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PROJECT REPORT ON
GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED
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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED
INTRODUCTION...............................................................................................................................3 OBJECTIVE........................................................................................................................................3 WHAT IS CORPORATE GOVERNANCE:.......................................................................................3 CODE OF CONFEDERATION OF INDIAN INDUSTRIES (CII)...................................................5 REPORT OF THE KUMAR MANGALAM BIRLA COMMITTEE ................................................6 THE CADBURY COMITEE – THE CODE OF BEST PRACTICE ...............................................46 NON-EXECUTIVE DIRECTORS................................................................................................50 DIRECTORS RESPONSIBILITY....................................................................................................55 INSIDER TRADING.........................................................................................................................56 CASE STUDY:..................................................................................................................................60
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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED
INTRODUCTION Corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomenons. As a result different people have come up with different definitions that basically reflect their special interest in the field. It is hard to see that this 'disorder' will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions rather than just mentioning one definition. OBJECTIVE
To attain highest standard of procedures and practices followed by the corporate world so as to have transparency in it’s functioning with an ultimate aim to maximise the value of various stakeholders.
WHAT IS CORPORATE GOVERNANCE:
Joanna Sheiton, (OCED) described “corporate governance as a set of relationships between a company’s management, its Board of directors, shareholders and other stakeholders”. In a broader sense, he defined good corporate governance as “important for overall market confidence, the efficiency of international capital allocation, the renewal of countries’ industrial bases, and ultimately nation’s overall wealth and Welfare”. The framework for corporate governance is not only an important component affecting the longterm prosperity of companies, it is a leading species of large genus namely, National Governance, Humane Governance, societal governance, economic governance and political governance.
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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Government provides necessary conditions or environment to Corporates to operate. However. Page 4 of 62 . they are not set in concrete and must be adjusted to reflect the specific circumstances and needs of individual organizations. It is to be noted that new technologies are on the anvil e. Finally. However. Moreover. Information Technology thereby improving the speed of communication and dearth of distance. there is no single model of good corporate governance. investment and competition policy. customers and suppliers.” The “one size fits all” approach has also been rejected by the OECD. Although the general principles are widely accepted. the commitments towards employees. The Business Roundtable states: “Good corporate governance is not a ‘one size fits all proposition. a corporation’s practices will evolve as it adapts to changing situations. but also the contractual covenants and insolvency powers of the debt holders. Kenneth Scott of Stanford Law School described. accounting standards. the regulations and the statutes. flexibility and adaptability in corporate governance.g. has advocated the need for pluralism. instead. enhancement of productivity and optimal use of available resources by corporate sector. value can be added by achievements of technological achievement. ‘corporate governance’ as to include every force that bears on the decision-making of the firm. Prof. and a wide diversity of approaches to corporate governance should be expected and entirely appropriate. In addition. the firm’s decisions are powerfully affected by competitive conditions in the various markets in which it operates. labour market policies and patterns of equity ownership also have a strong bearing on corporate performance. Despite the various attempts to define corporate governance and its elements. The quality of macroeconomic management and the state of competition in product and markets are no less important in having a bearing on the performance of the company. business ethics and corporate awareness of the environment standards and other societal interests of the communities in which they operate can also have an impact on the reputation and long-term success of a company. The legal system. that would encompass not only the control rights of stockholders. the competitiveness of the market is influenced by a range of government policies such as trade. which.
the CII said that the board members and senior management should: • Act in the best interests of.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED The OECD has recently reinforced this view and stated that ‘to remain competitive in a changing world. • Act honestly. corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities”. • Will deal fairly with all stakeholders. CODE OF CONFEDERATION OF INDIAN INDUSTRIES (CII) The Confederation of Indian Industry has proposed that a company’s board members should conform to the higher standards of corporate governance in order to protect investors’ interests. rules and regulations. Page 5 of 62 . In a code of conduct released today. • Act in good faith without allowing their independent judgment to be subordinated. fairly. • Not use any information or opportunity in a manner that would be detrimental to the company’s interests. ethically and with integrity. • Disclose any personal interest that they may have regarding any matters that may come before the board and abstain from discussion. and fulfill their fiduciary obligations to the company. voting or otherwise influencing a decision on any matter in which the concerned director has or may have such an interest. • Comply with all applicable laws.
The concept of corporate governance has been attracting public attention for quite some time in India.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • Abstain from discussion. The same applies to recent high-profile financial reporting failures even among firms in the developed economies. REPORT OF THE KUMAR MANGALAM BIRLA COMMITTEE Preface 1. In an age where capital flows worldwide. voting or otherwise influencing a decision on any matters that may come before the board in which they may have a conflict or potential conflict of interest. which leads firms to increasingly shift to financial markets as the pre-eminent source for capital. just as quickly as information. they play a significant Page 6 of 62 . directors and its financial reporting system has never been more crucial. independent oversight. Progressive firms in India have voluntarily put in place systems of good corporate governance. risks its very stability and future health. Internationally also. As the boards provide stewardship of companies. while this topic has been accepted for a long time. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. • Respect the confidentiality of information relating to the affairs of the company acquired in the course of their service as directors or senior management. • Not use confidential information for personal advantage or for the advantage of any other entity. As a result. more and more people are recognizing that corporate governance is indispensable to effective market discipline. a company that does not promote a culture of strong.1 It is almost a truism that the adequacy and the quality of corporate governance shape the growth and the future of any capital market and economy. Focus on corporate governance and related issues is an inevitable outcome of a process. the financial crisis in emerging markets has led to renewed discussions and inevitably focused them on the lack of corporate as well as governmental oversight. This growing consensus is both an enlightened and a realistic view. • Help create and maintain a culture of high ethical standards and commitment to compliance. In the process. the link between a company's management.
Without financial reporting premised on sound. To prevent this from happening.3 Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is an important instrument of investor protection.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED role in their efficient functioning. The principle should be ‘disclose or desist’. insiders abstain from transacting in the securities of the company. The rules also cover the dealing in the securities of their companies by the insiders. with higher valuations. Financial institutions. 1.4 Another important aspect of corporate governance relates to issues of insider trading. and reward such companies. Mutual Funds and concerned professionals who may have Page 7 of 62 . Studies of firms in India and abroad have shown that markets and investors take notice of wellmanaged companies. Intermediaries. and take unfair advantage of the resulting information asymmetry. It is the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. Corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public. In other words they have a system of good corporate governance. It is important that insiders do not use their position of knowledge and access to inside information about the company. reporting requirements and rules also goes beyond Corporates to other entities in the financial markets such as Stock Exchanges. reporting requirements.2. A common feature of such companies is that they have systems in place. while remaining within a framework of effective accountability. there are rules for reporting of transactions by directors and other senior executives of companies. respond positively to them. code of conduct and specific rules for the conduct of its directors and employees and other insiders. activity in their own shares and net year to year changes to these in the annual report. However. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures. which allow sufficient freedom to the boards and management to take decisions towards the progress of their companies and to innovate. capital markets will collapse upon themselves. the need for such procedures. especially directors and other senior executives. during sensitive reporting seasons. For example. in many countries. honest numbers. 1. as well as for a report on their holdings. 1. confidentiality norms. It is the muscle that moves a viable and accessible financial reporting structure.
For the nonmandatory recommendations. the recommendations in their respective regulatory or control framework. This will enable shareholders to know. the roles of the various committees of the board. 1. because they are the raison deter for corporate governance and also the prime constituency of SEBI. Page 8 of 62 . In a sense both these points of view are related and during the discussions at the meetings of the Committee. a report on corporate governance delineating the steps they have taken to comply with the recommendations of the Committee. For reasons stated in the report. but not later than March31. where the companies. the role of management. This is being dealt with in a comprehensive manner.5 The issue of corporate governance involves besides shareholders. all other stakeholders. 2001. under the Chairmanship of Shri Kumar Mangalam Birla. The other way of looking at corporate governance is from the contribution that good corporate governance makes to the efficiency of a business enterprise. through the listing agreement. in which they have invested.6 At the heart of the Committee's report is the set of recommendations which distinguishes the responsibilities and obligations of the boards and the management in instituting the systems for good corporate governance and emphasis’s the rights of shareholders in demanding corporate governance. stand with respect to specific initiatives taken to ensure robust corporate governance. there was a clear convergence of both points of view. The implementation will be phased. Certain categories of companies will be required to comply with the mandatory recommendations of the report during the financial year 2000-2001. The control and reporting functions of boards. The companies will also be required to disclose separately in their annual reports. Many of the recommendations are mandatory. It has been recommended that SEBI may write to the appropriate regulatory bodies and governmental authorities to incorporate where necessary. by a separate group appointed by SEBI. and others during the financial years 2001-2002 and 2002-2003. the Committee hopes that companies would voluntarily implement these. to the creation of wealth and to the country’s economy.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED access to inside information. 1. The Committee's recommendations have looked at corporate governance from the point of view of the stakeholders and in particular that of the shareholders and investors. all assume special significance when viewed from this perspective. these recommendations are expected to be enforced on the listed companies for initial and continuing disclosures in a phased manner within specified dates.
with better and more transparent reporting practices. The Constitution of the Committee and the Setting for the Report 2. on preferential basis at preferential prices. they would raise the standards in corporate governance. but there are many more. significantly increase its effectiveness and ultimately serve the objective of maximising shareholder value.7 The Committee recognised that India had in place a basic system of corporate governance and that SEBI has already taken a number of initiatives towards raising the existing standards. There is also an increasing concern about standards of financial reporting and accountability. The Committee also recognised that the Confederation of Indian Industries had published a code entitled "Desirable Code of Corporate Governance" and was encouraged to note that some of the forward looking companies have already reviewed or are in the process of reviewing their board structures and have also reported in their 1998-99 annual reports the extent to which they have complied with the Code. disproportionate to market valuation of shares.1 There are some Indian companies. especially after losses suffered by investors and lenders in the recent past.8 The Committee however recognised that a system of control should not so hamstring the companies so as to impede their ability to compete in the market place. whose practices are a matter of concern. which could have been avoided. leave alone the future projections at the time of raising money. which have voluntarily established high standards of corporate governance. which have raised capital from the market at high valuations and have performed much worse than the past reported figures. Another example of bad governance has been the allotment of promoter’s shares.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 1. strengthen the unitary board system. Page 9 of 62 . The Committee however felt that under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful. The Committee believes that the recommendations made in this report mark an important step forward and if accepted and followed by the industry. 1. Investors have suffered on account of unscrupulous management of the companies. at least in respect of essential features of corporate governance.
