MODULE III Role players

By Prangya Paramita

Corporate management structure :

Shareholders

Elect
Board of directors

Form
Executive committee

Appoints
Chief executives and senior executive

Who is a director? Section 2 (3) of the companies Act defines a director as follows- A director includes any person occupying the position of directors by whatever name called. Kinds of directors Full time director Non executive director Shadow directors

Qualifications of directors A director must : 1. Be an individual 2. be competent to enter into a contract 3. hold a share qualification if so required by the Article of association.
Disqualified 1. A person of unsound mind. 2. An un-discharged insolvent or one whose position for declaring himself so is pending in a court. 3. a person who has been convicted by a court for any offence involving moral turpitude. 4. A person whose calls in respect of shares of the company are held for more than 6 months have been in arrears. 5. A person who is disqualified for appointment as director by an order if the court on grounds of fraud or misfeasance in relation to the company. And of course, directors can be removed from office.

Board of directors/ board of trustees/ board of governors/ board of manager/ executive board A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Role of board of director small size of the board Independence of the board Diversity of the board A well informed board The board should have a longer vision and broader responsibility

Market forces and competition

Depositors, borrowers and other customers

Shareholder

Accountability disclosures Customer service and

satisfaction
Empowerment and pressure to perform Regulatory compliance Organizations welfare Board of director
Policy Compliance and Accountability

Continuing relationship

Compliance of business ethics

Providers of service & supplies

Top management

Career advancement & job satisfaction Employees Social responsibility

Transparency & fairness in dealings environmental preservation All other stakeholders

Who is an independent director?

An independent directors is defined as a non executive directors who is free from any business or other relationship which could materially interfere with the exercise of his independent judgment.

The Cadbury Report identifies two areas where nonexecutive directors can make an important contribution to the governance process as a consequence of their independence from executive responsibility. First, reviewing the performance of executive management and 2nd, taking the lead where potential conflicts of interest.

Who are Independent Directors

As per Clause 49 of the Listing Agreements an independent director shall mean non-executive director of the company who a. apart from receiving directors remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies; b. is not related to promoters or management at the board level or at one level below the board; c. has not been an executive of the company in the immediately preceding three financial years;

d. is not a partner or an executive of the

statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. e. is not a supplier, service provider or customer of the company.

 Role Of Independent Directors The non-executive directors should: * Contribute to and constructively challenge development of company strategy. * Scrutinize management performance. * Satisfy them that financial information is accurate * Meet at least once a year without the chairman or executive directors and there should be a statement in the annual report saying whether such meetings have taken place. * Be prepared to attend AGMs and discuss issues relating to their roles. * Have a greater exposure to major shareholders (particularly the senior independent director).
Effectiveness of the board as the oversight body to oversee what the management does Is there a better way to do it, in view of Recent scandals of disclosures and audits Size and scope of present day enterprise Complexity of operations

Role of Independent Directors

Independent Directors under Listing Agreement in India

Composition of the Board: Not less than 50% of the board to be non-executive directors Independent Directors: If the chairman executive: At least half of the board should comprise of independent directors If Chairman non-executive: At least one- third of the board should comprise of independent directors Non-executive directors remuneration to be approved by shareholders Board meetings to meet at least 4 times, with gap not exceeding 3 months. Minimum information for board meetings laid down Committees of Directors Audit Committee: shall have minimum 3 members all of them being non-executive and majority of them being independent Chairman of the committee shall be an independent director To meet at least thrice a year Company Secretary to act as secretary to the committee Remuneration Committee Shareholders/Investors Grievance Committee Limits on committee memberships and chairmanships

Auditors
Introduction: Auditors who are expected to be the watchdog of the organization are often bought in by managements through some profitable assignments. The objective of an audit: An auditor express an opinion on financial statements which are prepared within a framework of recognized accounting policies and practices and relevant statutory requirements.

