated its performance as well as the performance of the Statutory Auditors. The Chairman of the Audit Committee briefs the Board members about the significant discussions at Audit Committee meetings. Tata Steel Ltd The Company had constituted an Audit Committee in the year 1986. The scope of the activities of the Audit Committee is as set out in Clause 49 of the Listing Agreements with the Stock Exchanges read with Section 292A of the Companies Act, 1956. The terms of reference of the Audit Committee are broadly as follows: a) To review compliance with internal control systems; b) To review the findings of the Internal Auditor relating to various functions of the Company; c) To hold periodic discussions with the Statutory Auditors and Internal Auditors of the Company concerning the accounts of the Company, internal control systems, scope of audit and observations of the Auditors/ Internal Auditors; d) To review the quarterly, half-yearly and annual financial results of the Company before submission to the Board; e) To make recommendations to the Board on any matter relating to the financial management of the Company, including Statutory & Internal Audit Reports; f) Recommending the appointment of statutory auditors and branch auditors and fixation of their remuneration. Whistle Blower Policy The Audit Committee at its meeting held on 25th October, 2005, approved framing of a Whistle Blower Policy that provides a formal mechanism for all employees of the Company to approach the Ethics Counsellor/ Chairman of the Audit Committee of the Company and make protective disclosures about the unethical behaviour, actual or suspected fraud or violation of the Company’s Code of Conduct. The Whistle Blower Policy is an extension of the Tata Code of Conduct, which requires every employee to promptly report to the Management any actual or possible violation of the Code or an event he becomes aware of that could affect the business or reputation of the Company. The disclosures reported are addressed in the manner and within the time frames prescribed in the Policy. Under the Policy, each employee of the Company has an assured access to the Ethics Counsellor/Chairman of the Audit Committee.
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Tata Power Company Ltd The terms of reference, role and scope are in line with those prescribed by Clause 49 of the Listing Agreement with the Stock Exchanges. The Company also complies with the provisions of Section 292A of the Companies Act, 1956 pertaining to Audit Committee and its functioning. At its meeting held on 29th March 2001, the Board delegated the following powers to the Audit Committee:
• To investigate any activity within its terms of reference. • To seek information from any employee. • To obtain outside legal or other professional advice. • To secure attendance of outsiders with relevant expertise, if it considers necessary.
The role of the Audit Committee has been redefined as under: 1. Oversight 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. 2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees. 3. Approval of payment to statutory auditors for any other services rendered by the statutory
auditors. 4. Reviewing, with the management, the annual financial statements before submission to the
Board for approval, with particular reference to: a) Matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s report in terms of Clause (2AA) of Section 217 of the Companies Act, 1956
b) Changes, if any, in accounting policies and practices and reasons for the same c) Major accounting entries involving estimates based on the exercise of judgement by
management d) Significant adjustments made in the financial statements arising out of audit findings e) Compliance with listing and other legal requirements relating to financial statements f) Disclosure of any related party transactions g) Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval.
6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and follow-up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board.
10. Discussion with the statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors.
12. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 13. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee. Ultratech Cement Ltd The Company has an Audit Committee at the Board level which acts as a link between the Management, the Statutory and Internal Auditors and the Board of Directors and oversees the financial reporting process. The primary objective of the Committee is to monitor and provide effective supervision of the Management’s financial reporting process. The terms of reference/ power of the Audit Committee are in accordance with Clause 49 of the Listing Agreement. The Audit Committee has the following powers: - To investigate any activity within its terms of reference.
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- To seek information from any employee. - To obtain outside legal or other professional advice. - To secure attendance of outsiders with relevant expertise, if it considers necessary. The role of the Audit Committee includes the following:
1. Oversight of your Company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the Statutory Auditors and the fixation of audit fees.
3. Approval of payment to Statutory Auditors for any other services rendered by them. 4. Reviewing, with the Management, the annual financial statements before submission to the
Board for approval, with particular reference to: a. Matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s Report in terms of clause (2AA) of section 217 of the Companies Act, 1956.
b. Changes, if any, in accounting policies and practices and reasons for the same. c. Major accounting entries involving estimates based on the exercise of judgment by
Management. d. Significant adjustments made in the financial statements arising out of audit findings. e. Compliance with listing and other legal requirements relating to financial statements. f. Disclosure of any related party transactions. g. Qualifications in the draft audit report.
5. Reviewing, with the Management, the quarterly financial statements before submission to the Board for approval.
6. Reviewing, with the Management, performance of Statutory and Internal Auditors, adequacy of the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
8. Discussion with Internal Auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the Internal Auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board.