the implementation and inadequacy of penal provisions have left a lot to be desired. delay in dispatch of share certificates and dividend warrants and non-receipt of dividend warrants. which are not paying adequate attention to the basic procedures for shareholders’ service.2 There are also many companies. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. While enough laws exist to take care of many of these investor grievances. need was felt for a comprehensive approach at this stage of development of the capital market. companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency. 2. and it is therefore a priority on SEBI’s agenda. SEBI has been regularly receiving large number of investor complaints on these matters.4 Securities market regulators in almost all developed and emerging markets have for sometime been concerned about the importance of the subject and of the need to raise the standards of corporate governance.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED leading to further dilution of wealth of minority shareholders. many of these companies do not pay adequate attention to redress investors’ grievances such as delay in transfer of shares. The financial crisis in the Asian markets in the recent past have highlighted the need for improved level of corporate governance and the lack of it in certain countries have been mentioned as one of the causes of the crisis. To further improve the level of corporate governance. Indeed corporate governance has been a widely discussed topic at the recent meetings of the International Organisation of Securities Commissions (IOSCO). for example. efficiency and integrity. 2. This practice has however since been contained. to accelerate the adoption of globally acceptable practices of corporate governance. Besides in an environment in which emerging markets increasingly compete for global capital.3 Corporate governance is considered an important instrument of investor protection. 2. Page 10 of 62 . Raising standards of corporate governance is therefore also extremely relevant in this context.
the Combined Code of the London Stock Exchange. the OECD Code on Corporate Governance and The Blue Ribbon Committee on Corporate Governance in the US. The Committee also took note of the various steps already taken by SEBI for strengthening corporate governance. the CII has published a Code of Corporate Governance. 1999 under the Chairmanship of Shri Kumar Mangalam Birla. to draft a code of corporate best practices.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 2. • Page 11 of 62 . responsibilities of independent and outside directors. and c. The Committee’s membership is given in Annexure 1 and the detailed terms of the reference are as follows: a. as corporate governance frameworks are not exportable. b. while the Committee drew upon these documents to the extent appropriate. In preparing this report. some of which are: • strengthening of disclosure norms for Initial Public Offers following the recommendations of the Committee set up by SEBI under the Chairmanship of Shri Y H Malegam. the Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7. in areas such as continuous disclosure of material information. to suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies. In India. 2. the Report of the Greenbury Committee.5 In the above mentioned context. to suggest safeguards to be instituted within the companies to deal with insider information and insider trading. manner and frequency of such disclosures. member SEBI Board. providing information in directors’ reports for utilisation of funds and variation between projected and actual use of funds according to the requirements of the Companies Act. inclusion of cash flow and funds flow statement in annual reports . both financial and non-financial. the primary objective of the Committee was to view corporate governance from the perspective of the investors and shareholders and to prepare a Code to suit the Indian corporate environment. to promote and raise the standards of Corporate Governance.6 A number of reports and codes on the subject have already been published internationally – notable among them are the Report of the Cadbury Committee.
transparency and equality of treatment for all stakeholders. • • • • 2. puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to the stakeholders. to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of Management to it. in a transparent fashion.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • • declaration of quarterly results. and issue of regulations providing for a fair and transparent framework for takeovers and substantial acquisitions. mandatory appointment of compliance officer for monitoring the share transfer process and ensuring compliance with various rules and regulations. It is accountable to the stakeholders and directs and controls the Management. It stewards the company. issue of guidelines for preferential allotment at market related prices. The shareholders’ role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information. Page 12 of 62 . of the activities and progress of the company. timely disclosure of material and price sensitive information including details of all material events having a bearing on the performance of the company. namely. dispatch of one copy of complete balance sheet to every household and abridged balance sheet to all shareholders. 2. their roles and responsibilities as also their rights in the context of good corporate governance. the Board of Directors and the Management and has attempted to identify in respect of each of these constituents. Fundamental to this examination and permeating throughout this exercise is the recognition of the three key aspects of corporate governance. The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board.7 The Committee has identified the three key constituents of corporate governance as the Shareholders. sets its strategic aim and financial goals and oversees their implementation.8 The pivotal role in any system of corporate governance is performed by the board of directors. accountability.
Besides. academicians. and investor associations.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 2. 2. stock exchanges. Association of Mutual funds of India.12 The Committee has received comments from most of the above groups. and several eminent persons in the Indian capital market. The Institute of Chartered Accountants of India. These matters are discussed in greater detail in Para 12. the Committee held meetings with the representatives of the Chambers of Commerce. Institute of Company Secretaries of India. financial institutions. Malegam (who is also a member of this Committee) is examining these issues on a continuing basis.9 Crucial to good corporate governance are the existence and enforceability of regulations relating to insider information and insider trading. A separate committee appointed by SEBI under the Chairmanship of Shri Y. Sir Adrian Cadbury. Separately. and investor associations. the Association of Merchant Bankers of India. foreign investors. These matters are being currently examined separately by a Group appointed by SEBI under the Chairmanship of Shri Kumar Mangalam Birla. stock exchanges. This Committee has advised that while in most areas. accounting standards in India are comparable with International Accounting Standards both in terms of coverage and content. 2. The report was also sent to the Chambers of Commerce. The Committee has taken into account the views and comments of these respondents in this final report. have sent detailed comments on the draft report. Page 13 of 62 .11 The Committee’s draft report was made public through the media and also put on the web site of SEBI for comments. in 1991. H. These demand the existence and implementation of proper accounting standards and disclosure requirements. Chairmen of the Financial Institutions. Thus the Committee had the benefit of the views of almost all concerned entities that have a role in corporate governance. K. 2. the Financial Reporting Council and the Accountancy Bodies in the U.1 of this report. A copy of the draft report was also sent to Sir Adrian Cadbury who had chaired the Cadbury Committee on Corporate Governance set up by the London Stock Exchange. there are a few areas where additional standards need to be introduced in India on an urgent basis.10 Adequate financial reporting and disclosure are the corner stones of good corporate governance. experts and eminent personalities in the Indian capital market.
creditors. The Recommendations of the Committee 3. the employees of the company. 4. SEBI. This definition harmonises the need for a company to strike a balance at all times between the need to Page 14 of 62 . Shri P K Bindlish. who together with the investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders. and other stakeholders and with increasing sophistication achieved in capital markets. the government and the society at large. Vice-President Corporate Strategy and Business Development of the Aditya Birla Group. the shareholders. keeping pace with the changing expectations of the investors.13 The Committee puts on record its appreciation of the valuable inputs and painstaking efforts of Shri Anup Srivastava. keeping in view primarily the interests of a particular class of stakeholders. in the preparation of this report. keeping in view the interests of other stakeholder".2 The Committee therefore agreed that the fundamental objective of corporate governance is the "enhancement of shareholder value. Shri Umesh Kumar. It would therefore be necessary that this code also is reviewed from time to time.1 This Report is the first formal and comprehensive attempt to evolve a Code of Corporate Governance. the bankers. customers.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 2.1 Corporate governance has several claimants –shareholders and other stakeholders .which include suppliers. Division Chief. This Report on Corporate Governance has been prepared by the Committee for SEBI. in the context of prevailing conditions of governance in Indian companies. namely. and other officers of the SMDRP department of SEBI. Corporate Governance –the Objective 4. While making the recommendations the Committee has been mindful that any code of Corporate Governance must be dynamic. evolving and should change with changing context and times. shareholders. as well as the state of capital markets.
but as a way of life.3 In the opinion of the Committee. 4. 4. Structures and rules are important because they provide a framework. What counts is the way in which these are put to use. some companies are following exemplary practices. and the willingness shown by the companies themselves in implementing the Code. The extent of discipline. but alone. without the existence of formal guidelines on this subject. while others could be considered as Page 15 of 62 . the imperative for corporate governance lies not merely in drafting a code of corporate governance. will be the crucial factor in achieving the desired confidence of shareholders and other stakeholders and fulfilling the goals of the company. these cannot raise the standards of corporate governance. The Committee is thus of the firm view.4 It follows that the real onus of achieving the desired level of corporate governance. which will encourage and enforce good governance. the stock exchanges have enforced some form of compliance through their listing agreements. The Committee also noted that in most of the countries where standards of corporate governance are high. that the best results would be achieved when the companies begin to treat the code not as a mere structure. Mandatory and non mandatory recommendations 5. lies in the proactive initiatives taken by the companies themselves and not in the external measures like breadth and depth of a code or stringency of enforcement of norms.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Even now. The Committee was of the firm view that mandatory compliance of the recommendations at least in respect of the essential recommendations would be most appropriate in the Indian context for the present. transparency and fairness. 5. but in practicing it.1 The Committee debated the question of voluntary versus mandatory compliance of its recommendations.2 The Committee felt that some of the recommendations are absolutely essential for the framework of corporate governance and virtually form its core.
