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Group3 - Group Project - Corporate Governance PDF
Group3 - Group Project - Corporate Governance PDF
SECTION 1
This report is a detailed document on the “nomination and remuneration committee (NRC)”
in India, and it is an attempt to conduct an extensive study on the effectiveness and the
composition of the nomination and remuneration committee with the help of data from 10
companies.
PROJECT REPORT BY:
1
ACKNOWLEDGEMENT
Firstly, we would like to thank our course instructor of Corporate Governance (MGT 237),
Professor Nimit Thaker, for his valuable guidance regarding how to pursue this study and
also for allotting the companies and laying out the guidelines for data collection, data analysis
and reviewing research papers. We are also thankful to him for solving all kinds of doubts
regarding the project and leading us to a successful completion of this study.
We also appreciate the Teaching Associate (T.A.), Ms Anika Mansuri‟s efforts of sending us
timely reminders, plans and procedures.
Last but not the least; we would like to extend our gratitude towards each other for teamwork,
help, support and seriousness towards work and deadlines.
2
INDEX
SECTION TOPIC PG. NO.
1 BASIC INTRODUCTION 4-9
A. What is Corporate Governance? 4
B. Corporate Governance an Inter-Disciplinary Concept 4
C. Importance of Corporate Governance 4
D. Role of Corporate Governance 5
E. Scope of Corporate Governance 6
F. Brief Introduction to all Companies Under Study 6
2 LEGAL PROVISIONS 10-16
A. Need for Legal Provisions 10
B. Legal Provisions Related to the Topic 10
C. Provisions of Companies Act vs. SEBI Guidelines 12
D. Relation with Agency Theory, Stewardship Theory & Fiduciary Duties 12
E. Investors/Shareholders‟ Protection 14
F. Impacts on Disclosures and Transparency 15
G. Legal Provisions in Other Countries like UK and BRIC Nations 15
3 LITERATURE REVIEW 17-27
A. Discussion of Research Papers 17
B. Relevance of Project in India 24
C. Conclusions from Literatures Reviewed 25
4 DATA COLLECTION AND DATA ANALYSIS 28-33
A. Procedure of Collecting the Data 28
B. Items of Data Collected 29
C. Statistical Data on Different Items 31
D. Analysis of Data 31
5 CONCLUSION 34-36
A. Trends Emerging from Study 34
B. Unusual Findings from the Data and Unexpected Observations 34
C. How NRC Effectiveness Improves Greater Disclosures? 35
D. How NRC Effectiveness makes Director Remuneration Comparable 36
within the Industry? How it Reduces Shareholder Dissatisfaction?
6 REFERENCES 37-40
3
SECTION 1: BASIC INTRODUCTION
Corporate governance is the system of rules, practices, and procedures by which a firm is
coordinated and controlled. Corporate governance basically includes adjusting the interests of
an organization's shareholders, for example, investors, senior administration officials, clients,
agents, the legislature, and society. Since corporate governance additionally gives the
structure to achieving an organization's goals, it incorporates essentially every circle of the
executives, from activity plans and inner controls to execution estimation and corporate
disclosure.
The term governance has made an amazing profession in various disciplines concerned with
law and order. Corporate governance draws experiences from lawful investigations, political
theory, human sciences and history to illustrate the picture of existing, and contending and
complementing ways to deal with the idea of governance. It is contended that past
highlighting vital periods of methodological and hypothetical change inside various teaches,
for example, the regularly seen progress 'from the government to governance', governance is
itself an interdisciplinary concept.
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Growing number of scams: to control the growing number of scams which are
happening every day in India and worldwide, to avoid these scams and financial
irregularities corporate governance plays an important role.
Conflict of interest: For a company shareholders are very important and shareholders
association is not so strong in India, and the director doesn‟t use his power in a wrong
way, corporate governance is helpful to shareholders to protect their interest.
SEBI: Security exchange board of India made corporate governance compulsory for
companies, to protect the interest of shareholders and investors.
Then again, official administration may like to settle on choices to their greatest
advantage instead of the organization's advantage. Investors need an approach to check
this sort of movement to stay with the business on target. The corporate administration
record would detail the procedure the organization will use to adjust the interests of
executive management to the investors to acquire a useful trade-off.
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E. SCOPE OF CORPORATE GOVERNANCE
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Gastrointestinals, Anti-Osteoporosis, Sedative, Women's Healthcare, Anti-Rheumatic, Anti-
Diabetic, Anti-Psychotic, Tranquilizers, Pain Management and Tadalafil. Its major
competitors are Sun Pharmaceuticals, Abbott India, Cipla etc.ii
Cipla Ltd.:
Coal India Limited (CIL) is an Indian state-possessed coal mining and treatment facility
organization headquartered in Kolkata, West Bengal, India. It is the biggest coal-delivering
organization on the planet and a Maharatna PSU. Its products are cooking coal, semi cooking
coal, non-cooking coal, middlings, cil coal etc. Its major competitors are Guj Minerals,
Austral Coke, Auroma Coke etc.iv
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Container Corporation of India Ltd.:
Dlf Ltd.:
DLF Limited (Delhi Land and Finance) is Gurgaon based real estate developer. It was
established by Chaudhary Raghvendra Singh in 1946 and is situated in New Delhi, India.
