McKinsey Survey, Committees On Corporate Governance

McKinsey Survey on Corporate
Governance
McKinsey Survey on Corporate Governance
• Aim: to test the link between the market valuation and the corporate
governance.
• Outcome: companies with better corporate governance command a higher
price-to-book ratio.
• In the survey, around one-fifth of the institutional investors expressed
preference towards corporate governance over financials while deciding
their emerging market portfolios.
• Further, around a significant two-third felt corporate governance is almost
as important as the balance sheet.
• In fact, respondents to the survey were ready to pay a premium of 28 per
cent for the well-governed companies in emerging markets.
• The survey, which covered a sample of 188 companies in six emerging
markets (Malaysia, Mexico, South-Korea, Taiwan, India and Turkey)
The survey found that in India, good corporate governance increases market
valuation by:
• Increasing financial performance.
• Transparency of dealings, thereby reducing the risk that boards will serve
their own self-interests.
• Increasing investor confidence.
McKinsey rated the performance of corporate governance of each company
based on the following components:
i) Accountability: Transparent ownership, board size, board accountability,
ownership neutrality.
ii) Disclosure and transparency: Broad, timely and accurate disclosure,
International Accounting Standards.
iii) Independence: Dispersed ownership, independent audits and oversight,
independent directors.
iv) Shareholder equality: One share, one vote.
Various Committees on Corporate
Governance
Global Level Committees and Acts
• The Cadbury Committee on Corporate Governance–1992
• The Greenbury Committee–1995
• The Hampel Committee–1998
• The Combined Code–1998
• The Blue Ribbon Committee–1998
• The Turnbull Committee–1999
• The World Bank Initiative on Corporate Governance
• The Sarbanes-Oxley Act–2002
• The King Committee (I)–1994, The King Committee (II)–2002,
The King Committee (III)–2009, The King Committee (IV)–2017
National Level Committees
• The Working Group on Companies Act 1996
• The CII Efforts 1996
• The Kumaramangalam Birla Committee 1999
• The Naresh Chandra Committee 2002
• The Narayanamoorthy Committee 2003
• The JJ Irani Committee 2005
• Uday Kotak committee on corporate governance 2017
The Cadbury Committee on
Corporate Governance–1992
The Cadbury Committee on Corporate Governance–
1992
• The Committee (UK) was set up in May 1991 by the Financial Reporting
Council, the Stock Exchange and the accountancy profession in response to
the concern about the standards of financial reporting and accountability.
• The committee was chaired by Sir Adrian Cadbury and decided to review
those aspects of corporate governance relating to financial reporting and
accountability.
• The final report ‘The Financial Aspects of Corporate Governance’ (known
as the Cadbury Report) was published in December 1992.
• The immediate reason for the appointment of the committee by the
Financial Reporting Council, UK was the failure of one of the top company
Maxwell Communications and the death of Robert Maxwell in 1990 after
missing from his office.
1992
About Maxwell Communications Company:
• The Company was established in 1964.
• Hazell Sun merged with Purnell & Sons to form the British Printing
Corporation.
• In 1967 the British Printing Corporation merged its magazines into
Haymarket Group.
• In July 1981, Robert Maxwell acquired a stake of 29 per cent of the
company. The Next year he secured full control of it.
• He changed the name of the Company to British Printing &
Communications Corporation in March 1982 and to Maxwell
Communication Corporation in October 1987.
1992
The Cadbury Committee – Objectives:
• To uplift the low level of confidence both in financial reporting and in the ability of
auditors to provide safeguards.
• To review the structure, the rights and the role of BOD, the shareholders and the
auditors by making them more effective.
• To address various aspects of accounting profession.
• To raise the standard of corporate governance.
General principles of C.G developed by the Cadbury committee
• Rights and equitable treatment of shareholders–Minority Vs. Majority
• Recognition and protection of other stakeholder’s interest.
• Role and responsibilities of BOD–Size, independence, commitment, skills. Integrity
and ethical behavior of auditor.
• Disclosure and transparency–Timing, facts, etc.
1992
Major Recommendations related to the areas of:
• Board of director’s performance
• Board composition
• Board structure
• Role of independent directors
• Internal control system
• Board committees
• Chairman’s role
• Secretary’s role
• Training to board of directors etc.
1992
Major Recommendations:
1. The board must compose of an optimum number of executive and
nonexecutive directors. The executive directors must have good knowledge of
business and the non-executive directors have a broader view about the
activities of the company and the environment in which the company is
working.
2. The executive and the non-executive directors must work together with one
objective of maximizing the shareholder's wealth.
3. All board members will have equal responsibility in the actions of company
board.
4. Non-executive directors will have additional responsibilities of reviewing the
performance of executive directors in addition to reviewing the performance
of the board as such and must take a lead when a potential conflict of interest
arises.
1992
5. Chairman is primarily responsible for the working of the board and also
ensuring that all the executive and the non-executive directors are
encouraged to play their full role.
6. The Non-executive directors should bring an independent judgment on
issues of strategy formulation, performance, resource use and fixing the
standard of performance.
7. There should be a formal selection process of the non-executive
directors to ensure the independence the independence of them
through a nomination committee.
8. The independent directors must be appointed for a specific period and
the formal appointment letter must be given clearly mentioning their
rights, duties terms of appointment and responsibilities.
1992
9. The independent directors must be allowed to seek outside professional
advice on issues related to the company at company’s cost wherever
necessary.
10. Sufficient training must be given to directors for improving their
performance.
11. The board should recognize the importance of the finance function by
making it the designated responsibility of a non-executive director who
should be a signatory of the annual report and accounts on behalf of the
board.
12. There must be a board committees such as audit committee, nomination
committee, remuneration committee, etc. for the effective functioning of
these activities.