but body corporates (e. some of the recommendations may also need change of statute. be classified as non-mandatory. private and public sector banks.) incorporated under other statutes.4 The recommendations will apply to all the listed private and public sector companies. in accordance with the time table proposed in the schedule given later in this section. The latter. In the case of others. employees and professionals associated with such companies. 1957 and by amending the listing agreement of the stock exchanges under the direction of SEBI. financial institutions. which are not companies. may. for their enforcement. As for listed entities. The Committee therefore felt that the recommendations should be divided into mandatory and nonmandatory categories and those recommendations which are absolutely essential for corporate governance. management. in accordance with the schedule of implementation. Others.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED desirable. 5. would be less time consuming and would ensure speedier implementation of corporate governance. Besides.g. Compliance with the code should be both in letter and spirit and should always be in a manner that gives precedence to substance over form. such as the Companies Act. their directors. insurance companies etc. The ultimate responsibility for putting the recommendations into practice lies directly with the board of directors and the management of the company. Applicability 5.3 The Committee is of the opinion that the recommendations should be made applicable to the listed companies. and guidelines or directives issued by the relevant regulatory authorities. for the time being. which are either desirable or which may require change of laws. the recommendations will apply to the extent that they do not violate their respective statutes. can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. enforcement would be possible by amending the Securities Contracts (Regulation) Rules. Page 16 of 62 .
or net worth of Rs 25 crore or more any time in the history of the company.1 The board of a company provides leadership and strategic guidance.but not later than March 31. which are included either in Group ‘A’ of the BSE or in S&P CNX Nifty index as on January 1. It also recognises that some companies. 2000. An effective corporate governance system is one. 2003 by all the entities which are presently listed. However to comply with the recommendations. 2001 by all entities. which allows the board to perform these dual functions efficiently.5 The Committee recognises that compliance with the recommendations would involve restructuring the existing boards of companies.but not later than March 31. especially the smaller ones. The board of Page 17 of 62 . • Within financial year 2001-2002. 10 crore and above. at the time of listing. objective judgment independent of management to the company and exercises control over the company. the board’s attitude and the manner it translates its awareness and understanding of its responsibilities. 5. • Within financial year 2002-2003. these companies may have to begin the process of implementation as early as possible. 2002 by all the entities which are presently listed. These companies would cover more than 80% of the market capitalisation. may have difficulty in immediately complying with these conditions. The measure of the board is not simply whether it fulfils its legal requirements but more importantly.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Schedule of implementation 5.6 The Committee recommends that while the recommendations should be applicable to all the listed companies or entities. with paid up share capital of Rs 3 crore and above Board of Directors 6.but not later than March 31. there is a need for phasing out the implementation as follows: • • By all entities seeking listing for the first time. while remaining at all times accountable to the shareholders. with paid up share capital of Rs. Within financial year 2000-2001.
Till recently. director-personnel) are involved in the day to day management of the companies. risk policy. acquisitions and divestitures.2 The board directs the company. It controls the company and its management by laying down the code of conduct. There is a significant body of literature on corporate governance. 6. setting performance objectives. the non-executive directors bring external and wider perspective and independence to the decision making. which is the responsibility of the management. However. protecting and enhancing wealth and resources for the company. overseeing the process of disclosure and communications. The Committee took note of this while framing its recommendations on the structure and composition of the board. and overseeing major capital expenditures. Composition of the Board of Directors 6. annual budgets and business plans. which has guided the composition. executive directors and providing checks and balances to reduce potential conflict between the specific interests of management and the wider interests of the company and shareholders including misuse of corporate assets and abuse in related party transactions. chief executive. strategies. taking into account the interests of stakeholders. it is not involved in day-to-day management of the company. The executive directors (like director-finance. change in financial control and compliance with applicable laws. ensuring that appropriate systems for financial control and reporting and monitoring risk are in place. monitoring implementation and corporate performance. evaluating the performance of management. by formulating and reviewing company’s policies. it has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company. major plans of action. and independent directors if chosen were also handpicked thereby ceasing to be independent. This Page 18 of 62 . and reporting to them on the performance in a timely and transparent manner.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED directors of a company thus directs and controls the management of a company and is accountable to the shareholders. structure and responsibilities of the board.3 The Committee is of the view that the composition of the board of directors is critical to the independent functioning of the board. The composition of the board is important in as much as it determines the ability of the board to collectively provide the leadership and ensures that no one individual or a group is able to dominate the board. It is accountable to the shareholders for creating.
its management or its subsidiaries. Independent directors and the definition of independence 6. A conscious distinction has been made by the Committee between two classes of non-executive directors.Further. (promoters being defined by the erstwhile Malegam Committee).5 among the non-executive directors are independent directors.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED has undergone a change and increasingly the boards comprise of following groups of directors promoter director. namely. who have a key role in the entire mosaic of corporate governance. and which should be sufficiently broad and flexible. Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company. The Committee was of the view that it was important that independence be suitably. all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report. It was agreed that "material pecuniary relationship which affects independence of a director" should be the litmus test of independence and the board of the company would exercise sufficient degree of maturity when left to itself. correctly and pragmatically defined.6 The Blue Riband Committee of the USA and other Committee reports has laid considerable stress on the role of independent directors. The definition should bring out what in the view of the Committee is the touchstone of independence. to determine whether a director is independent or not. The Committee therefore agreed on the following definition of "independence”. those who are independent and those who are not. The law however does not make any distinction between Page 19 of 62 . a part of whom are independent. its promoters. so that the definition itself does not become a constraint in the choice of independent directors on the boards of companies. 6. which in the judgment of the board may affect their independence of judgement. executive and non executive directors.
help bring an independent judgment to bear on board’s deliberations especially on issues of strategy. and the ability to ask tough questions. This is a mandatory recommendation. leadership qualities and the ability to think strategically.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED the different categories of directors and all directors are equally and collectively responsible in law for the board’s actions and decisions. therefore. The number of independent directors (independence being as defined in the foregoing paragraph) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman. preparation and attendance. and the following structure and composition of the board and of the committees of the board. suggested the above definition of independence. a sense of accountability. having financial literacy. The Committee is also of the view that it is important that adequate compensation package be given to the non-executive independent directors so that these positions become sufficiently financially attractive to attract talent and that the non executive directors are sufficiently compensated for undertaking this work. The Committee is of the view that the non-executive directors. The Committee has. performance.e. 6. those who are independent and those who are not. The Committee therefore lays emphasis on the caliber of the nonexecutive directors. management of conflicts and standards of conduct. the directors must show significant degree of commitment to the company and devote adequate time for meeting. i.7 Good corporate governance dictates that the board be comprised of individuals with certain personal characteristics and core competencies such as recognition of the importance of the board’s tasks. especially of the independent directors. track record of achievements.9 The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. Besides. 6. Page 20 of 62 .8 Independence of the board is critical to ensuring that the board fulfils its oversight role objectively and holds the management accountable to the shareholders. at least one-third of board should comprise of independent directors and in case a company has an executive chairman. 6. integrity. at least half of board should be independent. experience.
The nominees of the institutions are often chosen from among the present or retired employees of the institutions or from outside. They also argue that there is a further conflict because the institutions are often major players in the stock market in respect of the shares of the companies on which they have nominees. On the other hand those who oppose this practice. Clearly when companies are well managed and performing well. 7.4 The Committee also recommends that when a nominee of the institutions is appointed as a director of the company. there is another set of directors in Indian companies who are the nominees of the financial or investment institutions to safeguard their interest.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 6. while conceding that financial institutions have played a significant role in the industrial development of the country as a sole purveyor of long term credit.3 The Committee recognises the merit in both points of view. the need for protection of institutional interest is much less than when companies are badly managed or under-performing.10 The tenure of office of the directors will be as prescribed in the Companies Act. Those who favour this practice argue that nominee directors are needed to protect the interest of the institutions who are custodians of public funds and who have high exposures in the projects of the companies both in the form of equity and loans. argue that there is an inherent conflict when institutions through their nominees participate in board decisions and in their role as shareholders demand accountability from the board. be subject to the same discipline Page 21 of 62 . he should have the same responsibility. there could be arguments both for and against the continuation of this practice. 7.1 besides the above categories of directors.2 There are arguments both for and against the institution of nominee directors. The Committee would therefore recommend that institutions should appoint nominees on the boards of companies only on a selective basis where such appointment is pursuant to a right under loan agreements or where such appointment is considered necessary to protect the interest of the institution. Nominee Directors 7. 7. In the context of corporate governance.
GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED and be accountable to the shareholders in the same manner as any other director of the company. In particular, if he reports to any department of the institutions on the affairs of the company, the institution should ensure that there exist Chinese walls between such department and other departments which may be dealing in the shares of the company in the stock market.
Chairman of the Board 8.1 The Committee believes that the role of Chairman is to ensure that the board meetings are conducted in a manner which secures the effective participation of all directors, executive and nonexecutive alike, and encourages all to make an effective contribution, maintain a balance of power in the board, make certain that all directors receive adequate information, well in time and that the executive directors look beyond their executive duties and accept full share of the responsibilities of governance. The Committee is of the view that the Chairman’s role should in principle be different from that of the chief executive, though the same individual may perform both roles. 8.2 Given the importance of Chairman’s role, the Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively. This is a non-mandatory recommendation. Audit Committee 9.1 There are few words more reassuring to the investors and shareholders than accountability. A system of good corporate governance promotes relationships of accountability between the principal actors of sound financial reporting – the board, the management and the auditor. It holds the management accountable to the board and the board accountable to the shareholders. The audit committee’s role flows directly from the board’s oversight function. It acts as a catalyst for effective financial reporting.