10. Discussion with Statutory Auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any areas of concern.
11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors, if any.
The Audit Committee reviews the following information: 1. Management Discussion and Analysis of financial condition and results of operations.
2. Statement of significant related party transactions (as defined by the Audit Committee), submitted by Management.
3. Management letters / letters of internal control weaknesses issued by the Statutory Auditors, if any.
4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief Internal Auditor. During the year, the Committee has reviewed the internal controls put in place to ensure that the accounts of your Company are properly maintained and that the accounting transactions are in accordance with prevailing laws and regulations. In conducting such reviews, the Committee found no material discrepancy or weakness in the internal control system of your Company. The Committee has also been mandated to periodically review the procedures laid down by your Company for assessing and managing risks. Videocon Industries Ltd. During the year under review, the Audit Committee was reconstituted on 8th December 2005. Scope of Audit Committee: The terms of reference are broadly as under:
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a. Overall assessment 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.
b. Recommending the appointment of external auditor, fixation of audit fee and also approval for payment for any other services rendered by the Auditors.
c. Reviewing with management the annual financial statements before submission to the board, focusing primarily on:
Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of Clause (2AA) of section 217 of the Companies Act, 1956.
• Changes, if any, in accounting policies and practices. • Major accounting entries based on exercise of judgment by management. • Observations if any, in draft audit report. • Significant changes/amendments, if any, arising out of audit. • The going concern assumption. • Compliance with accounting standards. • Qualification in the draft audit report. • Compliance with stock exchange and legal requirements concerning financial statements. • Any related party transactions i.e. transactions of the company of material nature, with
promoters or the management, their subsidiaries or relatives etc., that may have potential conflict with the interests of company at large.
d. Review of Quarterly / Half Yearly unaudited financial results before submission to the Auditors and the Board.
e. Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
f. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
g. Discussion with internal auditors any significant findings and follow up there on. h. Reviewing the findings, if any, of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.
i. Discussions with external auditors before the audit commences nature and scope of audit as well as have post-audit discussion to ascertain any area of concern.
j. Reviewing the company’s financial and risk management policies. k. To look into the reasons for substantial defaults, if any, in the payment to the depositors,
debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. l. Financial Statements and Investments made by Subsidiaries m. To review the functioning of Whistle Blower Mechanism, if any The Audit Committee also reviews: • Management discussion and analysis of financial conditions and results of operations. • Statement of significant related party transactions, if any. • Management Letters/Letters of internal control weaknesses issued by the Statutory Auditors;
Internal Audit Reports relating to internal control weaknesses; and • The appointment, removal and terms of remuneration of the Chief Internal Auditor. Dr Reddys Laboratories Ltd The management is responsible for the Company’s internal controls and the financial reporting process while the statutory auditors are responsible for performing independent audits of the Company’s financial statements in accordance with generally accepted auditing practices and for issuing reports based on such audits. The Board of Directors has entrusted the Audit Committee to supervise these processes and thus ensure accurate and timely disclosures that maintain the transparency, integrity and quality of financial control and reporting. The primary responsibilities of the Audit Committee are to: • Supervise the financial reporting process; • Review the financial results before placing them to the Board along with related disclosures and
filing requirements; • Review the adequacy of internal controls in the Company, including the plan, scope and
performance of the internal audit function;
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• Discuss with management the Company’s major policies with respect to risk assessment and risk management;
• Hold discussions with statutory auditors on the nature and scope of audits, and any views that they have about the financial control and reporting processes;
• Ensure compliance with accounting standards, and with listing requirements with respect to the financial statements;
• Recommend the appointment and removal of external auditors and their fees; • Review the independence of auditors; • Ensure that adequate safeguards have been taken for legal compliance both for the Company
and its other Indian as well as foreign subsidiaries; • Review related party transactions; and Review the functioning of Whistle Blower mechanism. • Implementation of the applicable provisions of the Sarbanes Oxley Act, 2002.
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Essar Steel Ltd The Company has an Audit Committee with scope of activities as set out in the amended clause 49 of the Listing Agreement with the Stock Exchanges read with Section 292A of the Companies Act, 1956. The broad terms of reference of the Audit Committee are as under: a) To hold periodic discussions with the Statutory Auditors and Internal Auditors of the Company
concerning the accounts of the Company, internal control systems, scope of audit and observations of the Auditors/Internal Auditors;
b) To review the quarterly, half-yearly and annual financial results of the Company before submission to the Board;
c) To make recommendations to the Board on any matter relating to the financial management of the Company, including the Audit Report;
d) Overseeing the Company’s financial process and disclosure of financial information to ensure that the financial statement is correct.