1992
13. Audit committees should be formally constituted to ensure that they have a clear
relationship with the board to whom they are answerable and to whom they should
report regularly. They should be given written terms of reference which deal
adequately with their membership, authority and duties, and they should normally
meet at least twice a year.
14. The audit committee must have three independent directors only.
15. The Company Secretary has a key role in ensuring that the bard procedures are
strictly followed.
16. The remuneration of both the executive and the non-executive directors must be
clearly disclosed in the annual report.
17. Financial report should be presented in a balanced and understandable manner to
the shareholders and should ensure the highest level of disclosure. The Financial
Reporting Council must develop a format for this purpose and all listed companies
must follow it.
1992
18. The director’s service contracts should not exceed 3 years without the
approval of the shareholders.
19. The nomination committee should have a majority of non-executive
directors on it and be chaired either by the chairman or a non-executive
director.
20. Directors need in practice to maintain a system of internal control over
the financial management of the company, including procedures
designed to minimize the risk of fraud. There is, therefore, already an
implicit requirement on the directors to ensure that a proper system of
internal control is in place.
1992
Major Recommendations (external audit):
1. The external auditors should be present at the board meeting when the
annual report and accounts are approved and preferably when the half-
yearly report is considered as well.
2. The auditor should have a duty to report fraud to the appropriate
authorities. The auditor’s duty is normally to report fraud to the senior
management. Where, however, if he/she no longer has confidence that
the senior management will deal adequately with the matter, he is
encouraged by professional guidance to report fraud to the proper
authorities.
3. In order to ensure transparency the fee paid to the external auditor for
audit work and other non-audit work if any should be specified
separately in the annual report.
1992
4. Professional objectivity must be ensured to the external auditor.
5. Auditor rotation system must be introduced and strictly adhered to.
6. Auditors while discharging their duties must ensure that accounting
standards are strictly followed.
7. Auditors owe a legal duty of care to the company and to the shareholders
collectively, but not to the shareholders as individuals nor to the third
parties
8. Companies’ statements of compliance should be reviewed by the
auditors before publication. The review should cover only those parts of
the compliance statement which relate to provisions of the Code where
compliance can be objectively verified. The Auditing Practices Board
should consider guidance for auditors accordingly.
1992
9. Directors should report on the effectiveness of their system of internal
control, and the auditors should report on their statement. The accountancy
profession together with representatives of preparers of accounts should
draw up criteria for assessing effective systems of internal control and
guidance for companies and auditors.
10. 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, building societies, insurance, and
investment business) so that they can report reasonable suspicions of fraud
freely to the appropriate investigatory authorities.
11. The accounting profession should continue its efforts to improve its
standards and procedures so as to strengthen the standing and
independence of auditors.
1992
Major Recommendations (for shareholders):
1. All parties concerned with corporate governance should use their influence to
encourage compliance with the code, institutional shareholders in particular,
with the backing of the institutional shareholders’ Committee.
2. Institutional investors should disclose their policies on the use of their voting
rights.
3. If long-term relationships are to be developed, it is important that companies
should communicate its strategies to their major shareholders and that the
shareholders should understand them. It is equally important that the
shareholders should play their part in the Communication process.
4. The board must ensure that any significant statement concerning their
companies is made publicly and hence equally available to all shareholders.
The Greenbury Committee Report -
1995
The Greenbury Committee Report - 1995
• In January 1995 a study group on director's remuneration was set up.
• Chairman of the committee: Sir Richard Greenbury, (Chairman of Marks
and Spencer’s).
• Objective: to identify good practices in determining director’s
remuneration and prepare a code of such practices for use by public
limited companies in the UK”.
• The committee focused the deliberations on:
• Remuneration policy
• Service conditions and compensation of directors
• Functioning of a remuneration committee
• Disclosure of director’s compensation
• Code of best practices in this respect
I. Major Recommendations (The remuneration committee):
1. To avoid potential conflicts of interest, the Board of Directors should set up
remuneration committees of Non-Executive Directors to determine on their
behalf, and on behalf of the shareholders, within agreed terms of reference
with the
• company’s policy on executive remuneration and specific remuneration,
• packages for each of the Executive Directors, including pension rights and any
compensation payments.
2. Remuneration committees should consist exclusively of the Non-Executive
Directors with
• no personal financial interest other than as shareholders in the matters to be
decided,
• no potential conflicts of interest arising from cross directorships and no day-to-day
involvement in running the business.
3. Remuneration committee Chairmen should account directly to the
shareholders through the means specified in the Code for the decisions their
committees reach. Where necessary, companies’ Articles of Association should
be amended to enable remuneration committees to discharge these functions
on behalf of the Board.
4. The members of the remuneration committee should be listed each year in the
committee’s report to shareholders.
5. The Board itself should determine the remuneration of the Non-Executive
Directors, including members of the remuneration committee, within the
limits set in the Articles of Association.
6. Remuneration committees should consult the company Chairman and/ or
Chief Executive about their proposals and have access to professional advice
inside and outside the company.
7. The remuneration committee Chairman should attend the company’s Annual
General Meeting (AGM) to answer shareholders’ questions about Directors’
remuneration and should ensure that the company maintains contact as
required with its principal shareholders about remuneration in the same way
as for other matters.
8. The committee’s annual report to the shareholders should not be a standard
item of agenda for AGMs. But the committee should consider each year which
the circumstances are such that the AGM should be invited to approve the
policy set out in their report and should minute their conclusions.
II. Major Recommendations (Disclosure and approval provisions):
1. The remuneration committee should make a report each year to the shareholders
on behalf of the Board. The report should form part of, or be annexed to, the
company’s Annual Report and Accounts. It should be the main vehicle through
which the company accounts to the shareholders for Directors’ remuneration are
communicated.