DLF created private provinces in Delhi, for example, Shivaji Park (their first improvement),
Model Town, Rajouri Garden, Krishna Nagar, South Extension, Greater Kailash, Kailash
Colony, and Hauz Khas. DLF fabricates private, office, and retail properties. Its major
competitors are Sobha, Prestige, Unitech, Omaxe, Global Realty, Shree Vardhman Group,
Bharti Realty. v
Dabur ( Dabur India Ltd.) (Devanagari: , got from Daktar Burman) is one of the India's
biggest Ayurvedic medication and regular customer items maker. Dabur demerged its Pharma
business in 2003 and hived it off into a different organization, Dabur Pharma Ltd. German
organization Fresenius SE purchased a 73.27% value stake in Dabur Pharma in June 2008 at
Rs 76.50 an offer. Its major products are Dabur Chawanprash, Hajmola, Phudin hara, Lal
Dant Manjan and hair oils. While its competitors are Marico, Patanjali Ayurved, Parle Agro,
Ruchi, Himalaya Herbals, Baidyanath, ITC, HUL, Emami and Godrej Consumer Products.
Divi's Laboratories Ltd is an India based maker of Active Pharmaceutical Ingredients (APIs)
and Intermediates. The organization is occupied with production of driving nonexclusive
mixes, Nutraceutical fixings and custom union of APIs and intermediates for worldwide
8
trailblazer organizations. Divis is among the biggest pharmaceutical organizations in India
with an arrangement of 120 items across differing helpful territories. Divi's Laboratories Ltd
was built up in the year 1990 as Divis Research Center (DRC) with Research and
Development as their prime basic. During the year 1991-93, the organization effectively built
up a few business forms for intermediates and mass actives and supplies to assembling
majors. In the year 1994, they changed their name to Divis Laboratories Ltd to mirror their
developing region of tasks. Their major competitors are Dishmen Carbogen Ltd, Dr. Reddy‟s
laboratories ltd, Eris Lifesciences ltd.
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SECTION 2: LEGAL PROVISIONS
a. The level and composition of the remuneration is reasonable and sufficient to attract,
retain and motivate directors of the quality required to run the company successfully.
b. Relationship of remuneration to performance is clear and meets appropriate
performance benchmarks.
c. Remuneration to directors, key managerial personnel and senior management involves
a balance between fixed and incentive pay reflecting short and long-term performance
objectives appropriate to the working of the company and its goals;
Provided that such policy shall be disclosed in the Board‟s report.
Securities & Exchange Board of India (Listing Obligations & Disclosure Requirement),
2015
Regulation 19
1) The Board of Directors shall constitute the nomination and remuneration committee as
follows:
a. The committee shall comprise at least three directors
b. All directors of the committee shall be non-executive directors; and
c. At least 50% of the directors shall be independent directors.
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Provided that the chairperson of the listed entity, whether executive or non-executive, may be
appointed as a member of the nomination and remuneration committee and shall not chair
such committee.
The quorum for the meeting of the nomination and remuneration committee shall either two
members or one-third of the members of the committee, whichever is greater including at
least one independent director in attendance.
2) The chairperson of the nomination and remuneration committee may be present at the
annual general meeting, to answer shareholders‟ queries; however it shall be up to the
chairperson who shall answer the queries.
(3A)The nomination and remuneration committee shall meet at least once in a year.
Section 178
1) The Board of Directors of every listed company and such other class or classes of
companies, as may be prescribed shall constitute the nomination and remuneration
committee consisting of three or more non-executive directors out of which not less
than on-half shall be independent directors:
Provided that the chairperson of the company (whether executive or non-executive) may be
appointed as a member of the nomination and remuneration committee and shall not chair
such committee.
2) The nomination and remuneration committee shall identify persons who are qualified
to become directors and who may be appointed in senior management in accordance
with the criteria laid down, recommend to the board, their appointment and removal
and shall carry out evaluation of every director‟s performance.
3) The nomination and remuneration committee shall formulate the criteria for
determining qualifications, positive attributes and independence of a director and
recommend to the Board a policy, relating to remuneration for the directors, key
managerial personnel and other employees.
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C. PROVISIONS OF COMPANIES ACT VS. SEBI GUIDELINES
The Companies Act Provisions focus highly on the working and the functioning of
procedures to be followed by the nomination and remuneration committee. The act gives
great insights on the profile of the committee as well as its members. SEBI Guidelines detail
up on the eligibility of directors in the committee and the quorum of the meetings to be held
by the committee. Both the set of laws provide the exactly same codes to be followed
regarding the nature of directors and the composition of committee, with SEBI Guidelines
providing comparatively comprehensive requirements. Both the set of laws promote the
composition, fairness and working of the committee in sync with each other and one covers
all the codes missing in the other. This makes the provisions of Companies Act and SEBI
Guidelines converging with each other. However, no one set of rules can be judged to be
more or less effective than the other as the scope of both these laws are quite different from
each other although they are converging.