e) Recommending the appointment and removal of external auditor, fixation of audit fee and approval for payment of any services.
f) Approval of payment to statutory auditors for any other services rendered by the statutory auditors. g) Reviewing with the management performance of statutory and internal auditors, and adequacy of internal control system. h) Reviewing the adequacy of internal audit function. i) Discussing with internal auditors any significant finding and follow up on such issues. j) Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control system of a material nature and reporting the matter to the Board.
k) Discussing with external auditors before the audit commences on the nature and scope of audit, as well as having post-audit discussion to ascertain any area of concern.
l) Reviewing the Company’s financial and risk management policies; and m) Examining reasons for substantial default in the payment to depositors, debenture holders, shareholders and creditors, if any. Hero Honda Motors Ltd Audit Committee Recommendation During the year there was no such recommendation of the Audit Committee which was not accepted by the Board. Hence, there is no need for the disclosure of the same in this Report. Merck & Co., India Committees of the Board There are currently six standing committees of the Board: Audit Committee – oversees the Company’s financial reporting process and internal controls. This committee is directly responsible for the appointment, engagement and oversight of the independent public accountants and has sole authority to approve audit engagement fees and terms as well as significant non-audit engagements with independent public accountants. Committee on Corporate Governance – considers and makes recommendations on matters related to the practices, policies and procedures of the Board. This committee has sole authority to retain and terminate director search firms and to approve retention fees and terms. Compensation and Benefits Committee – makes recommendations on organization, succession, the election of officers, consultantships and similar matters, and consults on matters concerning executive compensation and on pension, savings and welfare benefit plans. This committee has sole authority to retain and terminate compensation consultants who advise on director or executive compensation and sole authority to approve retention fees and terms. Finance Committee – considers and makes recommendations on matters related to the financial affairs and policies of the Company. Committee on Public Policy and Social Responsibility – advises the Board and management on Company policies and practices that pertain to the Company’s responsibilities as a global corporate citizen, its obligations as a pharmaceutical company, and its commitment to high standards of ethics and integrity.
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Research Committee – considers and makes recommendations on matters related to the C’mpany's strategies and operations for the research and development of pharmaceutical products and vaccines. It is the Board’s philosophy that matters of significance should be considered and, where appropriate, acted on by the full Board. The Board’s committees should function to perform the duties reserved to them by statute, regulation or charter, and to identify and focus issues for discussion by the full Board. At least annually, their respective members shall evaluate the effectiveness of the Audit Committee, Committee on Corporate Governance, and Compensation and Benefits Committee. The Committee on Corporate Governance recommends the composition of the Board’s committees in consultation with the Chairman of the Board, or if there is no Chairman of the Board, with the Lead Director of the Board. Committee assignments are subject to the approval of a majority of the full Board. Committee assignments should reflect the expertise and interests of Board members, with the goal of ensuring that Committee members have the requisite background and expertise to participate fully on the committees on which they serve. There is not mandatory rotation of Board members among committees. Continued Service on Board After Change in Career; Retirement of Directors (a) In the event that a director changes his or her primary position, the director will advise the
Chairman of the Board of such change, or if there is no Chairman of the Board, the Lead Director of the Board, who will then consult with the Committee on Corporate Governance regarding the director’s continued service on the Board. The Committee will review each situation on an individual basis, taking into consideration the background, expertise and expected continued contribution of the director.
(b) It is expected that a director shall not hold office beyond the next succeeding annual meeting after attaining the age of 72.
(c) It is expected that a director who also is an employee of the Company will not be a candidate for reelection following termination of regular full-time employment.
Other Service The Board recognizes that individuals should limit the number of boards on which they serve so that they can give proper attention to each board responsibility. However, the philosophy of the Board is not to set an invariant limit on the number of boards on which a director may serve. In the event that a director wishes to join the board of another company, it is expected that the director will advise the Chairman of the Board, or if there is no Chairman of the Board, the Lead Director of the Board, of his or her intention. The Chairman of the Board or Lead Director of the Board, as the case may be, will then consult with the Committee on Corporate Governance regarding whether the new commitment will allow the director to continue to fulfill his or her obligations to the Company. It is expected that a director will refrain from serving as a director, officer, employee or consultant with any competitive business during service with the Company and for three years or for a reasonable period of time, as determined by the Board of Directors, after service with the Company ends. Compensation of Directors The Committee on Corporate Governance should regularly review the compensation that is provided to the directors of the Company and make recommendations to the Board regarding any appropriate modifications. The Compensation and Benefits Committee shall be responsible for engaging consultants and experts to assist with this process if necessary. Compensation provided to directors should remunerate the directors fairly for their service to the Board. It should also support the Company’s goal of attracting and retaining the most qualified persons to the Board. Directors’ compensation should include stock-based components to align the interests of the directors with those of the stockholders of the Company. The Board has determined that the Company’s compensation goals are met by a compensation package that includes meeting fees, retainer arrangements, deferred compensation opportunities, and stock options. In addition, directors joining the Board prior to January 1, 1996 are eligible to receive a retirement benefit; this benefit is not available to directors joining the Board after December 31, 1995. As with all independent directors of the Company, directors who serve on the Audit Committee may not be paid remuneration by the Company other than the compensation provided to all directors of the Company. Directors who are current employees of the Company do not receive any additional compensation for their services as directors.