2. The report should set out the Company’s policy on executive remuneration,
including levels, and Individual components. Performance criteria and
measurement, pension provision, contracts of service and compensation
commitments on early termination must also be specified.
3. The report should state that, in framing its remuneration policy, the committee
shall give full consideration to the best practice provisions set out in the report.
The report should also include full details of all elements in the remuneration
package of each individual Director by name, such as basic salary, benefits in kind,
annual bonuses and long-term incentive schemes including share options.
4. Information on share options should be given to each Director in accordance with
the recommendations of the Accounting Standards Board’s Urgent Issues Task
Force Abstract 10 and its successors.
5. If grants under executive share option or other long-term incentive schemes are
awarded in one large block rather than phased, the report should explain and
justify. Also the report should specify pension entitlements earned by each
individual Director during the year, calculated on a basis of be recommended by
the Faculty of Actuaries and the Institute of Actuaries If annual bonuses or benefits
in kind are pensionable the report should explain and justify, the amounts received
by, and commitments made to, each Director.
6. Any service contracts which provide for, or imply notice periods in excess of one
year (or any provisions for predetermined compensation on termination which
exceed one year’s salary and benefits) should be disclosed and the reasons for the
longer notice periods explained.
7. Shareholdings and other relevant business interests and activities of the
Directors should continue to be disclosed as required in the Companies Acts
and the London Stock Exchange Listing Rules.
8. Shareholders should be invited specifically to approve all new long-term
incentive schemes (including share option schemes) whether payable in cash
or shares in which Directors or senior executives will participate which
potentially commit shareholders’ funds over more than one year or dilute the
equity.
III. Major Recommendations (Remuneration policy):
1. Remuneration committees must provide the packages needed to attract, retain
and motivate Directors of the quality required but should avoid paying more
than what is necessary for this purpose.
2. The committees should benchmark their company relative to other
companies. They should be aware what other comparable companies are
paying and should take account of relative performance.
3. The committees should be sensitive to the wider scene, including pay and
employment conditions elsewhere in the company, especially when
determining annual salary increases.
4. The performance-related elements of remuneration should be designed to
align the interests of Directors and shareholders and to give Directors keen
incentives to perform at the highest levels.
5. Remuneration committees should consider whether their Directors should be
eligible for annual bonuses. If so, performance conditions should be relevant,
stretching and designed to enhance the business. Upper limits should always
be considered.
6. The committees should consider whether their Directors should be eligible for
benefits under long-term incentive schemes. Traditional share option schemes
should be weighed against other kinds of long-term incentive scheme.
7. Any new long-term incentive schemes which are proposed should preferably
replace existing schemes or at least form part of a well-considered overall
plan, incorporating existing schemes which should be approved as a whole by
the shareholders. The total rewards potentially available should not be
excessive.
8. Grants under incentive schemes, including new grants under existing share
option schemes, should be subject to challenging performance criteria
reflecting the company’s objectives. Consideration should be given for criteria
which result the company’s performance relative to a group of companies in
some key variables such as total shareholder return.
9. Grants under executive share option and other long-term incentive schemes
should normally be phased rather than awarded in one large block.
10. Executive share options should never be issued at a discount.
11. Remuneration committees should consider the pension consequences and
associated costs to the company of basic salary increases, especially for
Directors close to retirement.
IV. Major Recommendations (Service contracts and compensation):
1. Remuneration committees should consider what compensation commitments
their Directors’ contracts of service, if any, would entail in the event of early
termination, particularly for unsatisfactory performance.
2. There is a strong case for setting notice or contract periods at, or reducing
them to, each year. Remuneration committees should, however, be sensitive
and flexible, especially over timing. In some cases notice or contract periods of
up to two years may be acceptable. Longer periods should be avoided
wherever possible.
3. If it is necessary to offer longer notice or contract periods, such as three years,
to new Directors recruited from outside, such periods should reduce after the
initial period.
IV. Major Recommendations (Service contracts and compensation):
4. Within the legal constraints, remuneration committees should tailor their
approach in individual early termination cases to the wide variety of
circumstances. The broad aim should be to avoid rewarding poor performance
while dealing fairly with cases where departure is not due to poor
performance.
5. Remuneration committees should take a robust line on payment of
compensation where performance has been unsatisfactory and on reducing
compensation to reflect departing Directors’ obligations to mitigate damages
by earning money elsewhere.
6. Where appropriate, and in particular where notice or contract periods exceed
one year, companies should consider paying all or part of compensation in
instalments rather than in lump sum and reducing or stopping payment when
the former Director takes on new employment.
The Hampel Committee, 1995
The Hampel Committee, 1995
• Set up in November 1995
• Objective: to promote high standards of corporate governance both to protect
investors and preserve and enhance the standing of companies listed on the
London Stock Exchange.
The Committee
• Developed the Cadbury Report.
• Recommended that
• the auditors should report on internal control privately to the directors.
• the directors maintain and review all (and not just financial) controls.
• companies that do not already have an internal audit function, should from
• time to time, review their need for one.
• Introduced the Combined Code that consolidated the recommendations of
earlier corporate governance reports (Cadbury and Greenbury)
The Combined Code, 1998
The Combined Code, 1998
• The Combined Code was subsequently derived from
• Ron Hampel Committee’s Final Report,
• The Cadbury Report and
• The Greenbury Report.
• The Combined Code is appended to the listing rules of the London Stock
Exchange. As such, compliance of the code is mandatory for all listed companies
in the United Kingdom.
• the boards should maintain a sound system of internal control to safeguard
shareholders’ investment and the company’s assets.
• It was observed that the one common denominator behind the past failures in
the corporate world was the lack of effective risk management.