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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 9.2 The Committee is of the view that the need for having an audit committee grows from the recognition of the audit committee’s position in the larger mosaic of the governance process, as it relates to the oversight of financial reporting. 9.3 A proper and well functioning system exists therefore, when the three main groups responsible for financial reporting – the board, the internal auditor and the outside auditors – form the threelegged stool that supports responsible financial disclosure and active and participatory oversight. The audit committee has an important role to play in this process, since the audit committee is a sub-group of the full board and hence the monitor of the process. Certainly, it is not the role of the audit committee to prepare financial statements or engage in the myriad of decisions relating to the preparation of those statements. The committee’s job is clearly one of oversight and monitoring and in carrying out this job it relies on senior financial management and the outside auditors. However it is important to ensure that the boards function efficiently for if the boards are dysfunctional, the audit committees will do no better. The Committee believes that the progressive standards of governance applicable to the full board should also be applicable to the audit committee. 9.4 The Committee therefore recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency. This is a mandatory recommendation. 9.5 The following recommendations of the Committee, regarding the constitution, functions and procedures of audit committee would have to be viewed in the above context. But just as there is no "one size fits all" for the board when it comes to corporate governance, same is true for audit committees. The Committee can thus only lay down some broad parameters, within which each audit committee has to evolve its own guidelines. Composition 9.6 The composition of the audit committee is based on the fundamental premise of independence and expertise.
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GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED The Committee therefore recommends that
the audit committee should have minimum three members, all being non executive directors, with the majority being independent, and with at least one director having financial and accounting knowledge;
• • •
the chairman of the committee should be an independent director; the chairman should be present at Annual General Meeting to answer shareholder queries; The audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee;
The Company Secretary should act as the secretary to the committee.
These are mandatory recommendations. Frequency of meetings and quorum 9.7 The Committee recommends that to begin with the audit committee should meet at least thrice a year. One meeting must be held before finalisation of annual accounts and one necessarily every six months. This is a mandatory recommendation 9.8 The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors. This is a mandatory recommendation. Powers of the audit committee 9.9 Being a committee of the board, the audit committee derives its powers from the authorisation of the board. The Committee recommends that such powers should include powers:
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Significant adjustments arising out of audit. fixation of audit fee and also approval for payment for any other services. transactions of the company of material nature.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • • • • To investigate any activity within its terms of reference. the Committee recommends that its role should include the following • Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct. Qualifications in draft audit report.e.10 As the audit committee acts as the bridge between the board. To seek information from any employee. Reviewing with management the annual financial statements before submission to the board. sufficient and credible. if it considers necessary. their subsidiaries or relatives etc. with promoters or the management. The going concern assumption. This is a mandatory recommendation. Any related party transactions i. o Page 25 of 62 . To obtain outside legal or other professional advice. Recommending the appointment and removal of external auditor. the statutory auditors and internal auditors. that may have potential conflict with the interests of company at large. Major accounting entries based on exercise of judgment by management. focusing primarily on: o o o o o o o • • Any changes in accounting policies and practices. To secure attendance of outsiders with relevant expertise. Compliance with accounting standards Compliance with stock exchange and legal requirements concerning financial statements. Functions of the Audit Committee 9.
Also post-audit discussion to ascertain any area of concern. Reviewing the adequacy of internal audit function. coverage and frequency of internal audit. 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. • • • Discussion with internal auditors of any significant findings and follow-up thereon. staffing and seniority of the official heading the department. reporting structure. • Discussion with external auditors before the audit commences. The overriding principle in respect of directors’ remuneration is that of openness and shareholders are entitled to a full and clear statement of benefits available to the directors. 10. the directors. including the structure of the internal audit department. • • This is a mandatory recommendation Remuneration Committee of the Board 10.2 For this purpose the Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of Page 26 of 62 . Reviewing the company’s financial and risk management policies. The policy should avoid potential conflicts of interest between the shareholders.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • Reviewing with the management. and the management. Looking into the reasons for substantial defaults in the payments to the depositors. of the nature and scope of audit.1 The Committee was of the view that a company must have a credible and transparent policy in determining and accounting for the remuneration of the directors. share holders (in case of non-payment of declared dividends) and creditors. external and internal auditors. the adequacy of internal control systems. debenture holders.
GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED reference. 10.3 The Committee however recognised that the remuneration package should be good enough to attract. all of whom should be non-executive directors. 10. it would be up to the Chairman to decide who should answer the queries. but not more than necessary for the purpose. The Committee was of the view that it should not be difficult to arrange for a date to suit the convenience of all the members of the committee.6 are non-mandatory. The remuneration committee should be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders. Page 27 of 62 .4 to 10.5 The Committee deliberated on the quorum for the meeting and was of the view that remuneration is mostly fixed annually or after specified periods. retain and motivate the executive directors of the quality required.4 The Committee recommends that to avoid conflicts of interest. to answer the shareholder queries. Composition. All the above recommendations in paragraphs 10. 10. This is a non-mandatory recommendation. the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment.6 The Committee also recommends that the Chairman of the remuneration committee should be present at the Annual General Meeting. of the Remuneration Committee 10. It would not be necessary for the committee to meet very often. The Committee therefore recommends that all the members of the remuneration committee should be present at the meeting. which would determine the remuneration packages of the executive directors should comprise of at least three directors. the remuneration committee. the chairman of committee being an independent director. Quorum etc. However.
severance fees. This is a mandatory recommendation.8 It is important for the shareholders to be informed of the remuneration of the directors of the company. pension etc.2 The Committee therefore recommends that board meetings should be held at least four times Page 28 of 62 . This is a mandatory recommendation. notice period. Stock option details. Details of fixed component and performance linked incentives. The various committees of the board recommended in this report would enable the board to have an appropriate structure to assist it in the discharge of its responsibilities. These need to be supplemented by certain basic procedural requirements in terms of frequency of meetings.1 the measure of the board is buttressed by the structures and procedures of the board. Disclosures of Remuneration Package 10.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 10. Board Procedures 11. and sufficient period of notice for the board meeting as well as circulation of agenda items well in advance. along with the performance criteria. and more importantly. benefits.7 The Committee recommends that the board of directors should decide the remuneration of non-executive directors. salary. Service contracts. stock options. if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report: All elements of remuneration package of all the directors i. the availability of timely information. bonuses. 11. the commitment of the members of the board.e.
This is a mandatory recommendation. This is particularly important from the angle of corporate governance. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED in a year. there should be a ceiling on the maximum number of committees across all companies in which a director could be a member or act as Chairman. Accounting Standards and Financial Reporting 12.1 Over time the financial reporting and accounting standards in India have been upgraded. This however is an ongoing process and we have to move speedily towards the adoption of international standards. This is a mandatory recommendation. The Committee further recommends that to ensure that the members of the board give due importance and commitment to the meetings of the board and its committees. The minimum information as given in Annexure 2 should be available to the board. The Committee took note of the discussions of the SEBI Committee on Accounting Standards referred to earlier and makes the following recommendations: Page 29 of 62 . with a maximum time gap of four months between any two meetings. The Committee recommends that a director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director.
The Committee was informed that the Institute of Chartered Accountants of India had already issued an Exposure Draft on the subject. The Committee was informed that SEBI was already in dialogue with the Institute of Chartered Accountants of India to bring about the changes in the Accounting Standard on consolidated financial statements. This again is an important disclosure. Management 13. The Committee recommends that the Institute of Chartered Accountants of India be requested to issue a standard on deferred tax liability at an early date. Equally in cases of companies with several businesses. the Committee recommends the disclosures set out in Clause 7 of Annexure-4 Treatment of deferred taxation The treatment of deferred taxation and its appropriate disclosure has an important bearing on the true and fair view of the financial status of the company. Disclosure and treatment of related party transactions. Segment reporting where a company has multiple lines of business. The Committee was informed that SEBI was already in dialogue with the Institute of Chartered Accountants of India to introduce the Accounting Standard on segment reporting.1 In the view of the Committee. The Committee recommends that the Institute of Chartered Accountants of India should be requested to finalise this at the earliest.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Consolidation of Accounts of subsidiaries The companies should be required to give consolidated accounts in respect of all its subsidiaries in which they hold 51 % or more of the share capital. is subservient to the board of directors and must operate within the boundaries and the policy Page 30 of 62 . The Institute of Chartered Accountants of India has already issued an Exposure Draft on the subject and should be requested to finalise this at an early date. The Institute of Chartered Accountants of India should be requested to issue the Accounting Standards for consolidation expeditiously. it is important that financial reporting in respect of each product segment should be available to shareholders and the market to obtain a complete financial picture of the company. the over-riding aim of management is to maximize shareholder value without being detrimental to the interests of other stakeholders. The management however. In the interim.
including financial matters and exceptions.3 The Committee believes that the management should carry out the following functions: • Assisting the board in its decision making process in respect of the company’s strategy. 13. It is responsible for translating into action. the Committee recommends that as part of the directors’ report or as an addition there to. code of conduct and performance targets. Setting up and implementing an effective internal control systems. by providing necessary inputs.2 The management comprises the Chief Executive. to maximize the shareholder value. Providing timely. substantive and material information. to the board. While the board is responsible for ensuring that the principles of corporate governance are adhered to and enforced. Managing the day to day affairs of the company to best achieve the targets and goals set by the board. Ensuring compliance of all regulations and laws. the real onus of implementation lies with the management.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED framework laid down by the board. • • • • • • • • 13.4 As a part of the disclosure related to Management. Ensuring timely and efficient service to the shareholders and to protect shareholder’s rights and interests. Co-operating and facilitating efficient working of board committees. Executive-directors and the key managers of the company. This Management Discussion & Page 31 of 62 . accurate. Functions of the Management 13. a Management Discussion and Analysis report should form part of the annual report to the shareholders. Implementing the policies and code of conduct of the board. Implementing and comply with the Code of Conduct as laid down by the board. the policies and strategies of the board and implementing its directives to achieve corporate objectives of the company framed by the board. board-committees and the shareholders. involved in day-to-day activities of the company. It is therefore essential that the board should clearly define the role of the management. policies. commensurate with the business requirements.
including number of people employed. The implementation of this strategy is done by a management team.5 Good corporate governance casts an obligation on the management in respect of disclosures. Outlook.g. The Committee therefore recommends that disclosures must be made by the management to the board relating to all material financial and commercial transactions. that may have a potential conflict with the interest of the company at large (for e. The shareholders are not expected to assume responsibility for the management of corporate affairs. The shareholders have therefore to necessarily delegate many of their responsibilities as owners of the company to the directors who then become responsible for corporate strategy and operations. Opportunities and Threats Segment-wise or product-wise performance.1 The shareholders are the owners of the company and as such they have certain rights and responsibilities. Risks and concerns Internal control systems and their adequacy. Material developments in Human Resources /Industrial Relations front. This relationship therefore brings in the Page 32 of 62 . commercial dealings with bodies.) This is a mandatory recommendation. dealing in company shares. where they have personal interest.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Analysis should include discussion on the following matters within the limits set by the company’s competitive position: • • • • • • • • Industry structure and developments. A company’s management must be able to take business decisions rapidly. This is a mandatory recommendation 13. Discussion on financial performance with respect to operational performance. Shareholders 14. But in reality companies cannot be managed by shareholder referendum. which have shareholding of management and their relatives etc.
