Corporate Governance

Suggestions of the Adrian Cadbury report, the Kumarmangalam report and their ethical ramifications.

What is Corporate Governance?
• Corporate governance is "the system by which companies are directed and controlled“ • It involves regulatory and market mechanisms, and the roles and relationships between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. • An important theme of corporate governance is the nature and extent of accountability of people in the business.

customers. creditors.Principles of Corporate Governance • Rights and equitable treatment of shareholders: – Organisation can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. suppliers. local communities. contractual. • Role and responsibilities of the board: – The board needs sufficient relevant skills and understanding to review and challenge management performance. • Interests of other stakeholders: – Organizations should recognize that they have legal. and policy makers. and market driven obligations to non-shareholder stakeholders. social. including employees. . investors.

Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. • Disclosure and transparency: – Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability.Principles of Corporate Governance • Integrity and ethical behaviour: – Integrity should be a fundamental requirement in choosing corporate officers and board members. .

Introduction • Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: – The Cadbury Report (UK. 2002). 1998 and 2004) – The Sarbanes-Oxley Act of 2002 (US. . 1991) – The Principles of Corporate Governance (OECD.

.Adrian Cadbury Report • Sir George Adrian Hayhurst Cadbury (born 1929) is a former British Olympic rower and Chairman of Cadbury and Cadbury Schweppes for 24 years. • He has been a pioneer in raising the awareness and stimulating the debate on corporate governance and produced the Cadbury Report.

was established in may 1991 by the financial reporting council. Wallpaper group coloroll and Asil Nadir’s Polly Peck Consortinum . the London Stock Exchange and the accountancy profession. • eg.The origin of the report • The committee on the financial aspect of corporate governance. • The committee was created due to lack of an increasing investor confidence in the honesty and accountability of listed companies. forever after known as Cadbury Committee.

2 further scandals shook the financial world. – Bank of credit and Commerce international .• Even as the committee was getting down to business.

Features of the report • Sir Adrian Cadbury was a visionary chairman who energetically promoted the committee recommendations • The committee reflected the main shareholders • The investigation produced the draft report followed by an extensive process of consultation • A final report was produced whose recommendation was widely accepted and adopted .

rights & role • Address various aspects of accountancy profession • Raise the Standard of corporate governance .Objective of the report • Uplift the low level of confidence • Review the structure.

.The contents of the Report • The central component of the voluntary code.Cadbury Code: – That there be a clear division of responsibilities at the top – That the majority of the board be comprised of outside directors – That remuneration committees for the Board members be made up in the majority of the non-executive directors and – That the Board should appoint an Audit Committee including at least three non-executive directors.

• Separate figures for salary and performance-related elements and on what basis the performance is measured. • Exec. Director etc. • There should be a full and clear disclosure of their total payments including pension contribution. .Recommendations in the Cadbury code of best practices • Directors service contracts should not exceed 3 years without shareholder's approval. Directors pay should be subject to the recommendations of a Remuneration Committee made up wholly or mainly of non-executive Directors. • It is the Board’s duty to present a balanced and understandable assessment of the company’s position.

• The directors should report that the business is a going concern. with supporting assumption or qualifications as necessary .• The board should establish an Audit Committee of atleast 3 non-exec. • The director should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities. Directors with written terms of reference which deal clearly with its authority and duties. • The Directors should report on the effectiveness of the company’s system of internal control.

Reactions to Report .

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KUMAR MANGALAM REPORT ORIGIN .

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. insiders abstain from transacting in the securities of the company. the corporate 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. do not use their position of knowledge and access to inside information. which include corporate insiders also. • To achieve this. It is important that insiders. to take unfair advantage over the uniformed stockholders and other investors transacting in the stock of the company.• Another important aspect of corporate governance relates to issue of insider trading.

the role of the management. The control and reporting functions of boards. • The other way of looking at corporate governance to the efficiency of a business enterprise. the role of various committees of the board. because they are the raison for the corporate governance and also the prime constituency of SEBI. to the creation of the wealth and to the country’s economy. all assume special significance when viewed from this perspective.• The committee’s recommendations look at corporate governance from the point of view of the stake holders and in particular that of the shareholders. .

At the heart of the committee's report is the set of recommendations & they are as follows • Distinguishes responsibilities & obligation of the Boards & Management • Disclosure of financial report within the specified date • Separate disclosure of annual report & report on corporate governance .

Objective of the report • To enhance shareholder value & keeping in view the interest of other shareholder • To treat the important not as the mere structure but as the way of life • Proactive initiative taken by companies themselves and not in external measure .

• The firm should have formal schedule of matter especially reserve to it for decision to ensure that the direction and control of the company in its hand. • The board should include non executive director of sufficient caliber and number for their view to carry significant weight in the board decision. • All director should have access to advice an services of the company secretary who is responsible for the board to ensure that board procedure are followed and applicable rules and regulation are complied with. .Recommendation “a proposal that an appropriate course of action” Relating to director the recommendation are • The board should meet regularly & retain full and effective control over the company and monitor the executive management. • Any question of removal of company secretary should be matter of board as a whole.

• The audit committee have minimum three member. all being non executive director and at lest one having financial & accounting knowledge. .There are some mandatory & non mandatory recommendation • Mandatory recommendation • The board of company should have optimum combination of executive and non executive director with not less than 50% of the board comprising the non executive director • The board of company should set up the qualified and independent audit committee.

• Half yearly declaration of financial performance including summery of the significant event in the last six month should be sent for every shareholder. • Non executive chairman should be entitle to maintain chairman office at the companies expenses.Non mandatory recommendation • The board should set up a remuneration committee to determine the companies polices on specific remuneration package for executive director. . This will be enable him to discharged the responsibilities effectively.

Implementation of recommendations • Provision of clause 49 • Requirement of clause 49 .

Provision of clause 49 • Composition of board :in case of full tome chairman 50% non 50% executive director executive director and • Constitution of audit committee:With 3 independent director with chairman having a financial background. Finance director and internal audit head to be special invitee and minimum 3 special meeting to be convened. .

segment wise and product wise performance.Requirement of clause 49 • Remuneration of director:. Detail of remuneration package. • Management discussion & analysis report :.it should include industries development and structure. . discussion on final performance.remuneration of non executive director to be decide by the board. Director not be member of 10 committee and chairman of 5 across the all companies .at lest 4 meeting in year. • Board procedure :. stock option performance incentive of director to be disclose. opportunities and threats . internal control systems and its adequacy.

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