The Turnbull Committee, 1999
• Set up by the Institute of Chartered Accountants in England and Wales (ICAEW)
in 1999.
• “Turnbull Report" was a report drawn up with the London Stock Exchange for
listed companies.
• To provide guidance to assist companies in implementing the requirements of
the Combined Code relating to internal control.
• Provided guidance to assist companies in implementing the requirements of the
Combined Code relating to internal control.
• Recommended that where companies do not have an internal audit function, the
board should consider the need for carrying out an internal audit annually.
• Recommended that the boards of directors confirm the existence of procedures for
evaluating and managing key risks.
The Blue Ribbon Committee (1999)
The background:
• Financial reporting of misstatement appears to be a growing problem in
the US.
• The number of class action securities suits filed has grown steadily since
the passage of the 1995 Private Securities Litigation Act, and allegations of
accounting manipulation have replaced disclosure-based allegations as the
primary grounds of complaint.
Aim:
• To overcome the problem and improve in the quality of financial reporting
by strengthening the effectiveness of audit committee.
• US has set up the Blue Ribbon Committee under the chairmanship of Levitt
in 1998.
• In February 1999, the Committee published the Report on Improving the
Effectiveness of Corporate Audit Committees (the Blue Ribbon Report).
• The recommendations of the committee include:
• the role of audit committee
• the independence of audit committee
• minimum size
• financial expertise of members in the committee
• Also communications with the external auditor and with shareholders .
• “Qualified, committed independent and tough-minded audit committees

represent the most reliable guardians of the public interest”
-Chairman, Blue Ribbon Committee Levitt.
The Blue Ribbon Committee (1999) - Recommendations
1. Audit committee and its member’s independence: Independence is
defined to exclude current and former employees, relatives of
management, persons receiving compensation from the company
(except directors’ fees) or controlling for-profit organizations receiving
from or paying the corporation significant sums, and compensation
committee interlocking directorships.
2. Financial experts and minimum committee members: a minimum of
three audit committee directors (Except small), each of whom is
financially literate and at least one of whom has accounting or related
financial management expertise.
The Blue Ribbon Committee (1999) - Recommendations
3. Need of a formal charter for audit committee: The audit committee
must have a formal charter and to disclose the status of the charter and
whether the audit committee has fulfilled its designated responsibilities
during the proxy statement period.
4. Responsibilities and activities of the audit committee: audit committee
must be active in the
• selection and the retention of the statutory auditor,
• regularly evaluate auditor’s independence,
• regularly discuss accounting quality with the auditor and to hold similar discussions
with the management and the auditor interim reviews and discussion of these
review-related issues with the auditor.
World Bank on Corporate
Governance
World Bank on Corporate Governance
• The World Bank Report on corporate governance recognizes the complexity
of the concept and focusses on the principles such as transparency,
accountability, fairness and responsibility that are universal in their
applications.
• The World Bank Group and the OECD signed a Memorandum of
Understanding on June 21, 1999, to sponsor the Global Corporate
Governance Forum.
• The forum will bring together other multilateral development banks,
bilateral and international organisations, the IMF, the Commonwealth.
Asia Pacific Economic Cooperation, International Accounting Standards
Committee, International Organisation of Securities Commissions, and the
private sector.
• It will provide a rapid response mechanism for coordinating and channeling
practical-technical assistance to specific constituents, on a national,
regional, and global basis, to help design and implement reforms.
• the forum will mobilize local and international public and private sector
expertise and resources to and advance corporate governance on a fast
track, emphasizing dialogue and consensus building.
Activities of the Forum:
• Broadening the dialogue to include perspectives from developing and
transition economies.
• Supporting countries in carrying out self-assessments and investor surveys
of other status and practice of corporate governance.
• Building consensus for policy, regulatory, and institutional reforms at
global, regional and local levels.
• Framing corporate governance strategies to take full advantage of the
potential for private sector involvement.
• Developing the capacity of governments to design and implement reforms
and the capacity of self-regulatory bodies to develop and execute their
own regulations.
Sarbanes–Oxley Act, 2002
• The common thread is that governance matters, that is, good governance
promotes good corporate decision-making.
• Sarbanes–Oxley Act is a step in this direction, which codifies certain
standards of good governance as specific requirements.
• The Act calls for protection to those who have the courage to bring frauds
to the attention of those who have to handle frauds.
• The Sarbanes–Oxley Act (SOX Act), 2002 is a sincere attempt to address all
the issues associated with corporate failures to achieve quality
governance and to restore investor’s confidence.
• The Act contains a number of provisions that dramatically change the
reporting and corporate director’s governance obligations of public
companies, the directors and officers.
Sarbanes–Oxley Act, 2002 - Important provisions
1. Establishment of Public Company Accounting Oversight Board (PCAOB):
• Consisting five members of whom two will be certified public accountants.
• All accounting firms will have to register themselves with this Board.
• The Board will conduct annual inspections of firms, which audit more than
100 public companies, and once in 3 years in other cases.
• The board will establish rules governing audit quality control, ethics,
independence and other standards.
• It can conduct investigations and disciplinary proceedings and can impose
sanctions on auditors.
2. Audit committee:
• responsible for appointment, fixing fees and oversight of the work of independent
auditors.
• The committee is also responsible for establishing and reviewing the procedures for
the receipt, treatment of accounts, internal control and audit complaints received
by the company from the interested or affected parties.
• The Act requires that registered public accounting firms should report directly to
the audit committee on all critical accounting policies and practices and other
related matters.
3. Conflict of interest: Public accounting firms should not perform any audit
service for a publicly traded company if the CEO, CFO, CAO, controller, or
any person serving in an equivalent position was employed by such firm
and participated in any capacity in the audit of that company during the
one year period preceding the date of initiation of the audit.