Agency Theory:
The Agency Theory scrutinizes the relationship between the agents and principals in the
business. There are two parties which exists in the agency relationship namely- agent and
principal. The agent acts and takes decisions on the behalf of principal. The theory analyses
the relationship between the agent and the principal and the conflicts which may arise due to
different risk perspectives and business goals.
Talking about the effect of agency theory on the legal provisions related to remuneration: The
theory aims to differentiate the interests and goals of the organization‟s stakeholder. It also
focuses on the part that the employee‟s remuneration is aligned with interest and goals.
The remuneration paid to the employee‟s is the agency cost. The impact of the agency theory
on the remuneration is that the employee will expect high agency cost whereas the employers
will expect to minimize it. The theory asks the principal to choose a contract scheme that will
help the participant align the interests of the agents with the principal‟s self-interest.
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Talking about the nomination part, corporate governance ensures the accountability and
responsibility of the individuals in an organization via trying to reduce or eliminate the
principal-agent problems. The theory lays down the relationship between the agent and the
principal very clearly. It makes sure that there is separation of ownership and control between
the both; it makes sure that the principals serve the interests of shareholders first.
Stewardship Theory:
The Stewardship Theory somewhat does not agree with the agency theory on the point of
managerial compensation system. The stewardship theory sees the management as a
dependent framework which works together as a team. According to this theory, it will not
give the senior management the space to persuade individual inspiration to surpass their role
in an organization. Thus, it will focus on building a reasonable team which can help in
increasing the wealth of shareholders. Hence, the theory stresses upon the requirement of
compensation agreement to remove the agency cost between the shareholders and mangers.
The theory significantly reduces the need to compromise on the remuneration packages
because organizations performance.
Talking about the nomination part the theories framework empowers the lower-level
members of the board to work harder and to push them towards securing the CEO title. It
focuses upon appointing those members as directors who can work in line with skills such as
risk taking, independency in decision making and work ethics. The compensation is decided
upon the individuals work contribution and risk-taking capability.
Fiduciary Duties:
The fiduciary duties have a different set of expectations from the board, it requires the
directors to put forward the company‟s interest prior to their own personal interests. There are
specific rules that prevent such conflict of interests in the remuneration and nomination of the
board members.
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E. INVESTORS/SHAREHOLDERS’ PROTECTION
An investor is the one who allots his capital in a company with an expectation of a financial
return. And hence in order to protect the interests of the investor and shareholders there are
various acts under, Companies Act 2013. The legal provisions help investors in safeguarding
and enforcing their rights and make claims.
There are various legal provisions that protects the interests of investors/shareholders. These
laws include:
Now that we know about few of these provisions present in the companies act for the
investors. The nomination and remuneration committee also helps in safeguarding the
interests of the shareholders. The Board members in a company are the main people on which
the future of the company relies. And the shareholders being the major capital investors, it is
important the company abides by all the legal provisions related to the Board‟s appointment
and remuneration method. When a company appoints a right Board member in the team
keeping all the legal provisions in the mind it helps the company make profits because of the
right guidance and capability of directors. Anything wrong or illegal happening in the
appointment process of directors can have an adverse effect on the interests of shareholders
and hence legal provisions make sure that this doesn‟t happen. Same goes with the
remuneration part of the directors. The legal provisions make sure that the directors do not
exploit the company‟s profit and get only the prescribed remuneration in the Companies Act.
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F. IMPACTS ON DISCLOSURES AND TRANSPARENCY
Adequate disclosures help improve public understanding of the structure and activities of
corporate policies along with the company as a whole. The corporates have to disclose
mandatorily under various legislations including the Companies Act, 2013 and SEBI (LODR)
Regulations, 2015 so on and so forth. Transparency acts as a pivotal feature in the market
based monitoring of companies and is central to its shareholders‟ ability to exercise their
ownership rights on an informed basis, which can help attract capital and maintain confidence
in capital markets.
United Kingdom:
Nomination:
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Remuneration:
To review, approve and oversee the implementation of remuneration policies for all
partners which are designed both to recognize in-year performance and to support the
long-term, business.
To establish a framework and determine criteria for the balance scorecard and KPIs of the
senior partner by which the performance is measured.
To determine the remuneration of the senior partner taking into account the evidence and
feedback by which the performance is measured.
Approving the remuneration of managing partner taking into account the assessment of
their performance by the senior partner.
To oversee the implementations of the pay appeals process approved by he board and
determine appeals submitted to the committee by partner in respect of their benchmark
remuneration.
BRIC Nations:
In the BRICS nations the nomination committee is only recommended by China and India.
