Corporate Governance Committees

(Lesson-10: BECG)

Prof. C. Anand Faculty IBS, Hyderabad

Contents
This deals with:1. Introduction to Corporate Committees 2. Indian Committees 3. Foreign Committees

Governance

1. Introduction to Corporate Governance Committees (CGCs)

Codes: Codes are a set of written rules, which are accepted as general principles which state how people in a particular organization or a country should behave. Regulations: A regulation is an official rule that lay down how things should be done. CGCs have developed several CG codes and regulations which are intended to control, guide or manage the behavior or conduct of individuals working in corporates/organizations.

Important Reports on CG published by CG Committees:

Indian Committees: 1. Kumara Mangalam Birla Committee 2. Ganguly Committee 3. Naresh Chandra Committee 4. CII Committee B. Foreign Committees: 1. OECD Committee 2. Cadbury Committee C. Companies Act (Legal Framework for CG)
A.
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1. Kumara Mangalam Birla Committee Report (KMBCR)

KMB Committee was instituted by SEBI in 1999 to suggest measures to promote and raise the standards of CG in India. Objectives: 1. To suggest amendments to listing agreements by cos. with SEs and other measures and improving CG in listed cos. regarding disclosures and responsibilities of independent/outside directors. 2. Draft a code of best practices. 3. To suggest safeguards within cos. to deal with insider information and insider trading.
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Recommendations of KMBC Report

KMBC identified the shareholders, Board & Mgmt. as the constituents that have a key role to play in CG and tried to identify their roles & responsibilities in ensuring effective CG. Its important recommendations are as follows:1. Board should have an optimum combination of both Executive and Non-Executive Directors and at least 50% of Board should comprise Non-EDs and one-third of Board should comprise of independent directors where Chairman is nonexecutive and at least half of the Board should be independent in case of Executive Chairman.
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Recommendations (Contd.)

of

KMBC

Report

2. A qualified & independent Audit Committee should be appointed to enhance financial disclosures and transparency. 3. A Remuneration Committee for deciding remuneration and compensation package including pension rights to EDs. 4. A Board Committee to look into shareholder issues, share transfers & redressal of complaints. 5. CG section of Annual Report (AR) to deal with remuneration paid to directors and on level of compliance by the co.. 6. Board Meetings should be held at least 4 times in a year with a maximum time gap of 4 months between 2 meetings.
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Recommendations of KMBC Report (Contd.)

7. All co. related information like qly results, etc. may be put on cos website. 8. No director should be a member in more than 10 committees or act as Chairman of more than 5 committees across all cos. in which he is a director. 9. Disclosures to be made to the Board by the management relating to all material, financial & commercial transactions, where they have personal interest. 10. Half-yearly declaration of financial performance should be sent to each household of shareholders.
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Recommendations of KMBC Report (Contd.)

11. FIs can have nominees on the boards of borrower cos., to protect their interests as creditors. The Nominee Directors should take an active interest in the activities of the Board and assume equal responsibilities, as any other director on the Board. 12.A separate section on compliance with mandatory recommendations should form part of the report and details of non-compliance should be highlighted. 13. A certificate from the auditors on compliance should form part of the AR and copies of ARs should be sent to the SEs.

Cadbury Committee Report (CCR)

Under the Chairmanship of Adrian Cadbury (May 1991), a committee was set up by Financial Reporting Council, London Stock Exchange to look into the financial aspects of Corporate Governance. It submitted its report on May 27, 1992, whose recommendations are as follows:There should be separation of roles of Chairman and CE. Non-executive directors should act independently while giving judgments on issues of strategy, performance, allocation f resources and designing codes of conduct. Majority of directors should be independent nonexecutive directors and should not have any financial interests in the company.
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1. 2.

3.

Cadbury Committee Report (contd.)

4. The directors term should not exceed 3 years, which can be extended with shareholders approval. 5. There should be full transparency relating to directors emoluments. There should be a judicious mix of salary and performance related pay. 6. A Remuneration Committee made of fully or largely of non-executive directors, should decide on the pay of the executive directors. 7. The interim company report should give the balance sheet information and be reviewed by the auditor. 8. There should be a professional and objective relationship between the board and executives.
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Cadbury Committee Report (contd.)

10. Information regarding the audit fee should be made public and there should be regular rotation of auditors. The recommendations of CCR were widely accepted by the corporates in UK and they became a reference point for many other committees, which were set up by various governments all over the world.

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OECD Report Recommendations (ORR)

OECD is an international organization for economic co-operation and development. In June, 1998, the OECD constituted an Ad-hoc Task Force on CG, with key representatives from all member countries, and other international organizations including World Bank, and provided recommendations (principles) primarily aimed at governments, but also provided guidance to SEs, investors, private corporations, national commissions on corporate governance as they deal with best practices, listing requirements and codes of conduct. The principles by OECD fall into 6 broad areas.
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OECD Report Recommendations (Contd.)

1. 2.

Ensuring the basis for an effective CG The rights of shareholders and key
ownership functions

3. 4. 5. 6.

The equitable treatment of shareholders The role of stakeholders Disclosure and transparency The responsibility of the board
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OECD Report Recommendations (Contd.)

Ensuring the basis for an effective CG: (For promoting transparent and efficient markets, be consistent with rule of law, and for articulating the division of responsibility among different supervisory, regulatory and enforcement authority) 2. The rights of shareholders and key ownership functions:
1.

(CG shall protect and facilitate the exercise of shareholders rights) 3. The equitable treatment of shareholders: ( CG shall ensure equitable treatment of all shareholders including minority, foreign shareholders including redressal for violation of their rights)
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OECD Report Recommendations (Contd.)

4. The role of stakeholders: (CG shall recognize rights of stakeholders cooperation between stakeholders and corporation) 5. Disclosure and transparency: (Timely and accurate disclosures as to all material matters final situation, performance, ownership and governance) 6. Responsibility of the Board: (1. Strategic guidance of the company; 2. Effective monitoring of management; and 3. Boards accountability to shareholders)
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OECD Report Recommendations (Contd.)

Thus the above 6 principles advocate for the following three:(1) For sound financial system (ii) Basis for cooperation between OECD and NonOECD countries (iii) To underpin the CG component of World Bank, and IMF reports on the observance on Standards and Codes (ROSE).

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