Types of audit 1. Financial audit 2. compliance audit 3. Operational audit 1.Financial auditThe financial statements commonly audited are balance sheet, the income statement, the cash flow statement and the statement of stockholders responsibility.

2. Compliance audit Whether the auditee is following specific procedures, rule or regulations set down by some higher competent authority. 3.Operational audit An operational audit is a review of any part of an organizations operating procedures and methods for the purpose of evaluating effectiveness and efficiency.

Definition of auditor An auditor is defines as a person appointed by a company to perform an audit. An auditor is a representative of the shareholders, forming a link between government agencies, stockholders, invertors and creditors. Types of auditors 1. Internal auditors 2. Independent auditors 3. Government auditors

Duties of auditor: whether loans and advances made by the company on the basis of security have been properly secured. whether loans and advances made by the company have been shown as deposits. whether the personal expenses have been charged to revenue account Verifying that the statements of accounts drawn up on the basis of the books exhibits a true and fair state of affairs of the business.

Composition of audit committee: 1. The audit committee should have minimum 3 members, all being independent directors with the majority being independent and with at least 1 director having financial and accounting knowledge. 2. the chairman of the audit committee should be an independent director. 3. The chairman should be present at annual general meeting to answer shareholder queries. 4. the audit committee should be invite such of the executives as it considers appropriate to be present at the meetings. 5. the company secretary should be act as the secretary to committee.

 Overseeing the financial reporting and disclosure process. Monitoring choice of accounting policies and principles. Overseeing hiring, performance and independence of the external auditors. Oversight of regulatory compliance, ethics, and whistleblower hotlines. Monitoring the internal control process. Overseeing the performance of the internal audit

Responsibilities

function. Discussing risk management policies and practices with management.

Objectives: 1. Audit committee ensures that published financial statement are not misleader. 2. Audit committee ensures that internal control are adequate. 3. To recommend the selection of external auditors. 4. To follow up allegation of material financial, ethical and legal irregularities

Powers of the audit committee 1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal ot other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary. The committee should meet at least 2 a year. One meeting must be held before finalization of annual accounts and one necessarily every 6 months.

Generally the major Functions of Audit Committee are as follows: overseeing the Companys financial reporting process and disclosure of financial information to ensure that the financial statements are correct, sufficient and credible, * recommending the appointment and removal of external auditor, fixation of audit fee and approval for payment of any other services, * reviewing with the Management the annual financial statements before submission to the Board, * reviewing with the Management the annual financial statements of the subsidiary companies, * reviewing with the Management and the external and internal auditors, the adequacy of internal control systems,

 * reviewing the adequacy of internal audit function, * discussing with internal auditors any significant finding and follow up on such issues, * reviewing the findings of any internal investigations by the internal auditors in matters where there is suspected fraud or irregularity, or a failure of internal control systems of a material nature, and then reporting such matters to the Board, * discussing with external auditors before the audit commences on the nature and scope of audit, as well as having post-audit discussion to ascertain any area of concern, * reviewing the Companys financial and risk management policies; and * examining reasons for substantial default in the payment to depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors, if any.

SEBI
1. Audit committees
Audit committees of publicly listed companies should be required to review the following information mandatorily: Financial statements and draft audit report, including quarterly / half-yearly financial information; Management discussion and analysis of financial condition and results of operations; Reports relating to compliance with laws and to risk management; Management letters / internal auditors; and Records of related party transactions

2. Financial literacy of members of the audit committee:

All audit committee members should be financially literate and at least one member should have accounting or related financial management expertise. It was also suggested that all audit committee members should be able to read and understand financial statements at the time of their appointment rather than within a reasonable period. 3. Audit Reports In case a company has followed a treatment different from that prescribed in an accounting standard, management should justify why they believe such alternative treatment is more representative of the underlying business transaction. Management should also clearly explain the alternative accounting treatment in the footnotes to the financial statements.

4. Related Party Transactions

A statement of all transactions with related parties including their bases should be placed before the independent audit committee for formal approval / ratification. If any transaction is not on an arms length basis, management should provide an explanation to the audit committee justifying the same.

