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Major Corporate Governance Committees

Around the world


Major Committees
• UK - Sir Adrian Cadbury Committee – 1992
• US - Sarbanes-Oxley Act – 2002
• India - Kumar Mangalam Birla Committee - 1999
• Need of the hour
• Recommendations
• Conclusion
Sir Adrian Cadbury Committee
The year of 1991 in UK

Washington Post termed BCCI as


Polly Peck International PLC,
‘Bank of Crooks and Criminals’
an FTSE 100 listed company in London

Maxwell Group Publishing company scandal in 1991


Sir Adrian Cadbury Committee of 1992
Profile of Sir Adrian Cadbury
• Descendent of the Cadbury family, the
family behind Cadbury (Mondelez Intl.)
• Director of IBM UK
• Director of Confederation of British
Industry (CBI)
• Director of the Bank Of England
• Deputy Chairman, Chairman and
Managing Director of Cadbury
Schweppes
Major Recommendations of the 90 page submission
• Regular meetings and assessment of control
• Role of Non-Executive Directors
• Professional Advice
• Training to Directors
• Appointment of internal committees
• Company Secretary guidelines
Nomination Committee:
• Majority of Non-Executive Directors
Remuneration Committee:
• Full disclosures of remuneration
• Contract length not exceeding 3 years
• Criteria for performance evaluation
Audit Committee:
• Minimum of 3 members
• Membership exclusive to 3 Non-Executive Directors
• Meetings
• Appointment of External Auditors, review of reports
etc.
• Conflict of interest of external auditors
Financial Reports/Standards Recommendations
• Number games and accounting standards
• Interim reports to shareholders apart from the annual and
half-yearly reports
• Simplified reports
• Rotation of auditors
• Going concern principle
• Reporting of fraud
• Audit as a standalone function
Conclusion
No system of corporate governance can be totally proof against fraud or
incompetence. The test is how far such aberrations can be discouraged and how
quickly they can be brought to light. The risks can be reduced by making the
participants in the governance process as effectively accountable as possible.
The key safeguards are properly constituted boards, separation of the functions
of chairman and of chief executive, audit committees, vigilant shareholders and
financial reporting and auditing systems which provide full and timely disclosure.

Update: The current Corporate Governance code that’s in force in UK is ‘The UK Corporate
Governance Code’. It is built upon the foundations of The Cadbury Committee with some
changes made which are apt to the present day. It came into force on 1st January 2019
Sarbanes-Oxley Act
The Year of 2001 in US

Enron WorldCom

Both the scams were audited by


Arthur Andersen LLP
Sarbanes-Oxley Act of 2002 (SOX Act)

Paul Sarbanes Mike Oxley


• Former Politician • Former politician
• Graduate of Princeton University • Ex-FBI employee
• Graduate of Harvard Law School
Highlights of the 66 Page Act
• Public Company Accounting Oversight Board (PCAOB)
• Auditor Requirements and guidelines
• Accountability of the board
• White collar crimes penalty
• Whistle Blower Protection
• Accounting disclosures
Major and crucial sections of the act
• Section 302: Senior corporate officers personally certify in writing
that the company's financial statements "comply with SEC disclosure
requirements and fairly present in all material aspects the operations
and financial condition of the issuer."
• Section 404: Establish internal controls and reporting methods
• Section 802: 3 rules of recordkeeping
I. Destruction and falsification of records
II. Defines the retention period for storing records
III. The specific business records that companies need to store,
which includes electronic communications.
Conclusion
Although SOX is widely accepted and praised to be extremely
effective in detecting and preventing potential corporate frauds it
is also heavily criticized for over burdening the companies with
unnecessary internal controls which delay decision making
process making the companies ineffective and adds unnecessary
costs increasing the operational expenses of the companies. But
still, many of the auditors like the Big4 strongly support the
implementation of SOX Act after it caused the downfall of their
sibling Arthur Anderson
Kumar Mangalam Birla Committee
Need
a) 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 areas such as continuous disclosure of material
information, both financial and non-financial, manner and
frequency of such disclosures, responsibilities of independent and
outside directors;
b) To draft a code of corporate best practices; and
c) To suggest safeguards to be instituted within the companies to deal
with insider information and insider trading.
Kumar Mangalam Birla

• MBA from London Business School


• Qualified Chartered Accountant (CA) from ICAI
• Chairman of Aditya Birla Group
• Chairman of Vodafone Idea Limited
• Chairman of IIM-Ahmedabad
• Served as the Chairman of IIT-Delhi Board of
Governors
Major Recommendations of the 28 page report
Mandatory Recommendations
• Those recommendations which are absolutely essential
for corporate governance, can be defined with precision
and which can be enforced through the amendment of
the listing agreement could be classified as mandatory
Non-mandatory recommendations
• Others, which are either desirable or which may require
change of laws, may, for the time being, be classified as
non-mandatory
• Classification of directors into Promoter, Executive, Non-Executive,
Independent and Nominee Directors
• Attractive compensation for Non-Executive Directors
• Not less than 50% to be Non-Executive Directors
• Criteria for minimum number of Independent Directors
i. Non-Executive Chairman = 1/3 should be of Independent
directors
ii. Executive Chairman = ½ should be of Independent directors
• Criteria for Nominee Directors
• Responsibilities of a Chairman
• The Board, internal auditors and external auditors form the three
legged stool of company’s financial reports
• All other recommendations of nomination and remuneration
committee are similar to the recommendations of the Cadbury
Committee
• Complete transparency should be maintained in terms of compensation
of the directors
• Disclosure of Conflict of Interest of Management personnel to the
Board of Directors
Audit Committee criteria:
• Minimum 3 members, all being non-executive
directors with majority being independent directors
• Chairman should be independent director
• Meet at least thrice a year with one necessary for
every 6 months
Conclusion
There are several corporate governance structures available in the
developed world but there is no one structure, which can be singled out
as being better than the others. There is no "one size fits all" structure
for corporate governance. The Committee’s recommendations are not
therefore based on any one model but are designed for the Indian
environment. Corporate governance extends beyond corporate law. Its
fundamental objective is not mere fulfilment 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. The
corporate governance has as many votaries as claimants.
Suggested List of Items in
‘The Report on Corporate Governance’
1. A brief statement on company’s philosophy on code of governance
2. Board of Directors
3. Audit Committee
4. Remuneration Committee
5. Shareholders Committee
6. General Body meetings
7. Disclosures
8. Means of communication
9. General Shareholder information
Thank You
Presented by:
KVS Varun
PGDM-IB (1704035)