4. Audit partner rotation: The Act provides for mandatory rotation of the
lead auditor, coordinating partner and the partner reviewing audit once
every 5 years.
5. Improper influence on conduct of audits: It will be unlawful for any
executive or director of the firm to take any action to fraudulently
influence, coerce, manipulate or mislead any auditor engaged in the
performance of an audit with the view to rendering the financial
statements materially misleading.
6. Prohibition of non-audit services: auditors are prohibited from providing
non-audit services concurrently with audit financial review services. Non-
audit services include:
• book-keeping or other services related to the accounting records or financial
statements of the client;
• financial information system, design and implementation;
• appraisal or valuation services, fair opinions;
• actuarial service;
• internal audit outsourcing services;
• management functions or human resources;
• broker or dealer, investment adviser or investment banking services;
• legal services or expert services unrelated to the audit and
• any other service that the board determines, by regulation, is impermissible.
7. CEOs and CFOs required to affirm financials:
• Chief executive officers and chief finance officers are required to certify the
reports filed with the Securities and Exchange Commission.
• If the financials are required to be restated due to material non-compliance
“as a result of misconduct” of the CEO or CFO, then such CEO or CFO will
have to return bonus and any other incentives received by him back to the
company.
• This applies to equity-based compensation received during the first 12
months after initial public offering. False and/or improper certification can
attract fine ranging from $1 million to $5 million or imprisonment up to 10
years or both.
8. Loans to directors:
• The Act prohibits US and foreign companies with securities traded within
the US from making or arranging from third parties any type of personal
loan to directors.
• It appears that the existing loans are not affected but material modifications
or renewal of loans and arrangements of existing loans are banned.
9. Attorneys:
• The attorneys dealing with the publicly traded companies are required to
report evidence of material violation of securities law or breach of fiduciary
duty or similar violations by the company or any agent of the company to
the Chief Counsel or CEO and if the Counsel or CEO does not appropriately
respond to the evidence, the attorney must report the evidence to the audit
committee or the Board of Directors.
10. Securities analysts:
• The Act has a provision under which brokers and dealers of securities
should not retaliate or threaten to retaliate an analyst employed by the
broker or dealer for any adverse, negative or unfavorable research report
on a public company.
• The Act further provides for disclosure of conflict of interest by the
securities analysts and brokers or dealers whether:
• The analyst has investments or debt in the company he is reporting on.
• Any compensation received by the broker dealer or analyst is “appropriate in
the public interest and consistent with the protection of investors”.
• The company (issuer) has been a client of the broker or dealer.
• The analyst received compensation with respect to a research report based
on investment banking revenues.
11. Penalties:
• For any wrongdoing are very stiff. Penalties for willful violations are even stiffer.
• Any CEO or CFO providing a certificate knowing that it does not meet with the
criteria stated may be fined up to $1 million and/or imprisonment upto 10 years.
• However, those who “willfully” provide certification knowing that it does not
meet the required criteria can be punished with a fine of $5 million and/or with
prison term up to 20 years.
In addition to these. Very importantly, the SOX Act provides for studies to be
conducted by the Securities and Exchange Commission or the Government
Accounting Office in the following areas:
• Auditor’s rotation.
• Off-balance sheet transactions.
• Consolidation of accounting firms and its impact on the accounting industry.
• Role of Credit Rating Agencies.
• Study of violators and violations during the years 1998–2001.
• Role of investment banks and financial advisers.
• “Principle-based” accounting.
The King’s Committee on Corporate
Governance
The King’s Committee on Corporate Governance
• The King’s Committee report on corporate governance is basically a South
African based corporate governance framework which is a requirement for
Johannesburg Stock Exchange listed companies.
• In July 1993, the Institute of Directors in South Africa asked retired South African
Supreme Court Judge Mervyn King to chair a committee on corporate
governance with Phillip Armstrong, Nigel Payne, and Richard Wilkinson members
to prepare guidelines for the governance structures and operation of companies
in South Africa.
• The committee came out with following reports
• first in 1994 (King I)
• second in 2002 (King II)
• third in 2009 (King III)
• fourth in 2017 (King IV) - This report is cited as the most effective summary of the
best international practices in corporate governance.
The King I Committee on CG
• In 1994, the first King reports on corporate governance was published which
form the first corporate governance code for South Africa.
• It recommended standards of conduct for boards and directors of listed
companies, banks, and certain state-owned enterprises. It included not only
financial and regulatory aspects, but also advocated an integrated approach that
involved all stakeholders.
• It included not only financial and regulatory aspects, but also advocated an
integrated approach that involved all stakeholders.
• It was applicable to all companies listed on the main board of the Johannesburg
Stock Exchange, large public entities as defined by the Public Entities Act of
South Africa; banks, financial and insurance companies as defined by the
Financial Services Acts of South Africa; and large unlisted companies.
• It defined ‘large’ as companies with shareholder equity over ` 50 million, but
encouraged all companies to adopt the code.
The King I Committee on CG
The key principles from the first King report covered:
• Board of directors makeup and mandate, including the role of non-executive
directors and guidance on the categories of people who should make up the non-
executive directors.
• Appointments to the board and guidance on the maximum term for executive
directors.
• Determination and disclosure of executive and non-executive director’s
remuneration.
• Board meeting frequency
• Balanced annual reporting
• The requirement for effective auditing
• Affirmative action programs
• The company’s code of ethics
The King II Committee on CG
• In 2002, when the Earth Submit was held in Johannesburg, King pushed for a
revision of the report (King II), including new sections on the role of the
corporate board on sustainability and risk management. This revised code of
governance was applicable from March 2002.
