Corporate Governance

Compiled by : Sadaf

-Process & structure by which business & affairs of corporate sector is directed & managed.

Objective:  To build up an environment of trust & confidence amongst those having competing & conflicting interest.  To enhance shareholders value & protect the interest of other stakeholders by enhancing the corporate performance & accountability.  CG A way of life rather than a code

Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society - Sir Adrian Cadbury

The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies -- customers, employees, investors, vendors and the society-at-large. The raison d'tre of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year.

- N R Narayana Murthy

Involves a set of relationship

 Involve various rules and incentives  Key aspect: Transparency of corporate structures and

operations/corporate responsibility
 The extent to which companies are running in an open and

honest manner

SEBI has mandate Corporate Governance in the listing requirement in Clause 49 of the Listing agreement. Reflecting the emergence of Corporate Governance issues, the Rating agencies in the country have started CGR (Corporate Governance Rating) for the Indian Corporates.

 Lays down the framework for creating long-term trust

.


Improves strategic thinking at the top by inducting independent directors. Rationalizes the management and monitoring of risk. Limits the liability of top management and directors. Long term reputational effects among key stakeholders.

  

The Board of Directors

Pivotal role Accountable to stakeholders Directs management

The Shareholders & Stakeholders

To participate in appointment of directors To hold the BoD accountable for governance through proper disclosures

The Management
To act on the direction of the BoD To provide requisite information to the BoD for decision making To implement and monitor control systems

Independent directors

Dont have any material, financial relationship or transactions with the company. Are the trustees of good corporate governance. Play an important role in creating trust between a company and its investors.

 

I. Board of Directors II. Audit Committee III. Subsidiary Companies IV. Disclosures V. CEO/CFO certification VI. Report on Corporate Governance VII. Compliance

Composition of Board of Directors : should have optimum combination of Executive & Non-executive directors with not less than 50% comprising of Nonexecutive Directors. Conditions are Chairman of the Board - non-executive Director,  At least one-third of the Board should comprise of Independent Directors Chairman of the Board - executive Director,  At least half of the Board should comprise of Independent Directors.
a.

b.

Non-executive Directors Compensation and Disclosures:



Fees/compensation, if any paid to non-executive Directors, to be fixed by the Board of Directors and require previous approval of shareholders. Number of stock options that can be granted to nonexecutive directors, including independent Directors.

c.

Other provisions as to Board and committees:

 Board should meet at least four times a year (maximum

gap-03mths)  A Director should not be a member in more than 10 committees or act as Chairman of more than 5 committees across all companies in which he is a Director.  Directors Mandatory annual requirement to inform the company about the committee positions he occupies in other companies.  The Board should periodically review compliance reports of all laws applicable to the company, prepared by the company.

d.

Code of Conduct:
 The Board should lay down a Code of Conduct

for all Board members and senior management of the company.  Posted on the website of the company.  Affirm compliance with the code on annual basis.  The Annual report of the company should contain a declaration to this effect signed by the CEO.

a.

Qualified and Independent Audit committee

   

Audit Committee should have minimum three directors as members. Two-third of the members should be independent directors All members should be financially literate and at least one member should have accounting or related financial management expertise The Chairman of the Audit Committee should be an independent Director. The Company Secretary should act as the secretary to the committee. The committee should meet at least four times in a year There should be minimum of two independent members present

b.

Meeting of Audit Committee:

 

c.

Powers of Audit Committee: 1) To investigate any activity within its term of reference 2) To see information from any employee 3) To obtain outside legal or other professional advice 4) To secure attendance of outsiders with relevant expertise, if it considers necessary

d.

Role of Audit Committee:

  

Includes overview of the Financial reporting process to ensure correctness, sufficiency and credibility of the financial statements To recommend the appointment /re-appointment /replacement of auditors and their fee Review with the Management:
The Annual and quarterly financial statements for submission to the Board for approval Performance of Auditors/adequacy of internal control systems

  

Review the adequacy of internal audit system Review the findings of any internal investigation into suspected fraud/irregularity/failure of internal control system of a material nature Look into reasons for substantial default in payment to depositors/creditors/debenture holders and so on

e.

Review of Information by Audit Committee: The Audit Committee should mandatorily review:
    

Management discussion and analysis of Financial condition and result of operations Statement of significant related party transactions, submitted by management Management letters/Letters of Internal control weakness issued by the statutory Auditors Internal audit reports relating to internal control weakness The appointment, removal and terms of the Chief internal auditor should be subject to review by the Audit Committee

The disclosure requirements of the Corporate Governance clause pertain to:

      

Basis of related party transactions Disclosure of accounting treatments Risk Management Proceeds from Public/rights/preferential issues Remuneration of Directors Management discussions/analysis report Information to shareholders on the appointment /reappointment of a Director

(A) Basis of related party transactions

A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. II. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee. III. Details of material individual transactions with related parties or others, which are not on an arms length basis should be placed before the audit committee, together with Managements justification for the same
I.

(B) Disclosure of Accounting Treatment To disclose in the financial statements, if an accounting treatment other than prescribed in Accounting Standard has been followed alongwith explanation. (C) Board Disclosures Risk management
 Internal and external business risks  Procedures to inform Board members about the

risk assessment and minimization.  Periodically reviewed

(D) Proceeds from public preferential issues etc.



issues, rights

issues,

To disclose to the Audit Committee, on use/application of funds as and when any issue is made In the Annual Report the criteria of making payments to be disclosed or a reference to be made that the same is available on the companys website

(E) Additional disclosures:

F) Management A Management Discussion and Analysis report to form part of the Annual Report. G) Shareholders Disclosures to shareholders in case of appointment /reappointment of directors, quarterly results and presentations made, shareholders grievance committee and share transfer committee, shareholding pattern-change

The CEO/CFO should certify to the Board of Directors that:

 The financial statements present a true and fair view.  No transaction is fraudulent, illegal/ violative of the

code of conduct.  Accept full responsibility for establishing/ maintaining internal controls.  Indicate to the auditors/ audit committee significant changes in internal control/accounting policies and instances of significant frauds.

The Annual report should contain separate section on Corporate Governance. Non-compliance of any mandatory requirements with reasons should be highlighted. The companies should submit a quarterly report signed by the Compliance officer/CFO to the Stock Exchange, within 15 days from the close of the quarter in the prescribed format.

The company should annex the Directors report to the shareholders, a certificate from the auditors/company secretaries regarding compliance with the conditions of Corporate Governance.

This should also be sent to the Stock Exchange, along with the companys annual report.

The CGR is meant to indicate the relative lend to which an organization accepts and follows the codes and guidelines of Corporate Governance The key variables analyzed while arriving at CGR for a corporate are:

     

Shareholding structure Governance structure and management process Board structure and process Stakeholder relationship Transparency and disclosures Financial discipline

The CGR scale range between CGR1 reflecting the highest assurance on the quality of the Corporate Governance and CGR6 reflecting low level of assurance on the quality of Corporate Governance.