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Stock Ownership Guidelines On joining the Board, each director must own at least one share of stock, with a target ownership level of 5,000 shares to be achieved by each director within five years of joining the Board or as soon thereafter as practicable. Shares held in the Merck Common Stock account under the Plan for Deferred Payment of Directors’ Compensation will be included in the target goal. Upon the request of a director, the Committee on Corporate Governance will consider if modification of the target ownership level is appropriate in view of a director’s personal circumstances. Chairmanship of Meetings In the absence of the Chairman of the Board, or if there is no Chairman of the Board, in the absence of the Lead Director of the Board, the senior independent director present shall preside at all meetings of the stockholders and the Board of Directors. Director Orientation and Continuing Education The Committee on Corporate Governance shall oversee the education and acculturation of new directors through an orientation program developed by management that exposes the director to the Company’s business and strategies, allows for formal and informal interaction with members of management, and facilitates the building of relationships with other Board members. The Committee on Corporate Governance and management shall identify and communicate external and internal training and educational opportunities for continuing directors in areas of importance to the Company. Incumbent Director Resignation Policy Under the C’mpany's Restated Certificate of Incorporation, in the case of an uncontested election of directors (that is, the number of nominees for any election of directors does not exceed the number of directors to be elected), a nominee for election as a director shall be elected to the Board of Directors if the number of votes cast for such n’minee's election exceeds the number of votes cast against such n’minee's election. If an incumbent director who was a nominee for reelection is not reelected in an uncontested election of directors, the incumbent director shall tender his or her resignation promptly following certification of the stockholder vote for consideration by the Committee on Corporate Governance and the Board in accordance with the following procedures.
The Committee on Corporate Governance shall promptly consider such tendered resignation and recommend to the Board the action to be taken with respect to such tendered resignation. The recommendation of the Committee may be, among other things
21. (i) accept the resignation; 22. (ii)reject the resignation but address what the Committee believes to
be the underlying reasons for the failure of the incumbent director to be re-elected(iii) reject the resignation. If the Committee recommends that the Board accept the tendered resignation, the Committee shall also recommend to the Board whether to fill the vacancy resulting from the resignation or to reduce the size of the Board.
In considering a tendered resignation, the Committee on Corporate Governance is authorized to consider all factors it deems relevant to the best interest of the Company, including
(i) what the Committee believes to be the underlying reasons for the failure of the incumbent director to be re-elected, including whether these reasons relate to the incumbent di’ector's performance as a director; whether these reasons relate to the Company or another company; and whether these reasons are curable and alternatives for effecting any cure;
(ii) the tenure and qualifications of the incumbent director; (iii) the incumbent di’ector's past and expected future contributions to the Company; (iv) the other Policies of the Board; and (v) the overall composition of the Board, including whether accepting the resignation would
cause the Company to fail to meet any applicable requirements of the Securities and Exchange Commission, the New York Stock Exchange or any other regulatory or self-regulatory requirements.
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The Board will act on the recommendation of the Committee on Corporate Governance no later than 90 days following certification of the stockholder vote for the stockh’lders' meeting at which the incumbent director was not reelected. In considering the Com’ittee's recommendation, the Board is authorized to consider the information and factors considered by the Committee and any additional information and factors as the Board deems relevant to the best interests of the Company. Following the’Board's decision, the Company will promptly file a Current Report on Form 8-K or issue a press release describing the’Board's decision and providing an explanation of the process by which the decision was reached and, if applicable, the reasons for rejecting the tendered resignation. Any incumbent director who tenders his or her resignation pursuant to this Policy in connection with an election of directors will not participate in the Committee on Corporate Gove’nance's or the’Board's consideration of his or her tendered resignation or, except as provided below, in the consideration of any other resignation tendered pursuant to this Policy in connection with that election of directors; provided that any incumbent director may provide to the Committee and/or the Board any information or a statement he or she deems relevant to the Com’ittee's and/or the’Board's consideration of his or her tendered resignation. In the event that a majority of the members of the Committee on Corporate Governance are required to tender their resignation pursuant to this Policy in connection with an election of directors, then, if the number of independent directors who are not required to tender their resignation in connection with an election of directors is three or greater, the Board shall appoint a committee, which shall be comprised of those independent directors selected by the independent directors from amongst themselves, for the purpose of considering the tendered resignations in accordance with the factors described above, and that committee shall make the recommendation contemplated to be made by the Committee on Corporate Governance to the Board under this Policy. Notwithstanding the foregoing, in the event that the number of independent directors who are not required to tender their resignation pursuant to this Policy in connection with an election of directors is less than three, a committee comprised of all independent directors, which shall be appointed by the Board, shall consider and act upon the tendered resignations in accordance with the factors described above; provided that each independent director required to tender his or her resignation pursuant to this Policy shall recuse himself or herself from consideration of his or her resignation. This Policy will be summarized or included in each proxy statement relating to election of directors of the Company.
