Corporate Governance

“Satyam Vada Dharmam

Chara”
“Forever speak the truth and follow the dharma”

- Taittariya Upanishad
Governance Concept in ‘Ramayana’

To provide “the maximum happiness for the

maximum number of people for the maximum period,
based on the principles of Dharma – righteousness
and moral values.”
- Ayodhya Kand
 Corporate Governance
What is Governance?

“Corporate Governance is the application of best management

practices, Compliance of law in true letter and spirit and
adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders”.

-The Institute of Company Secretaries of India

Purpose of corporate governance is to have a demonstrable

IMPACT on a corporation’s FINANCIAL PERFORMANCE.
 Driving Forces of CG in India
1) Unethical Business Practices
– Security Scams ---Harshad Mehtha Security Scam
• Equity allotments at discount rates to the controlling groups
• Disappearance of Companies (1993-94) - around 4,000
• companies with 25,000 crores without starting business
– Misdeed of Companies
• Plantation, Sheep rearing, etc.

2) Impact of Globalization
– Integration with Foreign Market
– Foreign Investors expectations
– New Business Opportunities --- IT & ITES, BPO etc.,
– New Capital formation – FII, FDI

3) Impact of Privatisation
– New structure of ownership
– Multinational Companies
Brief history of corporate governance
in India
• Unlike South-East and East Asia, the corporate governance initiative
in India was not triggered by any serious nationwide financial,
banking and economic collapse

• The initiative in India was initially driven by an industry association,

the Confederation of Indian Industry

– In December 1995, CII set up a task force to design a voluntary

code of corporate governance.

– The final draft of this code was widely circulated in 1997.

– In April 1998, the code was released. It was called Desirable

Corporate Governance: A Code.

– Between 1998 and 2000, over 25 leading companies voluntarily

followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
and many others
Brief history of corporate governance
in India

• Following CII’s initiative, the Securities and Exchange Board of India

(SEBI) set up a committee under Kumar Mangalam Birla to design a
mandatory-cum-recommendatory code for listed companies

• The Birla Committee Report was approved by SEBI in December 2000

• Became mandatory for listed companies through the listing

agreement, and implemented according to a rollout plan:

– 2000-01: All Group A companies of the BSE or those in the S&P

CNX Nifty index… 80% of market cap.

– 2001-02: All companies with paid-up capital of Rs.100 million or

more or net worth of Rs.250 million or more.

– 2002-03: All companies with paid-up capital of Rs.30 million or

more
Brief history of corporate governance
in India
• Following CII and SEBI, the Department of Company Affairs (DCA)
modified the Companies Act, 1956 to incorporate specific corporate
governance provisions regarding independent directors and audit
committees.

• In 2001-02, certain accounting standards were modified to further

improve financial disclosures. These were:

– Disclosure of related party transactions.

– Disclosure of segment income: revenues, profits and capital
employed.
– Deferred tax liabilities or assets.
– Consolidation of accounts.

• Initiatives are being taken to (i) account for ESOPs, (ii) further
increase disclosures, and (iii) put in place systems that can further
strengthen auditors’ independence.
 Mandated CG guidelines and
disclosures

Board of Directors: frequency of meetings and composition

• Board must meet at least four times a year, with a maximum time
gap of four months between two successive meetings.

• If the chairman of the Company is a non-executive then one-third

of the board should consist of independent directors, and 50%
otherwise.

• ‘Independent’ defined as those directors who, apart from receiving

director’s remuneration do not have any other monetary
relationship or transactions with the company, its promoters,
management or subsidiaries, which in the view of the board may
affect independence of judgment.
 Mandated CG guidelines and
disclosures

Board of Directors: frequency of meetings and composition

• The frequency of board meetings and board committee meetings,

with their dates, must be fully disclosed to shareholders in the
annual report of the company.

• The attendance record of all directors in board meetings and board

committee meetings must be fully disclosed to shareholders in the
annual report of the company.

• Full and detailed remuneration of each director (salary, sitting

fees, commissions, stock options and perquisites) must be fully
disclosed to shareholders in the annual report of the company.

• Loans given to executive directors are capped (no loans permitted

to non-executives), and must be fully disclosed to shareholders in
the annual report of the company.
 Mandated CG guidelines and
disclosures

Board of Directors: information that must be supplied

• Annual, quarter, half year operating plans, budgets and updates.

• Quarterly results of company and its business segments.
• Minutes of the audit committee and other board committees.
• Recruitment and remuneration of senior officers.
• Materially important legal notices and claims, as well as any
accidents, hazards, pollution issues and labor problems.
• Any actual or expected default in financial obligations.
• Details of joint ventures and collaborations.
• Transactions involving payment towards goodwill, brand equity
and intellectual property.
• Any materially significant sale of business and investments.
• Foreign currency and other risks and risk management.
• Any regulatory non-compliance.
 Mandated CG guidelines and
disclosures
Board of Directors: Audit Committee

• Audit Committee is mandatory.

• Must have minimum of three members, all non-executive directors, the

majority of whom are independent.

• Chairman must be an independent director, and must be present at the

annual shareholders’ meeting to answer audit or finance related
questions.

• At least one member must be an expert in finance/accounts.

• Must have at least three meetings per year, including one before
finalisation of annual accounts.