4 The Committee recommends that in case of the appointment of a new director or reappointment of a director the shareholders must be provided with the following information: • • • A brief resume of the director.5 The basic rights of the shareholders include right to transfer and registration of shares. A good corporate framework is one that provides adequate avenues to the shareholders for effective contribution in the governance of the company while insisting on a high standard of corporate behavior without getting involved in the day to day functioning of the company. Nature of his expertise in specific functional areas. The shareholders must therefore show a greater degree of interest and involvement in the appointment of the directors and the auditors. Responsibilities of shareholders 14. Indeed. 14. they should demand complete information about the directors before approving their directorship. 14.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED accountability of the boards and the management to the shareholders of the company. This is important especially in the Indian context.2 The Committee believes that the General Body Meetings provide an opportunity to the shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. It follows from the above that for effective participation shareholders must maintain decorum during the General Body Meetings. Page 33 of 62 . and Names of companies in which the person also holds the directorship and the membership of Committees of the board. It is important that the shareholders use the forum of general body meetings for ensuring that the company is being properly stewarded for maximising the interests of the shareholders. This is a mandatory recommendation Shareholders’ rights 14.3 The effectiveness of the board is determined by the quality of the directors and the quality of the financial information is dependent to an extent on the efficiency with which the auditors carry on their duties.
14. sale of assets or divisions of the company and changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership.8 The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months. The company should also keep the shareholders informed of the rules and voting procedures.10 The annual general meetings of the company should not be deliberately held at venues or the timing should not be such which makes it difficult for most of the shareholders to attend. participating and voting in shareholder meetings. 14. and be sufficiently informed on decisions concerning fundamental corporate changes. 14. Page 34 of 62 . they should not only be provided information as under the Companies Act. presentation made by companies to analysts may be put on company’s web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. The company must also ensure that it is not inconvenient or expensive for shareholders to cast their vote.6 The Committee therefore recommends that as shareholders have a right to participate in. This is a mandatory recommendation.7 The Committee recommends that information like quarterly results. 14. electing members of the board and sharing in the residual profits of the corporation. which govern the general shareholder meetings.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED obtaining relevant information on the company on a timely and regular basis. should be sent to each household of shareholders. 14.9 A company must have appropriate systems in place which will enable the shareholders to participate effectively and vote in the shareholders’ meetings. This is a non-mandatory recommendation. but also in respect of other decisions relating to material changes such as takeovers.
In this context. They have or are in the process of becoming majority shareholders in many listed companies and own shares largely on behalf of the retail investors. This virtually makes the concept of corporate democracy illusory. They thus have a special responsibility given the weight age of their votes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights. A detailed list of the matters which should require postal ballot is given in Annexure 3. The delegated authority should attend to share transfer formalities at least once in a fortnight. there should be a requirement which will enable them to vote by postal ballot for key decisions. although the formality of holding the general meeting is gone through.12 The Committee recommends that a board committee under the chairmanship of a nonexecutive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares. The Committee believes that the formation of such a committee will help focus the attention of the company on shareholders’ grievances and sensitise the management to redressal of their grievances. for shareholders who are unable to attend the meetings. This would require changes in the Companies Act. or a committee or to the registrar and share transfer agents.13 The Committee further recommends that to expedite the process of share transfers the board of the company should delegate the power of share transfer to an officer.11 Currently. The Committee was informed that SEBI has already made recommendations in this regard to the Department of Company Affairs. Institutional shareholders 14. It is imperative that this situation which has lasted too long needs an early correction. 14. non-receipt of balance sheet.14 Institutional shareholders have acquired large stakes in the equity share capital of listed Indian companies. in actual practice only a small fraction of the shareholders of that company do or can really participate therein. This is a mandatory recommendation 14.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 14. Page 35 of 62 . This is a mandatory recommendation. non-receipt of declared dividends etc.
complies with the corporate governance code in order to maximise shareholder value. In this context the Committee further recommends that the Securities Contract (Regulation) Act. Ensure that voting intentions are translated into practice Evaluate the corporate governance performance of the company • • Manner of Implementation 15. that as in other countries. that the listing agreement of the stock exchanges be strengthened and the exchanges themselves be vested with more powers. 15. 15. the institutional shareholders put to good use their voting power 14. the policies of the company so as to ensure that the company they have invested in. so that in addition to the above. 1957 for incorporating the mandatory provisions of this Report. so that they can ensure proper compliance of code of Corporate Governance. the mandatory provisions of the recommendations may be implemented through the listing agreement of the stock exchanges. Page 36 of 62 .1 The Committee recommends that SEBI writes to the Central Government to amend the Securities Contracts (Regulation) Rules.16 The Committee is of the view that the institutional shareholders • • • Take active interest in the composition of the Board of Directors Be vigilant Maintain regular and systematic contact at senior level for exchange of views on management. Practices elsewhere in the world have indicated that institutional shareholders can sufficiently influence because of their collective stake.15 Given the weight of their votes.3 The Committee recognises that the listing agreement is not a very powerful instrument and the penalties for violation are not sufficiently stringent to act as a deterrent. the institutional shareholders can effectively use their powers to influence the standards of corporate governance.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 14. The Committee therefore recommends to SEBI. 1956 should be amended. performance and the quality of management.2 The Committee further recommends to SEBI. the concept of listing agreement be replaced by listing conditions. What is important in the view of the Committee is that. strategy.
This will enable the shareholders and the securities market to assess for themselves the standards of corporate governance followed by a company. with a detailed compliance report on Corporate Governance. The same certificate should also be sent to the stock exchanges along with the annual returns filed by the company. 15.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 15. This is a mandatory recommendation End Note There are several corporate governance structures available in the developed world but there is no one structure. A suggested list of items to be included in the compliance report is enclosed. Non-compliance of any mandatory recommendation with reasons thereof and the extent to which the non-mandatory recommendations have been adopted should be specifically highlighted. in Annexure 4.6 The Committee recommends that there should be a separate section on Corporate Governance in the annual reports of companies. There is no "one size fits all" Page 37 of 62 . 15.5 The Committee also recommends that SEBI write to the Department of Company Affairs for suitable amendments to the Companies Act in respect of the recommendations which fall within their jurisdiction. which can be singled out as being better than the others. These could include power of levying monetary penalty both on the company and the concerned officials of the company and filing of winding-up petition etc.4 The Committee recommends that the Securities Contracts (Regulation) Act. This is a mandatory recommendation. which is sent annually to all the shareholders of the company.7 The Committee also recommends that the company should arrange to obtain a certificate from the auditors of the company regarding compliance of mandatory recommendations and annexe the certificate with the directors’ report. 15. 1956 be amended to empower SEBI and stock exchanges to take deterrent and appropriate action in case of violation of the provisions of the listing agreement.
Annexure Names of the Members of the committee 1 Shri Kumar Mangalam Birla. The corporate governance has as many votaries as claimants. The Committee believes that its recommendations will go a long way in raising the standards of corporate governance in Indian firms and make them attractive destinations for local and global capital. Shri Samir Biswas. J Bhagwati. The Committee’s recommendations are not therefore based on any one model but are designed for the Indian environment. Boston Consulting Group 2. IT. Its fundamental objective is not mere fulfillment of the requirements of law but in ensuring commitment of the board in managing the company in a transparent manner for maximising long term shareholder value. Ministry of Finance. as they are the prime constituencies of SEBI. Shri S. Country Head. Department of Company Affairs. Western Region. Government of India 4. Dr. Chairman. 3.P. Corporate governance extends beyond corporate law. the environment in which firms operate in India also changes. President of Institute of Chartered Accountants of India Page 38 of 62 .GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED structure for corporate governance. Chhajed. Regional Director. Effectiveness of corporate governance system cannot merely be legislated by law neither can any system of corporate governance be static. Shri Rohit Bhagat. Aditya Birla group Chairman of the Committee 1. the Committee has primarily focussed its recommendations on investors and shareholders. As competition increases. In this dynamic environment the systems of corporate governance also need to evolve. Secretary. These recommendations will also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millennium. technology pronounces the death of distance and speeds up communication. Among the latter.
