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Corporate Governance

What is Corporate Governance


It is a means to maximize long term shareholder value in a legal and ethical man
ner ensuring fairness, courtesy and dignity in all transactions of the Company.
What is Corporate Governance

It refers to the guideline, procedures, rules for decision making. It suggests h


ow to monitor the performance. It has to do with power and accountability; who e
xercises power, on behalf of whom and how the exercise of power is controlled
The Need for Corporate Governance

Poor Governance can harm national economic performance. Poor disclosures and aud
it procedures result in deteriorating financial conditions of the Corporations.
Poor governance undermines the confidence in the markets and hold the financial
system hostage.
Factors behind the Origin of Corporate Governance

In the era of globalization, foreign investors have become very careful about in
vesting their money. Kumar Mangalam Birla Committee Report appointed by SEBI has
formulated some guidelines. Increasing active rate of investigative reporting i
n business journalism. Mergers and acquisitions taking place at a fast pace.
Important issues of Corporate Governance

Social responsibility Multiple, divergent expectations of the shareholders. Fair


Business deals Prevention of corruption
The CEO as a Corporate Governor

Good public governance is about putting public good over private good and being
a good corporate citizen. Corporate governance translates into fairness, transpa
rency, raising the trust and confidence in shareholders and understanding societ
al responsibility.
Corporate Governance in India

Private Sector

Public Sector
Private Sector- categories of shareholders

Promoter director – Called as a functional director and belongs from the promoter
group. Professional director - Category of directors who are invited by the prom
oter group on the basis of competence and favourable personal equation. Institut
ionally nominated – These positions are fulfilled by senior activities or person o
f good reputation.
Public Sector – categories of directors

Functional directors – Full time employees of the PSUs. Govt. directors – They are t
he bureaucrats from different controlling administrative ministry. Outside direc
tors
Distinction between management and control
Management -Initiation ( proposals for managing the resources of the firms are d
eveloped) Implementation ( execution of approved proposals) Control Ratification
( proposals developed in the initiation stage are evaluated, if suitable, appro
ved) Monitoring ( Assessment of executive’s performance and implementation of prop
er reward system)
Active role of Institutional Investors

Give a direct voice in governance Need to improve their own governance


Expand the role of non – executive directors
CII has recommended the following : NED’ s should occupy at least 30% of the board
seats. There must be a limit on the number of Boards on which a person cans ser
ve. An audit committee, having at least three non-executive directors must be se
t and given access to all the information. All the NED ‘s must be compensated well
for their time and efforts
Proper and Timely Information to the Board

Ensure that the Board is well equipped with information. Information should be a
vailable on long term plans, budgets, competitive developments, quarterly result
s etc.,
Size of the Board

Optimum size of the Board (10-12) Bigger boards would be less effective as there
will be a problem of coordination.
Improve Accounting and reporting Practices

Business line reporting Group accounting EPS reporting


Factors in Corporate governance

Transparency in decision making Accountability which follows from transparency b


ecause responsibility could be fixed easily for actions taken or not taken Accou
ntability is for safeguarding the interests of the stakeholders and the investor
s in the organization
Pre requisites for corporate governance

Commitment of the management for the principle of integrity and transparency in


business operations. Legal and administrative framework created by the governmen
t.
Need for corporate governance in India

Financial scams Legal and administrative framework in India provides for excelle
nt scope for current practices.
Specific steps to improve corporate governance

Abolition of the Sick Industries Companies Act (SICA) and BIFR. Banking Secrecy
Act – Reveal those who are wilful defaulters. Benami Transactions Prohibition Act
and Prevention of Money Laundering Act
The Power of Ethical Management

Is the decision you are taking legal? If it is not legal, it is not ethical. Is
the decision you are taking fair? It should be a win-win situation for both the
parties entering into an agreement or if it is a general policy or a multi – level
agreement, there should be equal risk and reward to all concerned. Eleventh Com
mandment test – If the decision you are taking is such that if it is known in the
public through media, will you feel ashamed? If you are feeling ashamed then it
is not an ethical decision.
Conclusion

Corporate governance is the net result of the individual sense of values, the va
lues held in society or part of a society like professional bodies or business a
ssociations and finally the system of public governance. If those who violate th
e norms are effectively punished then there is a fear and there will be adherenc
e of the principles of
Kumaramangalam Birla Committee recommendations: Three Constituents

Shareholders the Board of Directors the Management


Applicability of recommendations

Mandatory Non mandatory


Mandatory recommendations

absolutely essential for the framework of corporate governance and virtually for
m its core which can be enforced through the amendment of the listing agreement
Applicability

Applicable to the listed companies, their directors, management, employees and p


rofessionals associated with such companies, The ultimate responsibility for put
ting the recommendations into practice lies directly with the board of directors
and the management of the company. Recommendations will apply to all the listed
private and public sector companies, in accordance with the schedule of impleme
ntation. As for listed entities, which are not companies, but body corporates (e
.g. private and public sector banks, financial institutions, insurance companies
etc.) incorporated under other statutes, the recommendations will apply to the
Board Of directors

