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Corporate Governance

Notes by
Dr. Anil Gor.
M.Com, LL.M.,M.F.M,Ph.D.,FCS,CAIIB.
E Mail : goranil@yahoo.co.in Mobile
09322242439

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Corporate Governance
Problems in Corporate Governance:
Vanishing Companies: Between 1991

and 1996, out of 3900 companies which


offered IPO, 2500 have vanished
There are over 1.36 lakhs companies
which are defaulting in complying with
requirements of Company Law
There are about 2481 sick companies
There is significant no of companies
which have not paid any dividends since
1996
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Latest Developments:
Satyam
Libor fixation by Senior executives of international banks.
Five Large Banks: RBS, Citi group, HSBC, JP Morgan

Chase and Deutche Bank were collectively fined $3.3


billion by Swiss Regulators for manipulating LIBOR.
Common Wealth Games Scam
Telecom Licenses : 2G scam
Coal mining allocations scam Coalgate scam
Rajat Gupta Insider Trading scam
Sharda Investment Fraud in W.Bengal
NSEL fraud.

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Consider this:
Moral failure pervaded our public life :
One out of every five members of Indian

parliament elected in 2004 had criminal charges


against him
A Harvard Professor found that one out of every
four teachers in Govt primary schools is absent
and one out of every four is simply not teaching.
A world bank study found that two out of five
doctors do not show up at primary health centres
and that 9% of their medicines are stolen.
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A cycles rickshaw driver in Kanpur routinely

pays a fifth of his daily earnings in bribes


to the police.
A farmer can not hope to get a clear title to
his land without bribing a revenue official
and that too after a humiliating ordeal of
countless visits to the revenue office.
- Gurcharan Das : Difficulty
of Being Good.

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With uplifted arms I cry, but no

one heeds;
From Dharma flow wealth and
pleasure,
Then why is dharma not pursued ?
- Mahabharat : XVIII
.5.49
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Jack Welch :
You must be public about

consequences of breaking
core values. I dont want to
wake up one day with a
profitable corporation that
does not have soul.
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Reasons for Poor Corporate Governance

in India:
Feudal mid set that exists in India
Manifold restrictions set by Government
Lack of concern for society
Sense of insecurity that prevails

amongst the very people who are


supposed to inspire a sense of
confidence about the company among
the stake holder population
Greed and Ego
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What is Corporate Governance?
Corporate Governance is the social,
legal and economic proceess in which
companies function and are held
accountable. It is the system by
which companies are run
-Cadbury Committee Report.
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Corporate Governance is the

exercise of power in responsible way


Sir Adrian Cadbury.
Two identifiable strands of thinking:
Some experts feel that Corporate
Governance is the system, procedures,
and institutions that ensure that the
management acts in the best interests of
the owners i.e., Shareholders.

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Second school of thought believes that

the management has to act in the best


interest of all its stake holders which may
include customers, employees, suppliers,
creditors and the society of which the
organization is a part.
Few more definitions:
James D. Wolfensohn : Former
president, World Bank : Corporate
Governance is about promoting corporate
fairness, transparency and accountability.
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Standard & Poor:
Corporate Governance is the

way a company is organized


and managed to ensure that all
financial stakeholders
(Shareholders and Creditors)
receive their fair share of
companys earnings and assets.
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CII : Corporate Governance deals with

laws, procedures, practices and implicit


rules that determine a companys
ability to take informed managerial
decisions vis--vis its claimants, in
particular, its shareholders, customers,
the employees and the state. There is a
Global consensus about the objective
of good governance: Maximizing Long
Term Shareholder Value
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Kumar Mangalam Birla Committee:
Strong Corporate Governance is

indispensable to resilient and vibrant


capital markets and is important
instrument of investor protection. It is
the blood that fills the veins of
transparent corporate disclosure and
high quality accounting practices. It is
the muscle that moves a viable and
accessible financial reporting structure.

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Theories associated with

development of corporate
Governance :
Agency Theory
Transaction Cost Economics
Stakeholder Theory
Stewardship Theory
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Agency Theory :
Agency theory identifies the agency

relationship
where one party, the principal , delegates
work to another party , the agent.
Problems in agency relationship are :
Agent not acting in the best interest of the
principal, misusing powers for pecuniary
or other advantages and not taking
appropriate risks.
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In the context of corporations, and

issues of corporate control, agency


theory views directors as agents.
Cost resulting from misuse of their
position as well as cost of monitoring
and disciplining them so as to prevent
abuse are called agency costs.
Much of the agency theory as related
to corporations is in the context of
separation of ownership and control.
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Transaction Cost Economics ( TCE ) Theory

views firm as a corporate governance structure.


