Landmarks in the Emergence

of Corporate Governance
 Introduction
USA
• 1979 SEC proposes for mandatory
reporting on internal financial
controls.
• 1985, Savings and Loan collapse,
and series of other fraudslead to the
formation of the Treadway
Commission
 UK
• In England, BCCI scandal. BCCI was a
global bank, constituting multiple layers
of entities related to one another
through an impenetrable series of
holding companies, affiliates,
• subsidiaries, banks-within-banks,
• insider dealings
• shoddy record-keeping, regulatory
review and audits,
 Cadbury Committee on
Corporate Governance, 1992
• The stated objective of the Cadbury
Committee was "to help raise the
standards of corporate governance
and the level of confidence in financial
reporting and auditing by setting out
clearly what it sees as the respective
responsibilities of those involved and
what it believes is expected of them".
 Recommendations
1. Regular meetings
2. Division of responsibilities
3. Non executive directors – sufficient caliber
4. Company secretary
NON EXECUTIVE DIRECTORS
 Independent judgment by non executive directors
 appointed for specified terms and reappointment
should not be automatic.
 Non-executive Directors should be selected
through a formal process
 CONTD
REPORTING
1. Present the understandable position of the
company
2. Professional relationship with auditors
3. Report on internal control effectiveness
4. Account preparation
5. Audit committee – 3 non executive directors
The Greenbury Committee, 1995

Produced the Greenbury Code of Best Practice which was

divided into four sections thus:
 Remuneration committee
 Disclosure
 Remuneration policy
 Service contracts and compensation.
The Hampel Committee, 1995
The Hampel Committee was set up in November 1995 to
protect investors and preserve and enhance the standing of
companies listed on the London Stock Exchange.
The committee
• developed further the Cadbury Report
• produced the Combined Code
• 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
 The Turnbull Committee, 1999

The Turnbull Committee was set up by the The Institute of

Chartered Accountants in England and Wales (ICAEW) in 1999.
The committee
• 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 boards of directors confirm the existence
of procedures for evaluating and managing key risks.
 World Bank on
Corporate Governance
• Efficient use of resources
• Openness
 Sarbanes-Oxley Act, 2002
Important provisions contained in SOX Act are briefly
given below:

Establishment of Public Company Accounting

Oversight Board (PCAOB)

All accounting firms will have to register themselves

with this board and submit among other details
particulars of fees received from public, company
clients for audit and non-audit services, financial
information about the firm, list of firms staff who
 contd..
• Audit committee
• Audit partner rotation
• Improper influence on conduct of audits
• Prohibition of non audit services
• Affirmation of financials by CEO and CFO
• No loans to directors if their co’s are traded in
market
• Attorney
• Penalty
McKinsey Survey on Corporate Governance

• Sample size – 188

• Parameters – (accountability, disclosure and
transparency, and share holder equality)
INCREASE MARKET VALUATION
• Improvement in financial performance
• Transparency of dealing
• Increased investor confidence
 Turnbell committee - 1991
• Guidance to company
• Internal audit function
• Procedure for managing the risk
 OECD Principles
• Right of share holder
• Equitable treatment of share holder
• Role of stakeholders
• Disclosure and transparency
• Responsibilities of the board
 Indian committee
Working group of the co’s act 1956
• Directors remuneration
• Information of business segments
• Use of funds raised from public
• Disclosure of debt exposure
 contd
NON FINANCIAL DISCLOSURE
• Relative directors – report
• Main register – disclosing the interest of the directors
in any contract or arrangement with company
• Shareholding register of directors
• Details of loan to directors
• Appointment of sole selling agent
• Compliance certificate
• Certificate that it follows the companies act
 cont
Drawbacks
• Non executive directors are not active
• Report – rule based no transparency
• Directors qualification
• Interaction of share holders with auditors
Confederation of Indian Industry’s Initiative

• Single board
• Listed company – 100 crores (NED)
Non executive director Percentage
• 30 % of the board if the chairman of the
company is a non executive director
• 50% of the board if the chairman and MD are
the same person
• Director – max 10 companies
 cont
• NED – Role
• Signature by CEO/ CFO on compliance
certificate
• Default in fixed deposit
 SEBI’s Initiative
7th may 1999 Kumar Mangalam Birla Committee
MANDATORY RECOMMENDATIONS
• Applicability for cos whose share capital is 3 crores and
more
• BOD
• Audit committee
• Remuneration committee
• Board meeting
• Mgt report
• Share holders- resume
 Contd
Non mandatory recommendations
• Chairman role to be different
• Remuneration committee
• Share holder rights
• Postal ballot
 Naresh chandra committee
21/08/2002
• Auditor company relationship
• Disqualification for audit assignment
• List of prohibited audit services
• Audit partner rotation
• Auditors disclosure of contingent liability
• Auditors disclosure of qualifications and consequent
action
• Independence standards for consulting
• Mgt certification in the event of auditors replacement
• Auditors annual certificate of independence
 N R Narayan Murthy Committee feb 2003

• Agreed for naresh chandra

• Audit committee
• Proceeds from IPO
• Disclosure of related party transaction
• Check the risk management of the company
• Code of conduct – website
• Doing away with the nominee directors
• Whistle blower policy
• Compensation to NED – approval form SH
Dr. J J Irani Report on Company Law - 2005

• 1/3rd of the board should be independent

directors
• Pyramid structure of the company
• Full liberty to SH on issue
• Penalty for wrong doing
• Company to self regulate their affairs
• Continue the existing accounting stds