The information on recruitment and remuneration of senior officers just below the board level. Shri Pratip Kar. H.Shri Rajesh Shah. S. SEBI 16. President. Show cause. Delhi Stock Exchange Annexure Information to be placed before board of directors 1.Shri Y. dangerous occurrences. R. 4.Shri Kamal Parekh. demand and prosecution notices which are materially important 7.Shri Anand Rathi. R. H. Executive Director.Dr. All India Association of Industries 8. Ex-President.Virender Ganda. Calcutta Stock Exchange (Shri J M Chaudhary – President Calcutta Stock Exchange 13. London Business School 7. Annual operating plans and budgets and any updates.B.N.Shri A K Narayanan. any material effluent or pollution problems. Managing Partner. Chairman and Managing Director. 3. Fatal or serious accidents. S. Quarterly results for the company and its operating divisions or business segments. 11. Sumantra Ghoshal. Page 39 of 62 2 . Executive Director. President of the Stock Exchange. SEBI — Member Secretary 9. 14. 5. Patil. 2. Shri L K Singhvi. Shri Vijay Kalantri. Dr. Sr. 6. Executive Director. Any material default in financial obligations to and by the company.Shri S. Ex-President of Institute of Company Secretaries of India 6. 17. including appointment or removal of Chief Financial Officer and the Company Secretary. 8. Professor of Strategic Management. Raval. Capital budgets and any updates. Managing Director. Shri . SEBI 18. Narayana Murthy. Mumbai 15.Ms D. or substantial nonpayment for goods sold by the company. Infosys Technologies Ltd. Executive Director.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 5. Billimoria & Co 10. Minutes of meetings of audit committee and other committees of the board. Sodhi. Former President of Confederation of Indian Industries. President of Tamil Nadu Investor Association 12. Malegam.Shri N. National Stock Exchange Ltd.
if material. 11. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement. delay in share transfer etc. assets. or intellectual property. of investments. statutory nature or listing requirements and shareholders service such as non-payment of dividend. the ownership and the management of the corporation.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 9. may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company. the strategy. Sale of material nature. 14. 13. including any judgment or order which. brand equity. Voting is the only Page 40 of 62 . Annexure 3 POST BALLOT SYSTEM Rationale Voting at the general meetings of companies is the most valuable and fundamental mechanism by which the shareholders accept or reject the proposals of the board of directors as regards the structure. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement. Any issue. 15. subsidiaries. Transactions that involve substantial payment towards goodwill. 12. Details of any joint venture or collaboration agreement. implementation of Voluntary Retirement Scheme etc. which is not in normal course of business. Non-compliance of any regulatory. Significant labour problems and their proposed solutions. 10. which involves possible public or product liability claims of substantial nature.
further issue of shares. Procedure for the postal ballot Page 41 of 62 . 3. shifting of registered office.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED mechanism available with the shareholders for exercising an external check on the board and the management. objects. 2. Since the shareholders of any large public listed company are scattered throughout the length and breadth of the country. 7. they are unable to physically attend the general meetings of the company to exercise their right to vote on matters of vital importance. it is felt that all the shareholders of a company should be given the right to vote on certain critical matters through a postal ballot system. 4. 1997. etc. 1956. a company is required to obtain the approval of its shareholders for various important decisions such as increase in its authorised capital. buyback of shares. Making a further issue of shares through preferential allotment or private placement basis. matters relating to alteration in the memorandum of association of the company like changes in name. sale of whole or substantially the whole of the undertaking. With a view to strengthening shareholder democracy. where the shareholding or the voting rights of the company exceeds 25%. change in the name. which has also been envisaged in the Companies Bill. 6. Items requiring voting by postal ballot Some of the critical matters which should be decided by this system are – 1. 5. Entering a new business area not germane to the existing business of the company. The system of voting by proxy has also not proved very effective. sale of investments in the companies. Under the present framework of the Companies Act. Variation in the rights attached to class of securities. address of registered office etc. Corporate restructuring. amalgamation and reconstitution.
than as prescribed by law. which will be obtained by the Designated-Person in advance and will be indicated on each prepaid envelope to be used by the members for sending the resolution. 5. The Designated-Person shall thereafter give a report to the Chairman and on the basis of such report the Chairman shall declare the results of the poll. 7. a prepaid postage envelope for facilitating the communication of the assent or the dissent of the shareholders to the resolutions within the said period.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Where a resolution is to be passed in relation to any of the aforesaid items through postal ballot. Annexure 4 Page 42 of 62 . 3. 6. A notice containing a draft of the resolutions and the necessary explanatory statement shall be sent to all members entitled to vote requesting them to send their assent or dissent within a period of thirty days from the date of posting of the letter. in the opinion of the board. 4. The notice shall be sent under certificate of posting and shall include with the notice. a retired judge or any person of repute who. The board of directors shall appoint a Designated-Person to conduct. can conduct the voting process in a fair & transparent manner. 2. The Designated-Person shall ascertain the will of the shareholders based on the response received and the resolution shall be deemed to have been duly passed if approved by members not less in number. All communications in this regard shall be made by and addressed directly to the said Designated-Person. 1. supervise and control the exercise of postal ballot. This person may be the Company Secretary. The envelope by post will be received directly by the Post Office through Box No.
Shareholders Committee. • • • • • Name of non-executive director heading the committee Name and designation of compliance officer Number of shareholders complaints received so far Number not solved to the satisfaction of shareholders Number of pending share transfers Page 43 of 62 . as per format in main report. Remuneration Committee. A brief statement on company’s philosophy on code of governance. 3. Number of Board meetings held. • • • • • Brief description of terms of reference Composition. nominee director. independent non-executive. • • Attendance of each director at the Board meetings and the last AGM. Board of Directors: • Composition and category of directors for example promoter. Audit Committee. which institution represented as Lender or as equity investor. executive. name of members and Chairperson Attendance during the year Remuneration policy Details of remuneration to all the directors. 5.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Suggested List of Items to Be Included In The Report on Corporate Governance In The Annual Report Of Companies 1. name of members and Chairperson Meetings and attendance during the year 4. non-executive. 2. dates on which held. • • • Brief description of terms of reference Composition.
Any website. on any matter related to capital markets. • Whether MD&A is a part of annual report or not. transactions of the company of material nature. Page 44 of 62 . Quarterly results o o o o Which newspapers normally published in. penalties. • Disclosures on materially significant related party transactions i. • • Half-yearly report sent to each household of shareholders. Disclosures. their subsidiaries or relatives etc. the directors or the management. 8. details of voting pattern Person who conducted the postal ballot exercise Are proposed to be conducted through postal ballot Procedure for postal ballot 7. General Body meetings. during the last three years. where last three AGMs held. • Details of non-compliance by the company. and strictures imposed on the company by Stock Exchange or SEBI or any statutory authority. Means of communication.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 6. Whether special resolutions o o o o Were put through postal ballot last year. and The presentations made to institutional investors or to the analysts. • • Location and time.e. that may have potential conflict with the interests of company at large. with its promoters. where displayed Whether it also displays official news releases.
. CRISIL index etc. conversion date and likely impact on equity Plant Locations Address for correspondence • • Page 45 of 62 .GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED 9. Registrar and Transfer Agents Share Transfer System Distribution of shareholding Dematerialization of shares and liquidity Outstanding GDRs/ADRs/Warrants or any Convertible instruments. Low during each month in last financial year Performance in comparison to broad-based indices such as BSE Sensex. time and venue Financial Calendar Date of Book closure Dividend Payment Date Listing on Stock Exchanges Stock Code Market Price Data : High.General Shareholder information • • • • • • • • • • • • • AGM : Date.
Further evidence of the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance which had either been published or were in preparation at that time.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED THE CADBURY COMITEE – THE CODE OF BEST PRACTICE INTRODUCTION Reasons for setting up the Committee • The Committee was set up in May 1991 by the Financial Reporting Council. and a wide range of submissions from interested parties. The underlying factors were seen as the looseness of accounting standards.. Page 46 of 62 . in producing its draft report which was issued for public comment on 27 May 1992. • T h e Committee wherever possible drew on these documents. and competitive pressures both on companies and on auditors which made it difficult for auditors to stand up to demanding boards. • These concerns about the working of the corporate system were heightened by some unexpected failures of major companies’ and by criticisms of the lack of effective board accountability for such matters as directors’ pay. the absence of a clear framework for ensuring that directors kept under review the controls in their business. Its sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected. the London Stock Exchange and the accountancy profession to address the financial aspects of corporate governance.
We welcome such statements and leave it to boards to decide the terms in which they make their statement of compliance. the great majority of which broadly support the Committee’s approach. The London Stock Exchange intends to require such a statement as one of its continuing listing obligations. they are important to a wider audience. Boards are not Page 47 of 62 .GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • Since then. STATEMENT OF COMPLIANCE We recommend that listed companies reporting in respect of years ending after 30 June 1993 should state in the report and accounts whether they comply with the Code and identify and give reasons for any areas of non-compliance. in any event. • The role of the auditors is to provide the shareholders with an external and objective check on the directors’ financial statements which form the basis of that reporting system. be more likely to be well directed. the Committee has received over 200 written responses to its proposals. that many companies will wish to go beyond the strict terms of the London Stock Exchange rule and make a general statement about the corporate governance of their enterprises as some leading companies have already done. • The Committee’s objective is to help to raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. however. We envisage. Although the reports of the directors are addressed to the shareholders. CONTENTS OF REPORT THE CODE OF BEST PRACTICE Degree of regulation would. if it were to enforce what has already been shown to be workable and effective by those setting the standard. and has carefully considered the balance of opinions expressed on particular issues. not least to employees whose interests boards have a statutory duty to take into account.
GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED expected to comment separately on each item of the Code which they are complying. that the Code. They arc responsible for ensuring that their actions meet the spirit of the Code and in interpreting it they should give precedence to substance over form. Certain director s may have particular responsibilities. Every public company should be headed by an effective board which can both lead and control the business. this means a board made up of a Page 48 of 62 . is kept up to date. and European Community directives and regulations may give rise to new issues. is developing. BOARD EFFECTIVENESS Every public company should be headed by an effective board which can both lead and control the business. Regardless of specific duties undertaken by individual directors. At the same time. The situation. views on best boardroom practice will evolve in the light of experience. in addition to being monitored. Within the context of the UK unitary board system. and of outside. it is for the board collectively to ensure that it is meeting its obligations. The Accounting Standards Board has in hand a programme of work on the basis of financial reporting. however. this means a board made up of a combination of executive directors. It is essential. under a chairman who accepts the duties and responsibilities which the post entails. non-executive directors. therefore. however. Keeping the Code up to date We have addressed those issues which appeared from the evidence before us to require the most immediate attention. All directors are equally responsible in law for the board’s actions and decisions. but areas of non-compliance will have to be dealt with individually. Revised accounting standards and improved methods of financial presentation will result. THE CODE OF BEST PRACTICE The Code is to be followed by individuals and companies in the light of their own particular circumstances. as executive or non-executive directors. with their intimate knowledge of the business. for which they are accountable to the board. who can bring a broader view to the company’s activities. Within the context of the UK unitary board system.