• In addition to those types of organizations listed in King I, it was applicable to
departments of
• State or national,
• provincial or local government administration falling under the Local Government:
Municipal Finance Management Act, and public institution or functionary exercising a
power or performing a function in terms of the constitution, or exercising a public power or
performing a public function in terms of any legislation, excluding courts or judicial officers.
• As before, it encourages all companies to adopt the applicable principles from the code.
The King II Committee on CG
The key principles from the second King report covered the following
areas:
• Directors and their responsibility
• Risk management
• Internal audit
• Integrated sustainability reporting
• Accounting and auditing
The King III Committee on CG
• The 2009 King III report on governance, strategy and sustainability were
integrated.
• Recommended that organizations produce an integrated report in place of
an annual financial report and a separate sustainability report and that
companies create sustainability reports according to the Global Reporting
Initiative’s Sustainability Reporting Guidelines.
• In contrast to the earlier versions, King III is applicable to all entities, public,
private and non-profit. King encourages all entities to adopt the King III
principles and explain how these have been applied or are not applicable.
• The code of governance was applicable from March 2010.
The King III Committee on CG
The report incorporated a number of global emerging governance trends
such as:
• Alternative dispute resolution
• Risk-based internal audit
• Shareholder approval of non-executive directors’ remuneration
• Evaluation of board and directors’ performance
It also incorporated a number of new principles to address elements not
previously included in the King reports:
• IT governance
• Business rescue
• Fundamental and affected transactions in terms of director’s
responsibilities during mergers, acquisitions and amalgamations.
The King IV Committee on CG
• There have been significant corporate governance and regulatory
developments, locally and internationally, since King III was issued in 2009
which need to be taken into account.
• The other consideration is that whilst listed companies are generally applying
King III, non-profit organizations, private companies and entities in the public
sector have experienced challenges in interpreting and adapting King III to their
particular circumstances.
• The enhancement will aim to make King IV more accessible to all types of
entities across sectors.
• Due to the consultative process to be followed, King IV will only be completed in
the second half of 2017. Providing for a 2-year period in respect of the drafting
process and another year grace period to allow organizations to implement,
• King IV become effective from middle 2017.
Indian Committees and Guidelines
The Kumar Mangalam Birla
Committee, 1999
The Kumar Mangalam Birla Committee, 1999
• SEBI appointed a committee on corporate governance on 7 May 1999, with 18 members
under the chairmanship of Kumar Mangalam Birla.
• To promoting and raising the standards of corporate governance.
• A veritable landmark in the evolution of corporate governance in India.
Aim:
• To suggest suitable amendments to the listing agreement (LA) 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.
• To draft a code of corporate best practices.
• To suggest safeguards to be instituted within the companies to deal with insider
information and insider trading.
Mandatory Recommendations:
1. Applicability: These are applicable to all listed companies with a paid-up
share capital of ` 3 crore and above.
2. Board of directors: The board of directors of a company must have an
optimum combination of executive and non-executive directors. The
number of independent directors should be at least one-third in case the
company has a non-executive chairman and at least half of the board in
case the company has an executive chairman.
3. Audit committee: A qualified and independent audit committee should
be set up to enhance the credibility of the financial disclosures and to
promote transparency.
The audit committee should have a minimum of three members, all being
non-executive directors with a majority being independent and at least one
director having financial and accounting knowledge. Also, the following
stipulations will have to be met:
• The company will continue business in the course of the following year.
• The accounting policies and principles conform to standard practice.
• The management is responsible for the preparation, the integrity and fair
presentation of financial statements and other information contained in the
annual report.
4. Remuneration committee of the board: The board of directors should decide
the remuneration of non-executive directors. Full disclosure of the
remuneration package of all the directors covering salary benefits, bonuses,
stock options, pension-fixed component, performance-linked incentives along
with the performance criteria, service contracts, notice period, severance fees
etc., is to be made in the section on corporate governance of the annual report.
5. Board procedures: The board meeting should be held at least four times a
year with a maximum time gap of four months between any two meetings.
Minimum information on annual operating plans and capital budgets, quarterly
results, minutes of meetings of audit committee and other committees,
information on recruitment and remuneration of senior officers, significant
labour problems, material default in financial obligations, statutory compliance
etc. should be placed before the board.
6. Management: Management discussions and analysts’ report covering
industry structure, opportunities and threats, segment-wise or product-
wise performance outlook, risks, internal control systems etc. are to form
a part of directors’ report or as an addition thereto.
7. Shareholders: In case of appointment of a new director or re-
appointment of existing director, information containing a brief resume,
nature of expertise in specific functional areas and companies in which
the person holds directorship and committee membership, must be
provided to the benefit of the shareholders.
8. Manner of implementations: A separate section on corporate
governance in the annual reports is to be introduced covering a brief
statement on
• company’s philosophy on code of governance
• board of directors
• audit committee
• remuneration committee
• shareholders’ committee
• general body meeting
• Disclosures, etc.
SEBI’s Response
• SEBI considered and adopted in its meeting held on 25 January 2000, the
recommendations of the Kumar Mangalam Birla Committee on corporate
governance appointed by it.
• In accordance with the guidelines provided by SEBI, the stock exchanges in India
have modified the listing requirements by incorporating in them a new clause
(Clause 49), so that proper disclosure for ensuring corporate governance is made
by companies:
• Board of directors
• Audit committee
• Remuneration of directors
• Board procedure
• Management
• Shareholders
• Report on corporate governance
• Compliance certificate from auditors.
SEBI’s Response
• SEBI’s Code of Corporate Governance requires that the following information be placed
by a company before the board of directors periodically:
• Annual operating plans and budgets and any updates thereon.
• Capital budgets and any updates thereon.