5. Risk Management a. Board disclosure

Procedures should be in place to inform Board members about the risk assessment and minimization procedures. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Management should place a report before the entire Board of Directors every quarter documenting the business risks faced by the company, measures to address and minimize such risks, and any limitations to the risk taking capacity of the corporation. This document should be formally approved by the Board.

b. Training of Board member Non-mandatory recommendation Companies should be encouraged to train their Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

6. Proceeds from Initial Public Offerings (IPO)

Companies raising money through an Initial Public Offering (IPO) should disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis. On an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. This statement should be certified by the independent auditors of the company. The audit committee should make appropriate recommendations to the Board to take up steps in this matter.

7. Code of Conduct
it should be obligatory for the Board of a company to lay down the code of conduct for all Board members and senior management of a company. This code of conduct shall be posted on the website of the company. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed off by the CEO and COO.

8. Nominee directors
Where an institution wishes to appoint a director on the Board, such appointment should be made by the shareholders. An institutional director, shall have the same responsibilities and shall be subject to the same liabilities as any other director.

9. Non-Executive Director Compensation

The Committee discussed the following issues relating to compensation of independent directors: 1. Whether limits should be set for compensation paid to
independent directors and how should these limits be determined 2. What are the disclosures to be made to ensure transparency; 3. In case of stock-based compensation, the vesting timeframe of the options and the parameters that trigger vesting such as average return on capital employed, turnover criteria, etc.

10. Independent Directors

1. Apart from receiving director remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies; 2. is not related to promoters or management at the board level or at one level below the board; 3. has not been an executive of the company in the immediately preceding 3 financial years;

4. is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last 3 years. 5. is not a supplier, service provider or customer of the company. 6. The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non-executive director.

11. Whistle Blower Policy Personnel who observe an unethical or improper practice (not necessarily a violation of law) should be able to approach the audit committee without necessarily informing their supervisors. Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc. The employment and other personnel policies of the company shall contain provisions protecting whistle blowers from unfair termination and other unfair prejudicial employment practices.

Whistle blower policy

Companies shall annually affirm that they have not denied any personnel access to the audit committee of the company (in respect of matters involving alleged misconduct) and that they have provided protection to whistle blowers from unfair termination and other unfair or prejudicial employment practices. The appointment, removal and terms of remuneration of the chief internal auditor must be subject to review by the Audit Committee. the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report.

12. Subsidiary Companies

Audit committee requirements

It should be recommended to the Central Government that the Companies Act, 1956 should be amended to exclude common directorships in holding and subsidiary companies, in computing the limits on directorships that an individual may hold; The provisions relating to the composition of the Board of Directors of the holding company shall also be made applicable to the composition of the Board of Directors of subsidiary companies;

Cont At least 1/3rd of the Board of Directors of the subsidiary company shall be non-executive directors of the parent company; The Audit Committee of the parent company shall also review the financial statements of the subsidiary company; The minutes of the Board meeting of the subsidiary company shall be placed for review at the Board meeting of the parent company; and The Board report of the parent company should state that they have reviewed the affairs of the subsidiary company also.

13. Analyst Reports

SEBI should make rules for the following: Disclosure in the report issued by a security analyst whether the company that is being written about is a client of the analysts employer or an associate of the analysts employer, and the nature of services rendered to such company, if any; and Disclosure in the report issued by a security analyst whether the analyst or the analysts employer or an associate of the analysts employer hold or held (in the 12 months immediately preceding the date of the report) or intend to hold any debt or equity instrument in the issuer company that is the subject matter of the report of the analyst.

Role of the Government in C.G. C&AG of India as the govt. auditor plays an important role in effective public sector governance. The principles of accountability, transparency, probity, equity and fairness are reviewed by C & AG and audit observations thereon are reported in the various Audit Repots. C.G. legislations Important amendments introduced in the year 2000 to sections 217 and 292 of the co. Act ,1956 set the tone for C.G.