Independent non executive directors. with their intimate knowledge of the business. non-executive directors. whose interests are less directly affected. who can bring a broader view to the company’s activities. boardroom succession. If the chairman is also the chief executive. Regardless of specific duties undertaken by individual directors. Neither is in conflict with the unitary nature of the board. Non-executive directors should address this aspect of their responsibilities carefully and should ensure that the chairman is aware of their views. All directors are equally responsible in law for the board’s actions and decisions. A number of companies have recognised that role and some have done so formally in their Articles. Certain directors may have particular responsibilities. The second is in taking the lead where potential conflicts of interest arise. are well-placed to help to resolve such situations. and their collective ability to provide both the leadership and the checks and balances which effective governance demands. and of outside. however. it is for the board collectively to ensure that it is meeting its obligations. Whilst it is the board as a whole which is the final authority. or directors’ pay. Page 49 of 62 . as the person to whom they should address any concerns about the combined office of chairman/chief executive and its consequences for the effectiveness of the board. whose role incorporate governance is fundamental. who might be the deputy chairman. executive and non-executive directors are likely to contribute in different ways to its work. under a chairman who accepts the duties and responsibilities which the post entails Tests of board effectiveness include the way in which the member’s of the board as a whole work together under the chairman. An important aspect of effective corporate governance is the recognition that the specific interests of the executive management and the wider interests of the company may at times diverge. board members should look to a senior non-executive director. for which they are accountable to the board. Shareholders are responsible for electing board members and it is in their interests to see that the boards of their companies are properly constituted and not dominated by any one individual.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED combination of executive directors. Non-executive directors have two particularly important contributions to make to the governance process as a consequence of their independence from executive responsibility. The first is in reviewing the performance of the board and of the executive. as executive or non-executive directors. for example over takeovers.
It is equally for chairmen to ensure that executive directors look beyond their executive duties and accept their full share of the responsibilities of governance. are enabled and encouraged to play their full part in its activities. We recommend. Given the importance and particular nature of the chairman’s role.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED THE CHAIRMAN The chairman’s role in securing good corporate governance is crucial. Non-executive directors should bring an independent judgment to bear on issues of strategy. It is for chairmen to make certain that their non-executive directors receive timely. that they are properly briefed on the issues arising at board meetings. performance. NON-EXECUTIVE DIRECTORS The Committee believes that the caliber of the non executive members of the board is of special importance in setting and maintaining standards of corporate governance. If the two roles are combined in one person. executive and non-executive alike. relevant information tailored to their needs. which will ensure a balance of power and authority. as equal board members. We recommend that the caliber and number of non-executive directors on a board should be such that their views will Page 50 of 62 . therefore. to the leadership of the company. and standards of conduct. it represents a considerable concentration of power. it should in principle be separate from that of the chief executive. resources. The emphasis in this report on the control function of non executive directors is a consequence of our remit and should not in any way detract from the primary and positive contribution which they are expected to make. and for ensuring that all directors. such that no one individual has unfettered powers of decision. for ensuring that all relevant issues are on the agenda. Chairmen are primarily responsible for the working of the board. including key appointments. Chairmen should be able to stand sufficiently back from the day-today running of the business to ensure that their boards are in full control of the company’s affairs and alert to their obligations to their shareholders. for its balance of membership subject to board and shareholders’ approval. and that they make an effective contribution as board members in practice. that there should be a clearly accepted division of responsibilities at the head of a company .
Boards should regularly review the form and the extent of the information which is provided to all directors. To meet our recommendations on the composition of sub-committees of the board. for example. there is a balance to be struck between recognising the value of the contribution made by non executive directors and not undermining their independence. two of the three should be independent in the terms set out in the next paragraph. In order to safeguard their independent position. An essential quality which non-executive directors should bring to the board’s deliberations is that of independence of judgment. we regard it as good practice for non-executive directors not to participate in share option schemes and for their service as non-executive directors not to be pensionable by the company. Information about the relevant interests of directors should be disclosed in the Directors’ Report. by chairmen of board committees. all boards will require a minimum of three non-executive directors. On fees. Non-executive directors lack the inside knowledge of the company of the executive directors. There is. Additionally. We recommend that the majority of non executives on a board should be independent of the company. which will reinforce the independence of non-executive directors and make it evident that they have been appointed on merit and not through any form of patronage. Given the importance of their distinctive contribution. non executive directors should be selected with the same impartiality and care as senior executives. We regard it as good practice for a nomination committee (dealt with below) to carry out the selection process and to make proposals to the board.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED carry significant weight in the board’s decisions. a case for paying for additional responsibilities taken on. Companies have to be able to bring about changes in the composition of their boards to maintain their vitality. therefore. Non Page 51 of 62 . Their effectiveness turns to a considerable extent on the quality of the information which they receive and on the use which they make of it. This means that apart from their directors’ fees and share holdings. one of whom may be the chairman of the company provided he or she is not also its executive head. It is for the board to decide in particular cases whether this definition is met. but have the same right of access to information as they do. The demands which are now being made on conscientious non-executive directors are significant and their fees should reflect the time which they devote to the company’s affairs. they should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment. We recommend that their appointment should be a matter for the board as a whole and that there should be a formal selection process.
Under the Companies Act the directors have a duty to appoint as secretary someone who is capable of carrying out the duties which the post entails. as well as their main board colleagues. if they remain on a board too long. attend and prepare minutes of board proceedings. combined with the greater demands now being made on them. Reappointment should not be automatic. the companies and the individuals concerned all gain. the make-up of a board needs to change in line with new challenges. but a conscious decision by the board and the director concerned. When companies encourage their executive directors to accept appointments on the hoards of the board of companies. The chairman and the board will look to the company secretary for guidance on what their responsibilities are under the rules and regulations to which they are subject and on how those responsibilities All directors should have access to the advice and services of the company secretary and should recognize that the chairman is entitled to the strong and positive support of the company secretary in ensuring the effective functioning of the board. should be a matter for the board as a whole. therefore. particularly if the divisional directors of larger companies are considered for non-executive posts. The Committee expects that the company secretary will be a source of advice to the chairman and to the board on the implementation of the Code of Best Practice. THE COMPANY SECRETARY The company secretary has a key role to play in ensuring that board procedures are both followed and regularly reviewed. We recommend. The responsibility for ensuring that the secretary remains capable. remuneration and its review. Our emphasis on the qualities to be looked for in non executive directors. Page 52 of 62 . It should be standard practice for the company secretary to administer. Furthermore. term of office. and any question of the secretary’s removal. raises the question of whether the supply of non-executive directors will be adequate to meet the demand. Their Letter of Appointment should set out their duties.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED executive directors may lose something of their independent edge. that non-executive directors should be appointed for specified terms. A policy of promoting this kind of appointment will increase the pool of potential non-executive directors.
but how to ensure its objectivity and effectiveness. The audit provides an external and objective check on the way in which the financial statements have been prepared and presented. building Page 53 of 62 . quite apart from their value to boards of directors. the directors are required to report on their stewardship by means of the annual report and financial statements sent to the shareholders. is not well designed in certain respects to provide the objectivity which shareholders and the public expect of auditors in carrying out their function. however. and the auditors should report on this statement.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED AUDITING The annual audit is one of the cornerstones of corporate governance. The accountancy profession together with representatives of preparers of accounts should develop guidance for companies and auditors The question of legislation to back the recommendations on additional reports on internal control systems and going concern should be decided in the light of experience The Government should consider introducing legislation to extend to the auditors of all companies the statutory protection already available to auditors in the regulated sector (banks. The most direct method of ensuring that companies are accountable for their actions is through open disclosure by boards and through audits carried out against strict accounting standards. SUMMARY OF RECOMMENDATIONS Directors should state in the report and accounts that the business is a going concern. in which auditors operate. with supporting assumptions or qualifications as necessary. and it is an essential part of the checks and balances required. The framework. Given the separation of ownership from management. Audits are a reassurance to all who have a financial interest in companies. The question is not whether there should be an audit.
Apart from their fees and shareholding. retain full and effective control over the company and monitor the executive management The board should include non-executive directors of sufficient caliber and number for their views to carry significant weight in the board’s decisions. resources. The board should meet regularly. There should be an agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary. The majority should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment. Page 54 of 62 . performance. The board should have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the company is firmly in its hands. and investment business) so that they can report reasonable suspicion of fraud freely to the appropriate investigatory authorities The accountancy profession together with the legal profession and representatives of prepareis of accounts should consider further the question of illegal acts other than fraud.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED societies. ‘_ Non-executive directors should bring an independent judgment 10 bear on issues of strategy. Any question of the removal of the company secretary should be a matter for the board as a whole. and standards of conduct. at the company’s expense. who is responsible to the board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. All directors should have access to the advice and services of the company secretary. insurance. including key appointments. Their fees should reflect the time which they commit to the company.
including selection. monitor achievement of strategic goals Oversee management performance. support and evaluation of CEO Page 55 of 62 .GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED DIRECTORS RESPONSIBILITY The following major responsibilities of the board of directors reflect the broad purposes of governance: • • • Define and uphold the mission and purpose of the MFI Develop and approve strategic directions (with management).
temporarily assume management responsibilities Three further responsibilities address board and board member conduct: • • • Uphold the ethical standards of the organization. with transparency and avoidance of conflicts of interest Represent the interests of the MFI as a whole and not those of one shareholder or group of shareholders Evaluate (or seek external evaluation of) its own performance and commit to improving that performance INSIDER TRADING Another important aspect of corporate governance relates to issues of insider trading. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures. To prevent this from happening. and take unfair advantage of the resulting information asymmetry.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED • • • • • Ensure that the MFI manages risks effectively. particularly in times of distress. including succession planning Ensure adequate resources to achieve the mission. The principle should be ‘disclose or desist’. insiders abstain from transacting in the securities of the company. ensure that organization fulfills its responsibilities to the larger community Ensure that the organization changes to meet emerging conditions. It is important that insiders do not use their position of knowledge and access to inside information about the company. assume fiduciary responsibility Foster effective organizational planning. Corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public. including assisting in raising of equity and debt Represent the MFI to the community and the public. Page 56 of 62 .