The resources of the economy are used by an
entrepreneurs by forming an organisation called
firm so as to carry out transactions at less cost .
And as the firm grows in size , its costs comes
down.
In its turn, firm becomes larger and more
transactions it undertakes, and will expand up to
the point where it becomes cheaper or more
efficient for the transactions to be undertaken
externally. TCE assumes that costs can be reduced
by appropriate corporate governance structure.
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Stake Holder Theory :
The stakeholder theory takes account of

wider group of constituents , rather than


focusing on shareholders. The stakeholders
would include the employees , the
suppliers, the consumers, the lenders and
creditors , the society and the Government,
all of them have stake in the business and
therefore their interests must be taken care
of for sustainability of business.
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Stewardship theory :
The stewardship theory regards

directors as stewards of the


companys assets and they will act
in the best interests of the
company. This theory permits the
powers of CEO and Chairmanship
of Board may be combined .
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Development of Corporate

Governance :
Important Inter national Committees :
Cadbury committee (1992)
Greenbury committee (1995)
Hampel Committee (1998)
LSE Combined Code (1998)
OECD Principles of Corporate Governance (1999)
Blue Ribbon Committee (1999)
Surbanes Oxley Act 2002.

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Corporate Governance Reforms in

India :
Important Committees in India:
CII : Voluntary Code of Corporate Governance

(1998)
Kumar Mangalam Birla Committee (2000)
RBI Report of the Advisory Group on Corporate
Governance (2001)
Naresh Chandra Committee ( 2002)
Narayan Murthy Committee (2003)
JJ Irani Committee (2005)
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Characteristics Principles:
Transparency
Independence
Accountability
Responsibility
Fairness
Social Responsibility

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Objectives:
That a properly structured Board

capable of taking independent and


objective decisions in place
That the Board is balanced as
regards the representation of
adequate number of non executive
and independent directors who will
take care of the business and well
being of all the stakeholders.
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Objectives:
That Board adopts transparent

procedures and practices and arrives at


decisions on the strength of adequate
information.
That the Board has effective machinery
to subserve the concerns of stake
holders.
That the Board keeps the stakeholders
informed of relevant developments
impacting the company.
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Objectives:
That the Board effectively and

regularly monitors the functioning of


the management team.
That the Board remains in effective
control of the company at all the times.
The overall endeavor of the Board
should be to take the organization
forward to maximize long term value
and shareholders wealth.
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How is Corporate Governance

Enforced?
Companies Act, 2013
Through the listing Agreement with Stock
Exchange.
Through independent well published
ratings of companies on Corporate
Governance.
Through institutional activism.
Through self regulation
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Scheme of Management under

Companies Act, 2013:


Separation of Ownership and Control:
Shareholders provide equity
Shareholders appoint Board of Directors
Board of Directors appoint team of
management for day to day operations
Shareholders also appoint independent
professional to report to them ie,
Auditors.
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Companies Act, 2013 provides for:
Detailed provisions for qualifications,

appointment, powers and removal of


directors including restrictions on
powers:
Powers to be exercised in the Board
meeting
Powers to be exercised with the consent
of the members of the company.
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Manner in which P&L, balance

Sheet, Directors report,


Management Discussion & Analysis,
Corporate Governance reports are
to be prepared
Manner in which AGM/EOGM are to
be conducted.
Secretarial audit for all listed
companies.
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Changes introduced by Companies Act

2013 :
Sec. 2(51) : Key Managerial

Personnel :
i) CEO or MD or Manager
ii) Company Secretary
iii) Whole time Director
iv) CFO
v) Any other person notified.
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Sec.135 : CSR : Schedule VII List

of CSR activities
Sec.149 : Independent Director
Sec166 : Composition of Board :
Duties of Director
Sec.197 : Remuneration Committee
Sec. 205: Functions of Co secretary
and Secretarial audit

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Composition of the Board :
Every listed public limited company to have at least

one third of the total directors as independent,


reason being that these directors, not connected
with promoter group, will ensure that the board
decisions are taken objectively in the interest of the
company and not to serve the private interests of
the promoters. The Act has also provided specific
definition and eligibility criteria in addition to
providing for code of conduct of independent
directors (Sec.149) including requirements of
evaluating the performance of independent
directors. ( Schedule IV of Companies Act 2013).
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Requirement of Resident Director and

woman director
Requirement of at least one Resident
Director and one woman director has also
been introduced, so that it should not
happen that no responsible person is
available in case of companies promoted by
foreign investors having foreigners as
directors. The woman director is expected
to provide gender sensitivity to the Board.

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Limit to maximum number of

directorship to be held by individuals :


Limit of 20 directorship with sub limited of
10 directorship in public limited companies,
has been introduced for any individual to
hold the position of a director so that the
person acting as director should not be
overburdened resulting in impact on quality
of contribution of a director at Board
meetings.
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Audit Committee of Board of Directors:

( Sec.178)
The Board of Directors of every listed companies is
compulsorily required to have Audit Committee of the
board consisting of minimum three independent
directors. This audit committee will inter alia, look
into :
the recommendations for appointment, remuneration
and terms of appointment of auditors of the company.
Review and monitor auditors independence ,
performance and effectiveness of audit process.
examination of financial statement and auditors report
thereon.
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approval or any subsequent modification of

transactions of the company with related parties.