On the other hand, Russia and Brazil do not provide any such regulation about the
nomination body. Talking about India and China, both of them require a majority of
independent directors, along with the chairperson while Brazil and Russia do not regulate this
aspect. Also, China is the only one who explains the committee‟s roles and power. None of
the BRICs nation considers the quality of non-executive director.
Regarding the remuneration committee in the BRICs, only India and China regulate the
composition of the body. China requires a majority of independent directors, including the
chairperson. India whereas regulates the composition less strictly than China. It requires only
three directors, all non-executive and comprising an independent chairperson. All the BRICs
underline the following common power: to study and review the remuneration polices and
makes recommendations. To develop the company‟s remuneration policies, to manage and
solve problems relating to succession, compensation and people development, to define the
appraisal and standard for directors.
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SECTION 3: LITERATURE REVIEW
In order to get an in depth understanding of this topic, we have reviewed 15 articles and
research papers and they are summarised as follows:
This paper was written with the aim of determining whether the presence of NRC
improves the CFP and enhances the overall ROA and EPS of the company.
There is very limited research work and empirical study done on the effectiveness of
NRC and so, this research paper is the first of its kind.
Presence of NRC leads to prevention of relationship between principal and the agent due
to which there is no information asymmetry, or the possibility of conflicts of interests
(agency theory).(Jensen and Meckling, 1976; Hill and Jones, 1992)
So, NRC is one of the most important committees of the BOD and ensures that there is a
reduction of agency conflicts and that the shareholders‟ interests are protected.
CFP of the company depends on what the NRC has appointed to the BOD and who all
form the executive management team. So, it is necessary for NRC to select the right
director in order to increase the firm‟s profitability.
NRC creates a lot of value for the company if it is influential enough to introduce
independent suggestions. Independent NRC does not usually get influenced by the CEO
or other executives and hence they actively exercise their control to increase the CFP.
Based on the sample of 228 companies 2015 and 2016, the research paper successfully
proves that there is a relationship between the nomination and remuneration committee
and the ROA (Return on Assets) and EPS (Earnings per Share) and thus a relationship
with financial performance of the company. This is proved via data analysis and
descriptive statistics.
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2. RBI tightens fit-and-proper criteria for directors on PSB boards ix
- GK Today
The RBI in 2019 for the first time produced an exhaustive list of disqualifications for
directors. In 2019, RBI issued „fit and proper‟ criteria for eligibility of directors for public
sector banks.
Soon RBI would also apply such guidelines to non-banking financial sector and other
private banks.
There must be minimum 3 non-executive directors on NRC, the age (35 years to 67
years), period for which office can be held (6 years), and exceptions are clearly
mentioned. This is necessary to bring back the PSBs on track.
The article clarifies that directors are working as employees and they are hence
compensated by the way of salary and other allowances.
The Rajasthan bench of AAR (Authority for Advance Ruling) gave explanation (to Clay
Craft India Pvt Ltd) as to whether the salaries paid to directors attract GST.
Since the directors are employees in all practical purposes, TDS is deducted on their
salary and PF laws are also applicable. Under reverse charge mechanism, this
consideration also attracts GST but this is on the basis of supply of service and not from
the perspective of the role of an employee.
The ruling needs greater clarification from Central government so that the lower
authorities do not misinterpret it. (Senior Partner, Rajat Mohan)
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4. Will your investors support your remuneration?xi
- Sophie Brookes
There is a cap on the maximum amount that can be paid to the directors as remuneration.
Sometimes it so happens that the directors are paid excessively and in such a case, the
shareholders may revolt against the unwarranted remuneration.
In 2018, the Investment Association introduced a public register that has the names of the
listed companies in which more than 20% of the shareholders have voted the resolution
(and these resolutions include the resolutions for executive pay too).
After the introduction of the register, the most recent AGM of companies revealed that
Unilever and Cineworld were also on that list.
This review by IA is mainly based on the new Corporate Governance Code of UK. This
now mentions proxy voting guidelines, and some basic principles of remuneration like
claw back, share plans and post-employment shareholding requirements.
Executive remuneration, specifically, is under scrutiny in India after the development of
corporate governance as a hot topic around the world.
The company has made it a point to attach a separate report on Corporate Governance
along with the Auditor‟s certificates in the Annexure. Colgate is involved in a lot of
socially responsible activities like promoting oral health, education, enhancing access to
water.
The social initiatives of Colgate show that the company is responsible and caring.
There were a few changes that the board made in terms of appointing independent
directors.
The appointment and remuneration of new directors and KMP are made on the basis of
expertise, qualifications, and core competencies. Evaluation is done on the basis of
parameters like accomplishment of the goal and overall performance, etc.
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6. Cadila healthcare Ltd.- Announcement under Regulation 30 (LODR) – Change in
Directoratexiii
- The Hindu Business Line and BSE India
DLF has eligibility criteria prescribed clearly that must be complied with for the
appointment of a director. The eligibility criteria are mentioned in the Articles of
Association.