The Board of a Company provides leadership and strategic guidance, objective jud
gment independent of the management to the Company and exercises control over th
e Company. The Board must fulfils its legal requirements and also must be aware
and understanding of its responsibilities. An effective corporate governance sys
tem is one, which allows the Board to perform these dual functions efficiently
Functions of the Board Of directors

Directs the Company by formulating and reviewing the Company’s policies. Controls
the Company and its management by laying down the code of conduct. Is accountabl
e to the shareholders for creating, protecting and enhancing wealth and resource
s of the Company. Is not involved in day to day
Composition of the Board Of directors

Executive directors are involved in the day to day management of the Companies N
on executive directors bring external and wider perspective and independence to
the decision making. Non executive directors may be independent or non-independe
nt.
Independent directors

Receive director’s remuneration Do not have any other material pecuniary relations
hip or transactions with the Company, its promoters, its management etc., Emphas
is on the calibre of the non executive directors.
Mandatory Recommendations

Optimum combination of executive and non-executive directors with not less than
50% of the board comprising the non executive directors. At least one third of t
he board should comprise of independent directors
Nominee Directors

Institutions should appoint nominees on the board of Companies only on a selecti


ve basis where such appointment is considered necessary to protect the interest
of the Institution
Chairman of the Board

The role of the Chairman is to ensure that the board meetings are conducted in a
n effective manner. The Chairman’s role should in principle be different from that
of the Chief Executive.
Non mandatory recommendation

A non executive Chairman should be entitled to maintain a Chairman’s Office at the


Company s expense and also allowed reimbursement of expenses incurred in the pe
rformance of his duties.
Audit Committee

Oversight of the finance function and monitoring Relies on the senior financial
management and the outside auditors.
Mandatory recommendation

A qualifies and independent audit committee should be set up by the board of a C


ompany. This would go a long way in enhancing the credibility of the financial d
isclosures of a Company and promoting transparency
Composition of the Audit Committee
Minimum of 3 members ( non executive directors, majority being independent and w
ith at least one director having financial and accounting knowledge) The chairma
n of the committee should be an independent director. The Chairman should be pre
sent at AGM to answer shareholder queries. The Company Secretary should act as t
he Secretary to the Committee ( the above are mandatory recommendations)
Meet at least thrice a year One meeting before finalization and one every 6 mont
hs Quorum should be either 2 members or 1/3rd of the members of the audit commit
tee whichever is higher and there should be a minimum of two independent directo
rs. ( this is a mandatory recommendation

Frequency of meetings and quorum of the Audit committee


Powers of the Audit Committee
To investigate any activity within its terms of reference To seek information fr
om any employee To obtain outside legal or other professional advice To secure s
ervices of outsiders with relevant expertise ( this is a mandatory recommendatio
n)
Remuneration

The Board of Directors should decide the remuneration of the non-executive direc
tors The annual report must contain : - all elements of the remuneration package
of all the directors - Details of fixed component and performance linked incent
ives - Service contracts, notice period, severance fees - Stock option details,
if any
( this is a mandatory recommendation)
Board procedures

The Board meetings should be held at least 4 times in a year with a maximum time
gap of 4 months between any two meetings. A director should not be a member in
more than 10 committees or act as a Chairman of more than 5 committees across al
l companies in which he is a director. Every director must inform the Company ab
out the Committee positions he occupies in other Companies and notify changes as
and when they take place.
Management

Management is responsible for ensuring that the principles of corporate governan


ce are adhered to and enforced. Disclosures must be made by the management to th
e Board relating to all material financial and commercial transactions, where th
ey have personal interest that may have potential conflict with the interest of
the Company at large
Shareholders

The GBM provide an opportunity to the shareholders to address their concerns to


the Board of Directors and comment on and demand any explanation on the Annual r
eport or on the overall functioning of the Company.
Responsibilities of Shareholders

Show a greater degree of interest and involvement in the appointment of director


s and the auditors. Inform themselves about the new directors.
Shareholders’ rights

Right to transfer and registration of shares. Obtaining relevant information on


the Company on a timely and regular basis Participating and voting in shareholde
r meetings Electing members of the Board Right to information on takeovers, sale
of assets or divisions of the Company and changes in the Capital structure. Hal
f yearly declaration of financial performance including summary of significant e
vents in the last 6 months should be sent to each household of shareholders.

( these are mandatory recommendations)


Shareholders rights
A board committee under the chairmanship of a non-executive director should be f
ormed to specifically look into the redressal of shareholder complaints like tra
nsfer of shares, non-receipt of balance sheet, non receipt of declared dividends
etc., ( this is a mandatory recommendation)
Institutional Shareholders

Have acquired large stakes in the equity share capital of listed companies . The
y have a bigger role to play in corporate governance as retail investors look up
on them for positive use of their voting rights.
Conclusion

Corporate governance must ensure commitment of the Board in managing the Company
in a transparent manner for maximising long term shareholder value.