• Quarterly results for the company and its operating divisions or business segments.
• Minutes of audit committee meetings.
• Information on recruitment and remuneration of senior officers just below the board level.
• Material communications from government bodies.
• Fatal or serious accidents, dangerous occurrences, or any material effluent pollution
problems.
• Details of any joint venture or collaboration agreement.
• Labor relations.
• Material transactions which are not in the ordinary course of business.
• Quarterly details of foreign exchange exposures and risk management strategies.
• Compliance with all regulatory and statutory requirements.
The Naresh Chandra Committee
Report, 2002
The Naresh Chandra Committee Report, 2002
• The Naresh Chandra Committee was appointed as a high-level committee to
examine various corporate governance issues by the Department of Company
Affairs on 21 August 2002.
• Naresh Chandra Committee report on ‘Corporate Audit & Governance’ has
taken forward the recommendations of the Kumar Mangalam Birla Committee
on corporate governance which was set up by the SEBI.
• The committee’s recommendations mainly concerned:
• the auditor–company relationship
• disqualifications for audit assignments
• list of prohibited non-audit services
• independence standards for consulting
• compulsory audit partner rotation
• auditor’s disclosure of contingent liabilities
• auditor’s disclosure of qualifications and consequent action
• managements’ certification in the event of auditor’s replacement
• auditor’s annual certification of independence
• The committee’s recommendations mainly concerned:
• appointment of auditors,
• certification of annual audited accounts by the CEO and the CFO,
• auditing the auditors,
• setting up of the independent quality review board
• proposed disciplinary mechanism for auditors
• independent directors
• audit committee charter
• exempting non-executive directors from certain liabilities
• training of independent directors
• establishment of corporate serious fraud office,
• the SEBI and subordinate legislation, and so on.
• Naresh Chandra Committee report on ‘Corporate Audit & Governance’ has
taken forward the recommendations of the Kumar Mangalam Birla
Committee on corporate governance which was set up by the Securities
and Exchange Board of India (SEBI) on the following two counts:
• Representation of independent directors on a company’s board.
• The composition of the audit committee.
The Narayana Murthy Committee
Report, 2003
The Narayana Murthy Committee Report, 2003
• The Committee on Corporate Governance, headed by Shri Narayana
Murthy was constituted by SEBI, in 2003. The terms of reference were:
1. to review the performance of corporate governance and
2. to determine the role of companies in responding to rumor and other
price-sensitive information circulating in the market in order to enhance
the transparency and integrity of the market.
C G Philosophy of the Committee:
• The committee recognized the fact a corporation is an integration of various
stakeholders, such as customers, employees, investors, vendor partners,
government and society, and capital is flowing from various persons staying
in different parts of the world.
• It is essential that the business must be conducted ethically and be governed
in a fair and transparent manner protecting the interest of all stakeholders.
• It is a key element in improving economic efficiency of the firm.
• The committee views corporate governance not in a strict legal point of view
but from the point of view of mind set and culture of the management.
• The committee is of the view that good corporate governance brings
credibility to the company and investors attach superior value and vice versa
for bad governance.
• Approach
• The approach of the Committee was that the regulations are made not for
regulations but for its effective implementation and achieving the goal.
• The Committee felt that regulators’ should clearly define regulations and
be able to effectively enforce it.
• It should be as few as possible and the role of the regulator should
primarily be that of a catalyst in enforcement.
• The deliberations were focused primarily on issues related to audit
committees, audit reports, independent directors, related parties, risk
management, directorships and director compensation, codes of conduct
and financial disclosures.
Approach:
Suggestions were invited from all stakeholders and each suggestion was
evaluated on the basis of seven parameters such as:
• Importance – How important is the recommendation to the member?
• Fairness – Does the recommendation enhance fairness to all stakeholders,
by minimizing asymmetry of benefits?
• Accountability – Does the recommendation make corporate management
more accountable?
• Transparency – Does the recommendation enhance transparency?
• Ease of implementation – Is the recommendation easy to implement?
• Verification – Is the recommendation objectively verifiable?
• Enforcement – Can the recommendation be effectively enforced?
1. Audit committee
2. Audit report and audit qualification
3. Related party transactions
4. Risk Management
5. Proceeds from IPO
6. Code of conduct
7. Exclusion of nominee director from the definition of independent director
8. Limits on compensation paid to independent directors
9. Internal policy on access to audit committee
10. Whistle blowing policy
11. Extension of provisions relating to the non-executive director, the
independent director and the audit committee to subsidiary companies
12. Disclosure in reports issued by security analyst
Dr. J. J. Irani Committee Report on
Company Law, 2005
Dr. J. J. Irani Committee Report on Company Law,
2005
• The Government of India constituted an expert committee on company law
on 2 December 2004 under the chairmanship of Dr. J. J. Irani to make
recommendations on
1. responses received from various stakeholders on the concept paper;
2. issues arising from the revision of the Companies Act, 1956;
3. bringing about compactness by reducing the size of the Act and removing
redundant provisions;
4. enabling easy and unambiguous interpretation by recasting the provisions of the
law;
5. providing greater flexibility in rule making to enable timely response to ever-
evolving business models;
6. protecting the interests of the stakeholders and investors, including small
investors; and
7. any other issue related, or incidental, to the above
Dr. J. J. Irani Committee Report on Company Law,
2005
Recommendation:
1. Independent Directors in Listed Companies - The SEBI had in the revised
Clause 49 of the Listing Agreement mandated that at least 50 per cent of the
board of a listed company comprise independent directors.
2. Pyramidal Structures - The committee has also suggested that corporates
should be allowed to maintain pyramidal corporate structures, that is, a
company which is a subsidiary of a holding company could itself be a holding
company.