1) Directors Responsibility statement:Directors which should affirm the following: annual accounts have been prepared in accordance with applicable accounting standards with proper explanation relating to material departures.
The selection and application of Accounting policies by Directors is consistent and prudent so as to give a true and fair view of the state of affairs of the company. Proper and sufficient care has been taken by the Directors for the maintenance of adequate accounting records for safeguarding the assets of the company and for preventing and detecting frauds and irregularities.

2) Formation of audit committee: Sec. 292A of the companies Act. 1956 requires every public limited company having paid up capital up not less than Rs. 5 crore to constitute at the board level. The Audit committee should have a minimum pf 3 Directors and 2/3rd of the total number of members of Audit committee shall be directors other than managing or whole time directors. The terms of reference of the Audit Committee include all matters related to financial reporting and the audit thereof including efficacy of the internal control system.

3) Guidelines of department of public Enterprises (DPE)on C.G. of central public sector enterprises. The DPE issued guideline on the composition of board: The guideline requires at least 1/3rd of the directors on the board of Central public sector Enterprises (CPSEs) to be non official Directors. The number of independent directors should be at least 1/3rd of the Board if the chairman is nonexecutive and not less than. 50 % if the Board has an executive chairman.

4) SEBIS guidelines on C.G. for listed Co.s:Clause 49 of the Listing Agreement specifies among other things, the following: 1) Composition of the Board of Directors of listed Government Co.s: Where the chairman of the Board is a non-executive director, at least 1/3rd of the Board should comprise of independent directors and in case he/she is an executive director, at least 1/2 of the Board should comprise independent directors. 2) Audit Committee in listed govt. Co.s: A qualified and independent Audit Committee shall be set up, giving the terms of reference. The audit committee shall have minimum 3 directors as members and 2/3rd of the members of Audit committee shall be independent directors. All members of Audit Committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

5) Constitution and composition of Audit Committee in listed Govt. Co.s: the following compliance were notices with respect to composition of Audit committee: the 7 govt. co.s , the Audit committee didnt consist of required number of independent directors like, Indian Tourism Development corporation Ltd., National Fertilizer Ltd., Mangalore Refinery and Petrochemicals Ltd. etc In case of Neyveli Lignite Corporation Ltd. There was only 1 independent director, as on 31 March 2007, on the Audit Committee of 4 members. The compliance with Clause 49 of the Listing agreement was made only on 1 June 2007 by induction of 3 independent directors on the Audit committee.

6) Constitution and composition of Audit Committee in unlisted Govt. Co.s: sec. 292 A of the Companies Act 1956, every public limited companies having paid up capital of not less than Rs. 5 crore shall constitute an Audit committee at the Board level consisting of minimum of 3 directors and 2/3rd of which shall be directors other than managing or whole time directors.
The following instances of noncompliance were noticed

No audit committee was formed by the following companies like- HMT M achines Tools Ltd., HMT Watched Ltd., Bharat Heavy Plated and Vessels ltd. etc. Audit committee formed by Indian Renewable Energy Development Agency Ltd. Consisted of 2 directors as against the requirement of minimum 3. The committee did not consist of 2/3 of directors as directors other than managing or whole time directors as there was only one such director.

Central Public Sector Enterprises The government-owned corporations play a pivotal role in the economic development of emerging economies because their participation is higher in the industrial and commercial activities of these economies. Resource constraints and limited scope of the private sector in the early stages of development and planning have set the stage for predominance of the public enterprises in these economies. Thus, public sectors in the leading developing countries of the world play a very important role.