The company prominently looks for people with relevant experience in the areas of sales,
finance, marketing, law, research, corporate governance, etc. as per the requirement at
that particular time and the decision of the nomination and the remuneration committee.
The board of the company is a progressive one because the NRC appoints the directors
who are professional, have high values, integrity and stature and the willingness to devote
time towards duties and responsibilities.
Britannia Industries Limited discloses the details of the remuneration of the directors for
the shareholders to review and for transparency.
The company has the market cap of Rs 759 Billion and the total annual CEO
compensation of Rs 91 Million for March, 2019.
So the company makes sure that the salary is lower valued at Rs 52 Million.
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9. Evaluating the Board of Directorsxvi
- Troy Segal
Size of the Board: There is no restriction to the number of the member in a board, but it
usually ranges between 3 and 31. Apart from that there has to be 2 committee of
independent directors namely compensation committee and the audit committee.
Degree of Independence: board should have independence director and the more the
better the board functions. Also if there is more independent director, there will be less
possibility of conflict of interest.
There mainly are four committees. Namely: the executive committee, compensation
committee, nomination committee and audit committee.
Purpose: To remunerate the board appropriately for the responsibility they bear.
Membership: Group should consist of chairman (non-executive director), two other non-
executive directors, all of them should independent. And neither the chairman nor the
director should be present when remuneration is being discussed.
Duties: Remuneration group should recommend the policy to remunerate directors, expert
directors, chairman and others, should recommend policy for reimbursing the expenses
done by the directors and lastly will review the remuneration policies.
Meetings: group shall meet twice per annum; chairman should be the one addressing the
meeting only in his/her absence should any other director be made chairman for that
meeting.
Authority: sub-committee has been authorized for seeking any information, investigating
the activities and to give legal advices if necessary.
Miscellaneous: at least once in a year should the group do following three things firstly
should review its own constitution, second recommend changes if necessary, and lastly
review their own performance.
Thus this is how Britannia‟ remuneration group works.
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11. Britannia Company’s Nomination Sub-Committeexviii
- Britannia
Two sections should be taken care of while appointing or removing any director. First one
is from the company‟s act 2013, SECC regulation 2018, a director may be recommended
to be removed by the committee if he/she break the rule mentioned in this section. And
secondly adding to the SECC regulation the SEBI regulation 2015, is also to be looked at
while appointing a director, he/she must be qualified according to the all the rules
mention under this act.
Board diversity is another thing to look at when we talk about board, there should be
people involved from different fields for various different perspective.
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13. Term of Appointment of Non-Executive Director in Dabur xx
- Mr Ajait Mohan Sharan
Non-executive directors are responsible for many important decisions of the company,
but are not actively participating on routine basis. They are present in the meeting of the
board and so are given sitting fees. Sitting fees are decided by the board. One lac per
meeting of board or audit committee.
Dabur has this rule, where the person is appointed here, he/she cannot take up any
positions in other competing company, positions like director, consultant, etc.
Evaluation takes annually, and on the basis of performance. Here their performance
decides whether or not should they be continuing with the company.
In India, shareholder does play a significant role. They are involved in majority and major
decisions of the company like appointment or reappointment of independent director.
Ever Indian company has two-third of the director who is to retire by rotation; their
appointment and reappointment are done by the shareholder of the company.
Appointment of independent director and then re-appointment of the independent director
by special resolution both are done by the shareholders.
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Shareholder is also given the wright of removing any director from his/her position.
Though this requires a valid reason and special resolution. They can also remove the
independent director who has been appointed second time, though shareholders are the
one to reappoint so they can only be removed by special resolution.
Given this rights shareholder cannot remove two type of directors. Firstly, the director
who is appointed by the tribunal under the companies act and secondly the director
appointed by proportional representation mechanism.
There are a lot of companies that have been caught in numerous scandals, conducting
transactions in bad faith, directors not complying with the fiduciary duties and indulged in
unethical related party transactions. A 360 degree review by the NRC usually ensures who
must stay in the company and who must leave. Such reviews by the NRC make sure that the
directors nominated are independent, the pay and remuneration is justifiable and that the
companies have ensured the policies with which the boards work smoothly. Earlier, such
disclosures and reviews were voluntary for companies in India and a few companies
disclosed their transparency and that the recommendations from NRC are being absorbed and
the directors are retained or nominated and remunerated accordingly. However, now the
Companies Act, 2013 and SEBI Guidelines have mandated this disclosure in the annual
report. From this, 3 questions arise:
Given the quick changes in the share prices, the habit of the media to reach to negative
conclusions, this question becomes important.
2) Is the evaluation process for the companies that are listed disguised and is it actually
difficult for family owned businesses to be controlled by stricter laws?
NRC may make a recommendation on the basis of the one-on-one experience of dealing with
the independent director and the public shareholders do not have such an experience, so
disguised or not, the review becomes important.