Reliance Energy Ltd The Audit Committee has the following po:
23. i. to investigate any activity within its terms of reference. 24. ii. to seek any information from any empliii. to obtain
outside legal and professional ad 25. iv. to secure attendance of outsiders with relevant expertise,
Oil & Natural Gas Corporation Ltd The role of the Audit & Ethics Committee includes the following:
a. Overseeing financial reporting processes and the disclosure of financial information, to ensure that the financial statements are correct, sufficient and credible;
b. Recommending to the Board, audit fees payable to Statutory Auditors appointed by C&AG and approving payments for any other services;
c. Reviewing with management the periodic financial statements/results before submission to the Board, focusing primarily on :
• matters required to be included in the Directors’ Responsibility statement; • any changes in accounting policies and practices; • major accounting entries based on exercise of judgement by the management; • qualifications in draft audit report; • significant adjustments arising out of the audit; • the going concern assumption;
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• compliance with accounting standards; • compliance with listing agreement and legal requirements concerning financial
statements; • any related party transactions i.e. transactions of the company of material nature,
with promoters or the management, their subsidiaries or relatives etc. that may have potential conflict with the interest of the company at large;
d. Reviewing with the management, Statutory Auditors, Govt. Audit and internal audit reports, adequacy of internal control systems and recommending improvements to the management;
e. Reviewing the adequacy of internal and function, approving internal audit plans and efficacy of the functions including the structure of the internal audit department, staffing, reporting structure, coverage and frequency of internal audits;
f. Discussion with internal auditors on any significant findings and follow – up thereon; g. Reviewing the findings of any internal investigations by the internal auditors into the
matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board;
h. Discussion with the Statutory Auditors before the audit commences, the nature and scope of audit, as well as post – audit discussion including their observations to ascertain any area of concern;
i. Reviewing the Company’s financial and risk management policies; j. Reviewing Quarterly Compliance Report confirming adherence to all the applicable laws,
rules guidelines, instructions and internal instructions/manuals including Corporate Governance principles;
k. Reviewing the management discussion and analysis of financial condition and results of operations, statement of significant related party transactions, management letters/letter of internal control weaknesses issued by the statutory auditors, internal audit.
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Whirlpool of India Ltd The functioning and terms of reference of the Audit Committee including the role, powers and duties, quorum for meeting and frequency of meetings, have been devised keeping in view the requirements of section 292A of the Companies Act, 1956 and the Listing Agreement with the Bombay Stock Exchange Ltd. The Company has a multi disciplinary Internal Audit Team which submits its report directly to the Audit Committee on a quarterly basis. The Chairman of the Audit Committee attended the last Annual General Meeting held on August 25, 2006 to answer shareholders queries. The Audit Committee is responsible
26. (i) Effective supervision of the financial reporting process, ensuring financial, accounting and operating controls and compliance with established policies and procedures.
27. (ii) Evaluating the adequacy of internal controls and its effective(iii) Reviewing the financial results of the Company for each quarter/ year before the same are placed at the Board meeting for appr
28. (iv) Providing an avenue for effective communication between the Internal Audit, the Statutory Auditors and the Board of Directors.