• Must meet with statutory auditors and internal auditors; have the
powers to seek any financial, legal or operational information from the
management; obtain outside legal or professional advice.
 Mandated CG guidelines and
disclosures
Board of Directors: Audit Committee functions

• Oversight of the company’s financial reporting process to ensure that

the financial statement is correct, sufficient and credible
• Appointment / removal of external auditor and fixing of audit fees
• Reviewing with management the annual financial statements before
submission to the board, focusing on:
– Changes in accounting policies and practices
– Major accounting entries
– Qualifications in draft audit report
– Significant adjustments arising out of audit
– The going concern assumption
– Compliance with accounting standards, with stock exchange and
legal requirements
– Any related party transactions
 Mandated CG guidelines and
disclosures
Board of Directors: Audit Committee functions

• Adequacy of internal audit and internal control systems, through

discussion with internal and statutory auditors as well as
management.

• Significant findings, follow-up and action taken reports.

• Discussion with internal and statutory auditors about scope and

design of audits.

• Reviewing financial and legal risks and company’s risk management

policies.

• Examining reasons behind any materially significant default to

creditors, bond-holders, suppliers and shareholders.
 Mandated CG guidelines and
disclosures
Disclosures to shareholders in addition to balance sheet, P&L
and cash flow statement

• Board composition (executive, non-exec, independent).

• Qualifications and experience of directors.

• Number of outside directorships held by each director (capped at director

not being a member of more than 10 board-level committees, and
Chairman of not more than 5).

• Attendance record of directors.

• Remuneration of directors.

• Relationship (familial or pecuniary) with other directors.

• Warning against insider trading, with procedures to prevent such acts.

• Details of grievances of shareholders, and how quickly these were

addressed.

• Date, time and venue of annual general meeting of shareholders.

 Mandated CG guidelines and
disclosures
Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement

• Dates of book closure and dividend payment.

• Details of shareholding pattern.

• Name, address and contact details of registrars and/or share

transfer agents.

• Details about the share transfer system.

• Stock price data over the reporting year, and how the company’s
stock measured up to the index.

• Financial effects of stock options.

• Financial effects of any share buyback.

• Financial effects of any warrants that are to be exercised.

• Chapter reporting corporate governance practices

 Mandated CG guidelines and
disclosures
Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement

• Detailed chapter on Management Discussion and Analysis focusing

on markets, operations, finances, accounts, risks, opportunities and
threats, internal control systems.

• Consolidated financial statement, incorporating accounts of all

subsidiaries (over 50% shares held by reporting company).

• Details of all significant related party transactions.

• Detailed segment reporting (revenues, costs, operating profits and

capital employed).

• Deferred tax liabilities and assets and debit/credit in the P&L for the
reporting year
Recent Misconducts: The List Goes On…

• Computer Associates:
– Artificially inflated revenue and improperly rewarded top
executives.
• CMS Energy
– Overstated revenues in 2000 and 2001 thru ‘round trip’ energy
trades?
• Dynegy
– Transactions to cut taxes and artificially increase cash flow ?
• Kmart
– Suspected improper accounting for vendor allowances
• Lucent Technologies
– Adjusted fiscal 2000 revenues by $679 million.
• Several more names, respected world-over
– AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone
Systems, Microstrategy, Mirant, Network Associates, Reliant
Resources, Vivendi Universal, Xcel Energy, Xerox.
Corporate Mis-Governance
 Theories of Corporate Governance

• Anglo-American model

• German model of CG

• Japanese model of CG
&
Infosys Technologies: The Best among
Indian Corporates
• As per the Credit Lyonnais Securities Analysis (CLSA), the
corporate governance ratings of the Software firms are higher than
those of other Indian firms.

• Infosys, based in Bangalore, is a publicly held, ISO 9001 certified

company offering information technology consulting & software
services.

• The software offered include application development, E-

Commerce & Internet Consulting, Software Maintenance.

• Respected across the country, with very strong systems, high

ethical values & a nurturing working atmosphere.

• Net income of US 1,155 million and revenue of US 4,176 million.

• At present having US 20.4 billion market capitalisation.

 Achievements

• Voted as the Best Managed Company in Asia.

• Biggest exporters of Software.

• First to follow the US Generally Accepted

Accounting Principles before going for Nasdaq
listing in 1991.

• Championed Corporate Governance in India.

Narayana Murthy’s Global Strategy

1) Global Delivery Model – Producing where it is most cost

effective to produce & selling where it is most profitable to sell.

2) Moving up the Value Chain – Getting involved in a

software development project at the earliest stage of its life
cycle.

3) PSPD Model – Predictability of Revenues, Sustainability of

Revenues, Profitability, De-risking.
ICSI National Award for Excellence in
Corporate Governance

Best Governed Companies

 Concluding Observations

• Code of CG should be redesigned to reflect international best

practices

• Stringent enforcement of Law

• More effective coordination and cooperation between SEBI, DCA

• CG mechanism should be flexible and suitable

• Overall ethical values in all segments should be promoted for

effective

• accounting, auditing, disclosure and transparent system.

 GROUP-8
WINNING GROWING
WINNING
EMPLOYEES
EMPLOYEES
GROWING
INVESTORS
INVESTORS Debojit Roy – H66
Sritanu Das Mahapatra – H57
Abhisek Sahu – H3
Krishnakant Pandey – H25
DELIGHTED
HAPPY
HAPPY Biswajit Ghosh – H12
DELIGHTED SOCIETY
CUSTOMERS SOCIETY
CUSTOMERS

SATISFIED
TRUSTED SATISFIED
TRUSTED GOVERNMENT AND
SUPPLIERS GOVERNMENT AND
SUPPLIERS REGULATORS
REGULATORS