3) Irrespective of the recommendations of NRC, what is it that the BOD actually does and
do the people (who have interests associated with the company) and the independent
director have a say?
24
These questions hold utmost relevance and importance in India where a lot of have been
devastated due to the lack of compliance in the board. So, such a project in India helps us
study the NRC of a few Indian Companies and come to conclusions and findings.
25
And thus to run a company and its board
smoothly it is important for NRC
committee to work effectiveness.
2. How do we determine the effectiveness When the policies framed by the NRC
of NRC board? board, are effective for the company, with
which the company executes its work
smoothly then one can assume that the
board is working effectively.
The member appointed by the committee,
work efficiently and in the favour of the
company, it is said to have that the
committee worked effectively in
appointing the right members.
When any director is not working to his
or her fullest, then it is the responsibility
of the NRC committee to recommend
his/her name for the removal of their
director, it is possible only when the NRC
committee evaluate the performance of
the director accurately, when this steps
are taken correctly then one can say that
the NRC board is working effectively.
And so when the appointment of right
director and removal of wrong director on
the basis of evaluation of director and
smooth working of the board with the
formulated policies, one can determine
the effectiveness of NRC board.
26
The directors can be compensated against
their services but at the same time the
interests of the shareholders are taken care of.
27
SECTION 4: DATA COLLECTION AND DATA ANALYSIS
We‟ve been assigned a task of collecting the data regarding the Nomination and
Remuneration Committee of ten different companies. Information such as total number of
members in NRC, number of independent directors in NRC, if there is any executive director
who is the member of NRC, if any ESOPs are being paid to the key managerial personnel of
the company and we have to compare if there is any increase or decrease in the remuneration
of directors. To find this information, we referred to the annual reports of the companies for
the last five years (from 2014-15 to 2018-19).
In these annual reports, number of members of NRC and number of meetings held for NRC
were mentioned under the Board Committees- Nomination and Remuneration Committee
under Annexure 1. ESOP offered to Managing directors and other key managerial personnel
were mentioned in the remuneration table under Annexure 17 which shows the total payment
made to the key managerial personnel. CEO/MD-employee remuneration ratio is mentioned
under Annexure E.
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B. ITEMS OF DATA COLLECTED
The data collected for our 10 companies is based on the Nomination and Remuneration
Committee under the title of corporate governance of the companies. Total 7 items are
considered collecting the data of the companies.
1. Number of members in NRC- In every listed company they have one section of Corporate
Governance in that there are different committees like audit, stakeholder, nomination and
remuneration etc. Minimum there should be 3 members in the committee of NRC. In that
one of the members should be chairperson of that committee one should be an
independent director and one executive director (not necessary).
2. Number of meetings during the year - In one financial year minimum 2 NRC meetings
should be conducted. One meeting for ensuring that Managing Directors, Key Managerial
Personnel and Execute Directors that they are performing their duty as per goal of the
company. After the financial year second Meeting to review the performance against the
key performance indicators. Minutes of the meetings are supposed to be sent to all
committee members for their approval within 15 days or if in case it is recorded then in
30 days and it is prepared by the company Secretary.
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5. Increase/Decrease in Director Remuneration in the last 3 years - This point will be
mentioned in the annual report of the company below the table of the remuneration of the
director. This shows that whether directors‟ remuneration is increased or decreased some
companies also included their ESOP in this statement.
6. Number of ESOP offered? To whom? - ESOP means employee stock ownership plan. It
is one type of ownership interest given as employee benefit to employees, directors etc. of
the company. Other name of this is ESOS employee stock ownership scheme. It is not
necessary for the company to give ESOS if the employee, director etc. who have done
extraordinary work for their company and company also have extra surplus funds with
them for this scheme then only the company offers ESOP.
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C. STATISTICAL DATA ON DIFFERENT ITEMS1xxiii
D. ANALYSIS OF DATA
Among the 10 companies which are studied, the Nomination and Remuneration Committees
are having 4-6 members and all of them are complying with the legal requirements. However,
there are some companies like Cadila, Coal India and Container Corporation which are
having 7 members in the committee. On the other hand, Colgate had 3 members in the
committee for the majority of its years which are studied. These are extreme situations which
are observed. Having higher members in the committee may indicate that the company
believes in having a board with diverse qualifications. The company may believe that the
diverse board could use their monetary resources efficiently and provide better pay to their
employees, keeping in mind shareholders interest. This may indicate that the company
believes in decentralization of its powers and does not only rely on its director‟s decision.
The board having 3 members describes that the power of the promoter group is much higher
and the company believes in centralization of its powers.
The law prescribes that the Nomination and Remuneration Committee should conduct 2
meetings in a year. The pattern which was followed in the companies studies was that the
average meetings held by them were 2-6. However, there are companies like Cadila and Coal
India which have conducted only one meeting during the year 2015-16. And there is a
company named Dabur which has conducted 7 meetings during the year 2016-17.