Satyam Computer Services Ltd The Audit committee consists of 100% independent and non-executive directors and provides assistance to the Board of directors in fulfilling its oversight responsibilities. The functions of Audit committee include: 1. Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statements are correct, sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees. 3. Approval of engagement of and payment to statutory auditors for any other non-audit services
rendered by the statutory auditors. 4. Reviewing with the management, the quarterly financial statements before submission to the
Board for approval. 5. Reviewing with the management, performance of statutory and internal auditors, and adequacy
of the internal control systems. 6. Reviewing the adequacy of internal audit function, if any, including the structure of the
internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
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Annexure 10
Differences between US and Indian Corporate Governance The NYSE Corporate Governance Standards stipulate that companies must have a majority of independent directors, where as in accordance with the listing agreements of the Indian stock exchanges, it must be an optimum combination of executive and non-executive directors with not less than 50% of the directors being non-executive directors. If the Chairman of the Board is not an executive director, at least one third of the directors should be independent. If the Chairman is an executive director, at least half of the board of the directors of the company should comprise of independent directors. In case of controlled companies (in which more than 50 percent of the voting power is held by an individual, a group of another company), it is not required to have a majority independent board as per NYSE code, where as there no such exemption available to the listed companies in India. Provisions of Clause 49 are applicable to all the listed companies who have entered into listing agreement with the Indian stock exchanges. In the NYSE code, non-management directors must meet at regularly scheduled executive sessions without management, which is not a requirement in India. A listed company according to the NYSE Governance standards, should have a nominating/corporate governance committee composed entirely of independent directors in addition to the Audit Committee, where as in India, constitution of Nomination Committee is non mandatory and need not comprise of independent directors. The nominating/corporate governance committee as per the NYSE governance standards, must have a written charter that addresses certain specific committee purposes and responsibilities and provides for an annual performance evaluation of the committee. In India, since constitution of nomination committee is non-mandatory does not require a charter for such committee and the performance evaluation of the non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated. In the US, companies must have a compensation committee composed entirely of independent directors and it should have written charter that addresses certain specific purposes and responsibilities of the committee and provides for an annual performance evaluation of the committee. In India listed companies may constitute a compensation/remuneration committee consisting of at least three directors, alal of whom should be non-executive directors an independent chairman in order to avoid conflict of interest. These are non-mandatory requirements. The listing requirements in India do not require that the compensation committee have a charter. The annual corporate governance report of the companies generally provides details of the remuneration including brief details of its agreed terms of reference. In US companies, the audit committee must have a written charter that addresses certain specific purposes and responsibilities of the committee, provides for an annual performance evaluation of the committee and sets forth certain minimum duties and responsibilities. In India as per the listing agreement, companies need to have a qualified and independent audit committee and stipulates the powers and role of audit committee. The audit committee needs to have all its members as non-executive directors with at least 2/3 of the members to be independent. All members should be financially literate and at least one member shall have accounting or related financial management expertise. The chairman of the audit committee shall be an independent director. There is no requirement of a written charter. Each listed company in the US, having an internal audit function which is required to provide the management and audit committee with ongoing assessments of the company’s risk management processes and system of internal control. A company may choose to outsource this function to a third party service provider other than its independent auditor. As per Clause 49 fo the listing agreement in India, there is no mandatory requirement of having an internal audit function, however, it is advisable to have being a necessary tool for internal control. Clause 49 defines the role of the audit committee shall inter alia include; “reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit”. According to NYSE standards, companies must adopt and disclose corporate governance guidelines and companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. As per Clause 49 of Indian Listing Agreement, the company needs to adopt of code of conduct/ethics for all the Board of Directors and to all senior management one level below the Board. Annual Report should disclose compliance with the Code by the Board Members and Senior Management. In NYSE standards, CEO of each listed company has to certify on an annual basis that he or she is now aware of any violation by the company of the
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NYSE corporate governance listing standards. This certification as well as that the CEO/CFO certification required under SOX Act of 2002 must be disclosed in the company’s annual report to shareholders. Further, CEO of each listed company must promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of this section. In respect of Indian companies, in addition to the CEO/CFO certification on the true and fair view of financial statements and compliance, are required to submit a quarterly compliance report to the Indian stock exchanges where their shares are listed. A separate section on the corporate governance will form the annual report of the company that gives details of adoption of an compliance with the mandatory clauses and non mandatory clauses. The company has to obtain a certificate issued by the auditors or practicing company secretaries regarding compliance of conditions of corporate governance and annex the same with the director’s report to be sent annually to the shareholders of the company and concerned stock exchanges.
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Annexure 11
Evolution of Corporate Governance 1950s - The Era of Excessive Managerial Power: In the 1950s, two factors combined to bestow enormous power on corporate executives. Market oligopolies created large companies - such as General Motors, General Electric, and IBM that were largely insulated from international competition, while the separation of ownership and control gave managers great leeway to do what they pleased. Critics viewed companies as running "without any discernible controls," and assuming power that could "rival the sovereignty of the state itself."