3. Power to Shareholders
4. Single Person Company
5. Self-regulation
6. Stringent Penalties
7. Accounts and Audits
Uday Kotak Report on Corporate
Governance 2017
Uday Kotak Report on Corporate Governance 2017
• The 25 member committee comprising of bureaucrats, executives, lawyers
and academics, was set up in June 2017 by SEBI under the chairmanship of
Mr. Uday Kotak.
• For studying the problems of corporate governance and improving the
governance practices of corporate India, ensuring higher degree disclosure
of related party transactions, improving effectiveness of board evaluation
practices etc.
• Submitted its report to the regulator( SEBI) on 5 October 2017,
recommending a member of changes in corporate governance norms.
Terms of Reference of the Committee:
1. Ensuring independence in the spirit of Independent Directors and their
active participation in functioning of the company.
2. Improving safeguards and disclosures pertaining to related party
transactions.
3. Issues in accounting and auditing practices by listed companies.
4. Improving effectiveness of board evaluation practices.
5. Addressing issues faced by investors on voting and participation in
general meetings.
6. Disclosure and transparency related issues, if any.
7. Any other matter, as the Committee deems fit pertaining to corporate
governance in India
The recommendations of the committee can be classified into the following
categories:
1. Composition and role of board of directors:
2. Institution of independent directors
3. Board committee
4. Enhanced monitoring of group entities
5. Related party transactions
6. Disclosure and transparency
7. Accounting and audited related issues
8. Investor participation in meetings of listed entities
9. Public sector corporate governance
10. Leniency mechanism
1. Chairman of the board cannot be the MD or the CEO of a company: The
chairman of the board cannot play eithers of the roles as an MD or CEO of the
company. In fact, this situation will impact a lot of companies who have the
same person holding the posts of both Chairman and MD. The companies
having a CMD or Chairman and CEO will now have to chose between retaining
the person in either role and finding another to fill the vacancy.
Industry experts have suggested that companies might opt to appoint a non-
executive chairman and retain the incumbent chairman as the MD or the CEO.
To be sure, a person cannot be Chairman and MD or CEO at the same time.
He/she could, however, be MD and the CEO at the same time without being
Chairman. Listed companies with more than 40% public shareholding should
separate the roles of chairperson and the MD or the CEO from 1 April 2020,
said the committee. Sebi may consider extending the requirement to all listed
entities by 1 April 2022.
2. Board of directors to have at least one woman independent director: This
suggestion is in addition to the existing requirement of having at least one woman
director on the board. This suggestion insists that from among the independent
directors one women director must be selected.
3. Board of directors to have a minimum of six directors: The board of directors of a
company must have at least six directors. It is actually double the previous
requirement of having at least three directors on the board of a public company.
4. Independent directors to make up 50 per cent of the board: At least half of the
directors on the board will have to be independent directors to ensure better
governance. The panel has recommended a minimum remuneration of ` 5 lakh per
year for independent directors and a sitting fee of Rs.20,000 to Rs. 50,000 for each
board meeting. It has also recommended that for the top 500 companies by
market capitalization, it should be compulsory to undertake Directors and Officers
Insurance for their independent directors.
5. Audit committee to review use of loans or investment of more than
Rs.100 crore by a holding company in a subsidiary: The audit committee
of any parent or holding company that has invested or lent Rs.100 crore
or more to a subsidiary will be responsible to review the use of those
funds by the subsidiary. This is to ensure more transparency on the use
of funds and to keep an eye on any round-tripping of funds.
6. SEBI to penalize auditors if any lapses are found: The SEBI will have the
right to pull up auditors for any lapses in corporate governance norms
and penalize them for the same. This will ensure diligent auditing of
company processes and funds.
7. Directorship in listed entities to be limited to 8 per person: A director in a listed
company can be a director on the board for only 7 other companies. In addition
to these, the committee also recommended that a formal induction be made
compulsory for every new independent director on the board, and that no
person be appointed as an alternate director for an independent director of a
listed company. The number of board meetings a year shall be increased from
one in every quarter to five in a year.
8. The committee proposed stricter rules and disclosures for related party
transactions. All material related party transactions shall require approval of the
shareholders through resolution and no related parties shall vote to approve
such resolutions whether the entity is a related party to the particular
transaction or not. Further, the committee also recommends that All entities
falling under the definition of related parties shall not vote to approve the
relevant transaction irrespective of whether the entity is a party or not.
9. Minimum remuneration: The Independent directors must get minimum
remuneration of Rs. 5 lakh per annum and sitting fee of Rs.20,000 –
50,000 for each board meeting. It should be mandatory for firms to seek
the public shareholders’ approval for annual remuneration of the
executive directors from promoter family if the amount is Rs.5 crore or
2.5% of the firm’s net profit. In case of more than one such director, the
same condition should apply for aggregate annual remuneration
exceeding 5% of the net profit. The approval of the shareholders must be
required every year in which annual remuneration payable to single non-
executive director exceeds 50% of total remuneration payable to all non-
executive directors.
10. Risk management and IT committee: The top 500 listed companies
should have risk management committee of boards for cyber security. In
addition to this, the listed entity must constitute an information
technology committee that will focus on digital technology
11. Companies should disclose and update all ratings.
12. Public sector companies to be governed by listing requirements.
13. Creation of a formal channel for sharing information with promoters
14. Mandate minimum qualification to independent directors and disclose
their relevant skills.
15. Disclose medium and long term strategies in annual reports
Thank You.

McKinsey Survey, Committees On Corporate Governance

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

McKinsey Survey, Committees On Corporate Governance

Uploaded by

Copyright:

Available Formats

McKinsey Survey on Corporate

• “Qualified, committed independent and tough-minded audit committees

You might also like