The lower the frequency of meetings shows that the Company‟s committee is having some
influence from the Board of directors as the company is not involved in the duty for which it
is appointed. Whereas, higher the number of meetings shows that the company Dabur may
1
The data collected on Nomination Committees of 10 companies is presented in the adjoining excel sheet.
31
have some issues within themselves. But that's a positive sign as the company is meeting and
solving whatever the problem is.
The law prescribes that the Nomination and Remuneration Committee should have one half
of its members as independent directors. There are companies like Colgate and Coal India
which are not complying with the legal requirements. Colgate in the year 2016-17 had only 1
Independent director out of 3 members in the NRC. This shows that the remuneration of
directors still lies in the hands of the key managerial persons as the lower the independent
directors in the committee indicates that the top individuals are influencing the nomination
process.
The law suggests that there should not be any executive directors in the Nomination and
Remuneration Committee. The data which is collected shows that Colgate Ltd was having an
executive director in the NRC in the years 2014-15 and 2016-17. This shows that the
companies are supporting concentrated form of authorization. And this becomes a bad sign as
the director is involved in his/her own remuneration decision. This is a sign of a Ceremonial
Board (Rubber Stamp Board) as the board follows what the executive directors say and does
not apply their own mind.
Other companies are complying with the legal norms and can be merely classified as
Liberated Board as they may get influenced by the directors but they are somewhat
complying with legal norms.
Cadila Health Care had an Employee- CEO ratio between 500 and 600. This shows that the
company provides a very high percentage of remuneration to directors in comparison to the
employees of the company. The average ratio should be up to 300. But considering Cadila it
is way too high. This shows that the worker pay has stagnated as executive pay has soared.
32
The same observations occur in Container Corp. of India as its pay ratio is going beyond 600
also.
The average increase in the remuneration of Key managerial personnel is between 1-30%
each year. The following cases are the exceptions to it:
Britannia in the year 2015-16 had an increase in its remuneration of Key Managerial
Personnel by 51.4%. This was mainly given to the Managing Director who was having the
highest increase of 181.54%. The annual reports show that the increase was due to an
increase in the Net Cash Flow from operations. But the remuneration and perks [the ESOP
(worth Rupees 75000) in the year is also offered to only one person that is MD] offered were
the highest to MD, higher than any key managerial person.
In Coal India, the highest increase in the remuneration of Key Managerial Personnel was in
the year 2016-17, which was 74.93%. The annual report suggests that the drastic increase in
remuneration was due to an increase in the paid up capital of the company in that financial
year. The company even states that because the company does not offer any stock option
plans it has to increase the remuneration.
Divi‟s Laboratories had an increase in the remuneration of KMP by 44% in the year 2018-19.
The reason for the increase is due to the increase in return on capital employed of the
company.
The increase in remuneration of KMP in Dr. Reddy‟s Laboratories in the year 2018-19 was
due to the introduction of new products that the company introduced in that particular year.
Therefore the KMP were given an increase of 25% where among the previous years they had
decreased.
Another trend which was observed was that the ESOP offered by the companies were mainly
offered to the Key Managerial Personnel, only a small amount of the same was offered to
employees.
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SECTION 5: CONCLUSION
We have taken into consideration financial years 2014-2015, 2015-2016, 2016-2017, 2017-
2018, and 2018-2019 to analyse the Nomination and Remuneration committee of the
companies. During the analysis it is has come to our notice that the companies have different
culture and working patterns. In companies like Cadila Healthcare Ltd., Coal India Ltd. and
Container Corporation of India they have 7 members in the committee while on other hand
companies such as Colgate Palmolive Ltd. have 3 members in its Nomination and
remuneration committee based on the years that we studied. While the number of meetings
conducted by Cadila and Coal India was only 1 (2015-2016) and company like Dabur India
Ltd. conducted 7 meetings (2016-2017).
There are some findings that were analysed during the analysis that were uncommon in some
companies.
Colgate had 1 independent director out of total 3 members (2016-2017) which it has
disclosed in its annual report. Also it had executive director in its committee (in 2014-2015,
2016-2017) which is not illegal or breach of any law but it is not ideal situation for a
committee.
In Cadila Health Care, the employee-CEO ratio is between 500 and 600. This shows that the
directors and KMPs were given high amount of remuneration compare to the employees.
Britannia Industries Ltd. shows and increase of 51.4% increase in the remuneration of the
Key Managerial Personnel. The major amount of this increase was seen in the remuneration
of Managing Director which was 181.54%. This was due to increase in Net cash flow from
operation as shown in the annual report. But this raises a question whether the role of the
34
managing director in increase of cash flow so much significant that such high increase is seen
in remuneration.
Thus it is necessary for a company to prove its reasons for changes in the remuneration as
this might be seen a matter of concern for the shareholders and other investors to know
whether the KMPs are putting the benefit of the company as a priority or not.
Selection, appointment and removal of Directors, Key managerial personnel and senior
management.