Q. Critically examine the role played by Govt. in promoting corporate Governance in India?

Growth of corporate governance in India / Corporate governance of India has undergone a paradigm shift
In 1996, Confederation of Indian Industry (CII), took a special initiative on Corporate Governance. The objective was to develop and promote a code for corporate governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. This initiative by CII flowed from public concerns especially the regarding the protection of investor interest, small investor, the promotion of transparency within business and industry

Securities and Exchange Board of India The Government of India's securities watchdog , Securities Board of India, announced strict corporate governance norms for publicly listed companies in India. The Indian Economy was liberalized in 1991 . In order to achieve the full potential of liberalization and enable the Indian Stock Market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms. SEBI, established in 1988 and became a fully autonomous body by the year 1992 with defined responsibilities to cover both development and regulation of the market.

SEBI
On April 12, 1988, the Securities and Exchange Board of India (SEBI) was established with a dual objective of protecting the rights of small investors and regulating and developing the stock markets in India. In 1992, the Bombay Stock Exchange (BSE), the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta.

Analysts unanimously felt that if more powers had been given to SEBI the scam would not have happened.
As a result the Government of India (GoI) brought in a separate legislation by the name of SEBI Act 1992 and conferred statutory powers to it. Since then, SEBI had introduced several stock market reforms. These reforms significantly transformed the face of Indian Stock Markets.

SEBI and Clause 49 SEBI asked Indian firms above a certain size to implement Clause 49, a regulation that strengthens the role of independent directors serving on corporate boards. On August 26, 2003, SEBI announced an amended Clause 49 of the listing agreement which every public company listed on an Indian stock exchange is required to sign. The amended clauses come into immediate effect for companies seeking a new listing.

Clause 49 Clause 49, which has recently been revised by the SEBI, of the listing agreement between listed companies and the to enhance the corporate stock exchanges is all set governance (CG) requirements, primarily through increasing the responsibilities of the Board, consolidating the role of the Audit Committee and making management more accountable These changes are aimed at moving Indian companies rapidly up the evolutionary path towards business processes and management oversight techniques.

The major changes to Clause 49 1. Independent Directors 1/3 to depending whether the chairman of the board is a non-executive or executive position.
2. Non-Executive Directors ----The total term of office of nonexecutive directors is now limited to three terms of three years each. 3. Board of Directors-----The board is required to frame a code of conduct for all board members and senior management and each of them have to annually affirm compliance with the code. 4. Audit Committee---- Financial statements and the draft audit report / reports of management discussion and analysis of financial condition and result of operations/ report of compliance with laws condition and result of operations/ reports of compliance with laws and risk management / management letters and letters of weakness in internal controls issued by statutory and internal auditors/ appointment, removal and terms of remuneration of the chief internal auditor.

Clause 49..
5. Whistleblower Policy ---- This policy has to be communicated to all employees and whistleblowers should be protected from unfair treatment and termination. 6. Subsidiary Companies-----50% non-executive directors & 1/3 & independent directors depending on whether the chairman is nonexecutive or executive. 7. Disclosures---- Contingent liabilities / Basis of related party transactions./ Risk management/ Proceeds from initial public offering /Remuneration of directors . 8. Certifications----reviewed the necessary financial statements and directors report; established and maintained internal controls, and disclosed to the auditors and informed the auditors and audit committee of any significant changes in internal control and/or of accounting policies during the year.

Clause 49 amended The Clause 49 of the Listing agreement of SEBI Act is the outcome of Narayana Murthy Committee, which has come into effect January 1st 2006. Amended Clause 49 of the Listing Agreement. Aid to Corporate Governance 1. Control Environment 2. Risk Assessment and Management.

Industrial policy

Industrial policy--- The governments liberalization and economic reforms programme aims at rapid and substantial economic growth, and integration with the global economy in a harmonized manner. The industrial policy reforms have removed the industrial licensing requirements, removed restrictions on investment and expansion, and facilitated easy access to foreign technology and foreign direct investment. Foreign Direct Investment Government wishes to facilitate foreign direct investment (FDI) and investment from NonResident Indians (NRI)s including Overseas Corporate Bodies (OCBs), that are predominantly owned by them, to complement and supplement domestic investment. Investment and returns are freely repatriable, except where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchange neutrality etc. as per the notified sectoral policy.