Response – The Trustbusters Managerial power was curbed by antitrust policy and heightened pressure from international rivals. Most big mergers during this era were barred by the Justice Dept. or the courts, but competition in manufacturing did more to diminish managerial power than all the antitrust decisions of the era.
1960s and 1970s -- The Age of Conglomerates With business conditions conducive to growth, companies morphed into modern-day conglomerates. For a time, they were viewed as a solution to the "separation" problem. Central managers in headquarters would monitor operating managers in far-flung divisions, allocating capital where returns were highest. But ultimately, inefficiencies began to creep into these vast organizations, creating the enemy of profits: Corporate bloat.
Response -- The Hostile Takeover The conglomerate created an opportunity for the market to do what powerful managers wouldn't: Bust up the bloated bureaucracies and sell off the parts. The hostile takeover was celebrated in the 1987 film Wall Street, in which Michael Douglas plays corporate raider Gordon Gekko.
1980s - The Rise of Insider Trading With the explosion in hostile takeovers, insider trading suddenly held out the potential for vast riches. Managers and Wall Street cronies who got wind of a buyout could easily buy up stock before the deal was announced and sell it immediately after at a huge profit. Michael Milken and Ivan Boesky became poster boys for the excesses of the era
Response -- The Stock Option Boom It was about this time that stock options burst on the scene and quickly gained in popularity thanks to favorable accounting treatment and tax laws. To shareholders tired of seeing managers get rich destroying their companies, options promised a solution to the "separation" problem once and for all. By turning managers into owners, options would be an incentive to create shareholder value, not destroy it. At least that was the hope.
1990s -- CEO Pay: Nowhere to Go but Up It didn't quite work out that way. Encouraged by favorable accounting, boards granted options with abandon. And the longest bull market in history converted them into almost unimaginable wealth for top executives. Instead of an incentive to create shareholder value, in many cases they were an incentive to fudge the numbers. In the immediate aftermath of the 1990s, earnings restatements increased dramatically.
Response -- Shareholder Activism As executive pay ballooned, shareholder efforts to rein it in increased, accelerating after investment portfolios evaporated following the market collapse in 2000. At the same time, activists began attacking managerial power on other fronts - pushing for better disclosure, independent boards, and splitting the roles of chairman and CEO
2000s -- The Age of Scandal The collapse of Enron and massive accounting fraud at WorldCom ushered in an age of scandal that would forever tarnish the image of the CEO. A massive regulatory push to curb CEO power -- including the Sarbanes-Oxley Reform Act of 2002 - was met with equal but opposite pushback from the business community.
Response -- The Downsized CEO Directors, auditors, and lawyers emerge from the scuffle with far more power than they had - and CEOs with far less. Emboldened boards topple Fannie Mae's Franklin Raines, Boeing's Harry Stonecipher, Disney's Michael Eisner, Hewlett-Packard's Carly Fiorina, and AIG's Hank Greenberg.
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Annexure 12 Indices of Regulation of Securities Markets
Company Symbol Disclosure requirements
Liability standard
Supervisor characteristics
Rule - making power
Investigative powers
Orders Criminal Sections
Public enforcement