Evaluation of their performance
Recommend remuneration and incentive payable plans
Board diversity
Disclosures are very important as it creates transparency between the company and the
stakeholders on the basis that capable and equitable people are appointed to run the
company. The nomination and remuneration committee has to disclose all the necessary
information in the report of the company.
The committee‟s disclosures will help the stakeholders to know if the directors and other
senior management are working appropriately or not. The committee analyses the
performance of the management personnel so that it can decide whether to make any change
or not in their remuneration. If in the disclosures done by the committee the remuneration of
a manager or director has significant change then the shareholders can know about the matter
more accurately. If there is a negative change i.e. if the remuneration has decreased then the
shareholders will get alarmed and will ask the company the reason of such increase. On the
other hand if the company has increased the remuneration then the shareholder can ask for
reason as at the end it is their money that the company is using. So such kind of disclosure
by nomination and remuneration committee will help the stakeholders to know the company
better.
35
The nomination and remuneration committee also formulates and discloses qualifications
requirement, positive attributes and independence of directors. This will also help the
stakeholders to build trust in the company as they will come to know that company is in
good hands.
Remuneration is an issue of negotiation among the directors and top executives of the
company. Shareholders and other investors take active interest in the remuneration issue and
thus it is a very important task for the Nomination and Remuneration committee to decide
fair packages. Remuneration committee should have a skill to analyze the industry in which
they are working and how the packages are decided in the industry with accordance to the
performance of the industry.
External pressure of the industry is also a factor which can affect the remuneration as any
industry has its own set standards of performance and the remuneration is related with that.
Also the development stage of the company or the industry at large affect the remuneration as
any company would study its competitor‟s strategy. The position and reputation of the
company in the industry also affects the remuneration packages. Shareholders and other
investors compare the performance of the company they have invested with that of other
competitor companies.
The shareholders also see the stock market and compare the performance of other companies
with the prices and then compare the remuneration to other companies‟ accordance with their
performance. After comparing, if the outcome is positive i.e. company if fair and is in good
hands who are putting company‟s interest first and not their personal motive by looking at the
remuneration decided by the Nomination and Remuneration committee. Thus shareholder
satisfaction will increase and if outcome is not positive then shareholders will get more active
in the company affairs.
36
SECTION 6: REFERENCES
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Evaluation Policy. (p.1-13). Web. Retrieved from: https://kewalkiran.com/wp-
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i
Capital Market. (nd.). About Britannia Industries Ltd | Company Information |
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ii
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iii
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iv
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v
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vi
(lawctopus, n.d.) (westlaw, n.d.) (legalservicesindia, n.d.) (researchgate, n.d.) (kpmg, n.d.)
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The Institute of Compny Secretaries of India. (2019). Lesson 15: Board Constitution and its
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viii
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37
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NCE
ix
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Brookes, Sophie. (November 28, 2018). Will your investors support your remuneration?
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xii
Economic Times: India Times. (March, 2019). “Corporate Governance, Directors and Key
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xiii
The Hindustan Business Line. (December 06, 2018). Cadila healthcare Ltd.-
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xiv
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Key Managerial Personnel”. Director Report: DFL Limited. The Economic Times Markets.
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xv
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Managerial Personnel”. Director Report: Britannia Industries Ltd. The Economic Times
38
Markets. Web. Retrieved from: https://economictimes.indiatimes.com/britannia-industries-
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xvi
Segal, Troy. (March 27, 2020). Evaluating the Board of Directors. Investopedia. Web.
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xviixvii
Britanniapandi. (n.d). “Remuneration Group: Terms of References”. The Britannia
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20190327.pdf
xix
MSE. (n.d). Nomination and Remuneration Policy. Metropolitan Stock Exchange. Web.
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Us/policy/2019/May/Nomination-and-Remuneration-Policy.pdf
xx
https://www.dabur.com/img/upload-files/3227-terms-of-appointment-of-Mr-Ajit-Mohan-
Sharan.pdf
xxi
(N.A). (n.d). Terms of Appointment as Non-Executive Independent Directors. Dabur. Web.
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xxii
Mangaldas & Co., Shardul Amarchand. (July 10, 2018). Corporate Governance in India.
Lexology. Web. Retrieved from: https://www.lexology.com/library/detail.aspx?g=673fd913-
c212-42bc-9d9c-a0eb14002359
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xxiii
All the data figures retrieved from Company Annual Reports:
http://britannia.co.in/investors
https://www.cadilapharma.com/about/corporate-governance/
https://www.cipla.com/investors
https://www.coalindia.in/Manage/ViewDocumentModule.aspx
https://investor.colgatepalmolive.com/financial-information/annual-reports
http://www.concorindia.com/investors-relations.asp
https://www.dlf.in/investor.php
https://www.dabur.com/in/en-us/investor/financial-information/reports/annual-reports
https://www.divislabs.com/investor-relations/reports-and-filings/annual-reporting/
https://www.drreddys.com/investors/reports-and-filings/annual-reports/
40