The implementation of this strategy is done by a management team. the need for such procedures. in many countries. Financial institutions. by a separate group appointed by SEBI. as well as for a report on their holdings. For example. participating and voting in shareholder meetings. But in reality companies cannot be managed by shareholder referendum. reporting requirements and rules also goes beyond Corporates to other entities in the financial markets such as Stock Exchanges. especially directors and other senior executives. electing members of the board and sharing in the residual profits of the corporation. there are rules for reporting of transactions by directors and other senior executives of companies. The shareholders are not expected to assume responsibility for the management of corporate affairs. Rights and Responsibilities of shareholders The basic rights of the shareholders include right to transfer and registration of shares. This relationship therefore brings in the accountability of the boards and the management to the shareholders of the company. during sensitive reporting seasons. The shareholders have therefore to necessarily delegate many of their responsibilities as owners of the company to the directors who then become responsible for corporate strategy and operations. activity in their own shares and net year to year changes to these in the annual report. Intermediaries. Mutual Funds and concerned professionals who may have access to inside information. code of conduct and specific rules for the conduct of its directors and employees and other insiders.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED reporting requirements. SHAREHOLDERS The shareholders are the owners of the company and as such they have certain rights and responsibilities. obtaining relevant information on the company on a timely and regular basis. However. A good corporate framework is one that provides adequate avenues to the shareholders for effective contribution in the governance of the company while insisting on a high standard of corporate behavior without getting involved in the day to day functioning of the company. under the Chairmanship of Shri Kumar Mangalam Birla. A company’s management must be able to take business decisions rapidly. confidentiality norms. The rules also cover the dealing in the securities of their companies by the insiders. Page 57 of 62 . This is being dealt with in a comprehensive manner.
The Committee was informed that SEBI has already made recommendations in this regard to the Department of Company Affairs. It is imperative that this situation which has lasted too long needs an early correction. in actual practice only a small fraction of the shareholders of that company do or can really participate therein. they should not only be provided information as under the Companies Act. The company must also ensure that it is not inconvenient or expensive for shareholders to cast their vote. and be sufficiently informed on decisions concerning fundamental corporate changes. The annual general meetings of the company should not be deliberately held at venues or the timing should not be such which makes it difficult for most of the shareholders to attend. sale of assets or divisions of the company and changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership. The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months. In this context. there should be a requirement which will enable them to vote by postal ballot for key decisions. Page 58 of 62 . The company should also keep the shareholders informed of the rules and voting procedures. presentation made by companies to analysts may be put on company’s web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. should be sent to each household of shareholders. for shareholders who are unable to attend the meetings. but also in respect of other decisions relating to material changes such as takeovers. The Committee recommends that information like quarterly results. This would require changes in the Companies Act. Currently. This virtually makes the concept of corporate democracy illusory. although the formality of holding the general meeting is gone through.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED The Committee therefore recommends that as shareholders have a right to participate in. A company must have appropriate systems in place which will enable the shareholders to participate effectively and vote in the shareholders’ meetings. which govern the general shareholder meetings.
This is a mandatory recommendation Page 59 of 62 . It follows from the above that for effective participation shareholders must maintain decorum during the General Body Meetings. The shareholders must therefore show a greater degree of interest and involvement in the appointment of the directors and the auditors. Indeed. The Committee recommends that in case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: • • • A brief resume of the director. and Names of companies in which the person also holds the directorship and the membership of Committees of the board. It is important that the shareholders use the forum of general body meetings for ensuring that the company is being properly stewarded for maximising the interests of the shareholders. they should demand complete information about the directors before approving their directorship.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED The Committee believes that the General Body Meetings provide an opportunity to the shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. Nature of his expertise in specific functional areas. This is important especially in the Indian context. The effectiveness of the board is determined by the quality of the directors and the quality of the financial information is dependent to an extent on the efficiency with which the auditors carry on their duties.
Certainly. everyone in the industry regards the Dutch assets as the crown jewel. Corus represents about 20 million tons of annual steel production. They ultimately decided. Several major steel companies looked seriously at Corus and kicked the tires. Page 60 of 62 . The British assets are older. however. beat CSN. Indeed. and less profitable. Between the two sets of assets. Corus had been on the market for at least the last two years. which translates to a total purchase price of $12 billion. less productive. meaning that Tata simply got caught up in a kind of deal frenzy. The price was 608 pence per share. and they just could not back down. The big question everyone in the steel business is asking: What does Tata [and CSN] see in Corus that would make it pay $12 billion for a company that many other strategic players passed on at $5 billion? Feeding Frenzy or Light Lunch? One theory is that Tata violated the "in-too-far" rule. They have union issues and are burdened with more than $13 billion of pension liabilities. and amortization] for what many industry observers regard as a troubled steel company. that Corus was not worth the effort or the price. even when the price was around $5 billion. On the other hand. depreciation. its own share price fell significantly. taxes. Why? What's next for the steel industry? And how will this deal affect the industry's ongoing consolidation efforts? Corus was formed via the merger of Hoogovens. which is a very large amount of additional capacity for a growth-oriented steel company to add. Tata will catapult from being outside the 30 largest steel companies to No. 5 on a capacity basis. a Dutch steel company. convincing themselves that the acquisition would be good at almost any price. since each time Tata raised or threatened to raise the price for Corus. in a final face-off. Tata's shareholders thought that the company had caught a bad case of irrational exuberance.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED CASE STUDY: Tata's Steep Price for Corus The fierce battle over Corus (CGA) was recently decided when Tata. Tata thus agreed to pay approximately nine times EBITDA [earning before interest. the Brazilian rival. the Indian steelmaker. and the former British Steel. with this acquisition.
Reading the Future Yet there is simply no other steel company the size of Corus available on the market. dumping. Putting Tata and Corus together will create a company with about 29 million tons of production -. except maybe Tata and CSN. Arcelor Mittal.5 times EBITDA. trades at 6.which sold for a then-unheard-of $230 per ton -. Page 61 of 62 . like Mittal's purchase of the U. creating a global superpower at over 120 million tons per annum of production. Should Corus be valued at a multiple that is more than 30% greater than that of Arcelor Mittal? I don't think anyone believes so. so if a smaller player like Tata had aspirations to become a large player. the purchase price per ton amounts to about half of what it would cost today to build those same assets from scratch. This is an astronomical price in the steel business.a giant leap for Tata. In the period from the late 1990s through 2003 alone.S. A third theory is that.S. Japan's Nippon. As noted above. is what does this transaction presage for the steel industry? Certainly. This theory maintains that there are also big synergies available by combining the two companies which will boost earnings. Perhaps the most important question coming out of the Corus/Tata deal. despite the enormous price tag for Corus.over time the Corus price will be viewed as just another speed bump in steel's global consolidation. independent steel companies were forced into bankruptcy due to pricing swings. but still light years from Mittal. By comparison. has a mere 35 million tons. steel's global consolidation played a major role in the contest over Corus. however. the next largest steel company. and other forms of economic misery.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Tata's shares lost 11% on the day after its winning bid was announced. more than 50 U. this was perhaps the only one-stop move that Tata could make to do so. Consolidation is intended to bring price stability to an industry that has historically suffered through constant feast-or-famine pricing cycles. Another theory is that. Tata agreed to pay about nine times Corus's EBITDA. while CSN's stock price jumped more than 7% after it lost the auction. Indeed. where all other major steelmakers trade at roughly five to seven times EBITDA. legacy liabilities. Which brings me to the price. the industry leader. the age of consolidation is upon us. steel company ISG in 2004 -. Mittal set the standard with its acquisition of Arcelor (MTTFF). Certainly. which now produces some 9 million tons.
The steel industry has historically been valued by the markets at significantly less than other industrial sectors such as oil and gas. one that has seen the industry consolidate as never before and which augurs well for the future. Arcelor Mittal and other major producers cut production rather than prices -. in the last year.a move that benefited them and all other participants up and down the steel food chain. the bottom line on the Corus-Tata deal is that it is part of the new continuum in the steel business. such as transparent corporate governance and a formal dividend policy. the industry looks back on Corus-Tata deal wistfully. Certainly. So. business. Thus. because the steel industry is populated by public and private companies that are run by "kings. Getting two kings to agree to a mega-merger is a tough assignment. amid generally falling steel prices.GOOD CORPORATE GOVERNANCE – AN IDEA WHOSE TIME HAS ARRIVED Hoping for Sustainable Earnings However. Source: Business Week Page 62 of 62 . It will be interesting to see whether. Where will these deals come from? That is the harder question. in 2006. Industry leaders are hoping that price stability combined with various shareholder-friendly actions. and chemicals. and cultural issues. cement. will result in sustainable earnings for the industry and lead to a re-rating of the industry by the financial markets. given all the personal. Arcelor Mittal has led the charge to bring stability to the industry. remembering fondly the time when a major steel company sold for "only" nine times EBITDA. say five years from now. more blockbuster deals will be necessary to further consolidate and stabilize the industry." each of whom wants to run the show. mining.
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