English Legal Origin Australia AUS 0.75 0.66 0.67 1.00 1.00 1.00 0.83 0.90 Canada CAN 0.92 1.00 0.67 0.50 1.00 1.00 0.83 0.80 Hong Kong HKG 0.92 0.66 0.33 1.00 1.00 1.00 1.00 0.87 India IND 0.92 0.66 0.33 0.50 1.00 0.67 0.83 0.67 Ireland IRL 0.67 0.44 0.00 1.00 0.00 0.00 0.83 0.37 Israel ISR 0.67 0.66 0.67 0.00 1.00 1.00 0.50 0.63 Kenya KEN 0.50 0.44 0.33 1.00 0.50 1.00 0.67 0.70 Malaysia MYS 0.92 0.66 0.33 0.50 1.00 1.00 1.00 0.77 New Zealand NZL 0.67 0.44 0.33 0.00 1.00 0.00 0.33 0.33 Nigeria NGA 0.67 0.39 0.67 0.50 0.00 0.00 0.50 0.33 Pakistan PAK 0.58 0.39 0.67 1.00 1.00 0.17 0.08 0.58 Singapore SGP 1.00 0.66 0.33 1.00 1.00 1.00 1.00 0.87 South Africa ZAF 0.83 0.66 0.33 0.00 0.50 0.00 0.42 0.25 Sri Lanka LKA 0.75 0.39 0.33 1.00 0.50 0.00 0.33 0.43 Thailand THA 0.92 0.22 0.67 1.00 1.00 0.33 0.58 0.72 USA USA 1.00 1.00 1.00 1.00 1.00 1.00 0.30 0.90 United Kingdom GBR 0.83 0.66 0.00 1.00 1.00 1.00 0.42 0.68 Zimbabwe ZWE 0.50 0.44 1.00 0.00 0.00 0.08 1.00 0.42 Mean 0.78 0.58 0.48 0.67 0.75 0.57 0.65 0.62 Company Symbol Disclosure
requirements Liability standard
Supervisor characteristics
Rule - making power
Investigative powers
Orders Criminal Sections
Public enforcement
French Legal Origin Argentina ARG 0.50 0.22 0.67 1.00 1.00 0.08 0.17 0.58 Belgium BEL 0.42 0.44 0.00 0.00 0.25 0.00 0.50 0.15 Brazil BRA 0.25 0.33 0.33 1.00 0.50 0.75 0.33 0.58 Chile CHL 0.58 0.33 0.33 1.00 0.75 0.42 0.50 0.60 Colombia COL 0.42 0.11 0.33 1.00 0.75 0.33 0.50 0.58 Ecuador ECU 0.00 0.11 1.00 1.00 0.25 0.08 0.42 0.55 Egypt EGY 0.50 0.22 0.67 0.00 0.25 0.17 0.42 0.30 France FRA 0.75 0.22 1.00 0.50 1.00 1.00 0.33 0.77 Greece GRC 0.33 0.50 0.67 0.00 0.25 0.17 0.50 0.32 Indonesia IDN 0.50 0.66 0.33 1.00 1.00 0.25 0.50 0.62 Italy ITA 0.67 0.22 0.67 1.00 0.25 0.00 0.50 0.48 Jordan JOR 0.67 0.22 0.33 1.00 1.00 0.67 0.00 0.60 Mexico MEX 0.58 0.11 0.00 1.00 0.25 0.00 0.50 0.35 Netherlands NLD 0.50 0.89 0.33 1.00 0.50 0.00 0.50 0.47 Peru PER 0.33 0.66 0.67 1.00 0.75 1.00 0.50 0.78 Philippines PHL 0.83 1.00 0.67 1.00 1.00 1.00 0.50 0.83
220
This table shows the securities laws variables for each country covering the areas of (a) disclosure requirements (b) Liability standards (c) Supervisor characteristics (d) Rule making power of the Supervisor (e) Investigative powers of the Supervisor (f) Orders to issuers, distributors, and accountants (f) Criminal sanctions applicable to directors, distributors, and accountants and (g) Public enforcement
Portugal PRT 0.42 0.66 0.67 1.00 1.00 0.25 0.00 0.58 Spain ESP 0.50 0.66 0.67 0.00 0.50 0.00 0.50 0.33 Turkey TUR 0.50 0.22 0.67 1.00 1.00 0.00 0.50 0.63 Uruguay URY 0.00 0.11 0.67 1.00 0.25 0.50 0.42 0.57 Venezuela VEN 0.17 0.22 0.33 1.00 1.00 0.08 0.33 0.55 Mean 0.45 0.39 0.52 0.79 0.64 0.32 0.40 0.53
221
Company Symbol Disclosure
requirements Liability standard
Supervisor characteristics
Rule - making power
Investigative powers
Orders Criminal Sections
Public enforcement
German Legal Origin Austria AUT 0.25 0.11 0.33 0.00 0.00 0.00 0.50 0.17 Germany DEU 0.42 0.00 0.33 0.00 0.00 0.00 0.50 0.22 Japan JPN 0.75 0.66 0.00 0.00 0.00 0.00 0.00 0.00 Korea KOR 0.75 0.66 0.33 0.00 0.00 0.08 0.33 0.25 Switzerland CHE 0.67 0.44 0.33 1.00 1.00 0.00 0.33 0.33 Taiwan TWN 0.75 0.66 0.33 1.00 1.00 0.17 0.83 0.52 0.60 0.42 0.28 0.33 0.17 0.04 0.42 0.25 Scandinavian Legal Origin Denmark DNK 0.58 0.55 0.00 1.00 0.50 0.33 0.00 0.37 Finland FIN 0.50 0.66 0.67 0.00 0.25 0.17 0.50 0.32 Norway NOR 0.58 0.39 0.00 0.00 0.25 0.33 1.00 0.32 Sweden SWE 0.58 0.28 0.00 1.00 0.25 0.67 0.38 0.50 Mean 0.56 0.47 0.17 0.50 0.31 0.38 0.52 0.38 Mean all countries 0.60 0.47 0.45 0.66 0.60 0.38 0.50 0.52
Source: What Works in Securities Laws? Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer*, Dartmouth College, Yale University, and Harvard University, June 11, 2004