scrutiny of inter corporate loans and investments.
valuations of undertakings or assets of the
company wherever it is necessary.
evaluation of internal financial controls and risk
management systems.
Monitoring the end use of funds raised through
public offers and related matters.
The Audit committee with majority of independent
directors will ensure control function of the Board is
objectively excercised.
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Nomination and Remuneration Committee

of Board of Directors: ( Sec.178):


The process of selection, nomination and

remuneration of Directors has been introduced


whereby Nomination and Remuneration Committee
consisting of three non executive directors of which
not less than one half will be independent directors,
will decide the recruitment criteria, search for
suitable persons and formulate remuneration policy
for directors, key managerial personnel and
employees. Again, objective is to have unbiased and
independent exercise of powers of the Board of
Directors in the overall interests of the company.
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Stakeholders Relationship Committee:

( Sec.178(5)&(6)):
The Board of Directors of a company which has
more than one thousand shareholders, debenture
holders, deposit holders and any other security
holders, shall appoint Stakeholders Relationship
Committee consisting of a chairperson who shall be
non executive director and such other members as
may be decided by the Board. The objective is to
address to shareholders grievances promptly and
systematically at a seniors level ie, Committee of
Board of Directors.

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Restrictions on powers of the Board of

Directors:
The Companies Act, 2013 has restricted loans to
the directors, Employees Stock Option Scheme
(ESOP) to independent directors, and imposed
process restrictions for entering into loans related
party transactions. The company would require the
approval by members by way of special resolution
for entering into related party transactions.
Further, directors are prohibited to enter into
forward transactions in securities of the company
or its holding company or subsidiary companies.
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Secretarial audit :
Secretarial audit has been made compulsory

for listed as well as large companies.


Compliance certificate :
The annual return, filed by a listed companies
and companies having Rs.10 cr. Turnover,
shall be certified by practicing company
secretaries in practice, certifying that annual
return , discloses the facts correctly and
adequately and that company has complied
with all the provisions of Companies Act.
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Strengthening whistle blowing policy:
The Companies Act has strengthened the

whistle blowing policy offering protection to


employees and giving hem direct access to
chairman of audit committee. Further, auditors,
are required to immediately report to the
Central Government, any offence involving
fraud that is being or has been committed
against the company by its officers or
employees. The provisions of whistle blowing
policy also applies to Cost auditor as well as
secretarial auditor.
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Rotation of Auditors:
The companies Act provides for compulsory

rotation of auditors : individual auditor-every


five years and firm of auditors every ten
years. Further auditors are prohibited to from
rendering services of accounting and book
keeping, internal audit, design and
implementation of management information
system, actuarial services, investment
advisory or investment banking services, any
outsourced financial or management services.
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Corporate Social responsibility (CSR):
Every company fulfilling any one of the

criteria: Net Worth of Rs.500 cr. Or Turnover


of Rs.1000 cr or net profit of Rs.5 cr, should
spend 2% of average net profit of last three
years on projects of social welfare listed in
Schedule VII of the Companies Act. Further
the Board is required to have CSR policy
and also have CSR committee for
implementing and monitoring CSR policy of
the company.
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Listing Requirements: Overview:
SEBI Guidelines : Cir. Dated 17th April ,2014:
Objectives of the guidelines/ principles:
A. Rights of shareholders
B. Role of Stakeholders
C. Disclosures & Transparency
D. Responsibilities of the Board

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Disclosure of Information
Functions of Board
Composition of Board

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Independent Directors
D. Board committees
E. Code of Conduct
F Whistle Blower Policy

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A. Rights of Shareholders:
The company should seek to protect and

facilitate the exercise of shareholders rights :


Right to participate in and to be informed on,
decisions concerning fundamental corporate
changes
Opportunity to participate and vote in general
meetings of shareholders
To be informed of the rules including procedures
that govern general shareholders meetings
Opportunity to ask questions to the Board
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Participate in key corporate governance decisions such as

the nomination and election of the board members


Exercise of ownership rights of shareholders including
institutional shareholders
Adequate mechanism to address grievances of shareholders
Minority shareholders to be protected.
Timely and adequate information : on date ,location and
agenda of the meeting.
Timely and adequate information on capital structure
arrangements that enable certain shareholders to obtain a
degree of control disproportionate to their equity ownership
Info on rights attached to all shares classes of shares before
the issue

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The company should ensure equitable treatment to all

shareholders including minority and foreign


shareholders
B. Role of stakeholders in corporate Governance:
Rights of stakeholders established by law and through
mutual agreements are to be respected.
Stakeholders to have opportunity obtain effective
redress for violation of their rights.
Company should encourage employee participation
Access to relevant , sufficient and reliable information
on timely and regular basis
Effective whistle blower policy

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C. Disclosure and Transparency :
All material matters including financial

position, performance, ownership and


governance of the company.
Information to be in accordance with
standards of accounting, financial and non
financial disclosues

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D. Responsibilities of the Board :
1. Disclosure of information by the

members of the Board: whether they


have directly or indirectly or on behalf of
third parties, a material interest in any
transaction or matters affecting the
company.
Maintain operational transparency to
stakeholders at the same time maintaining
confidentiality of information
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2. Key Functions of the Board:

A. Reviewing and guiding Corporate

strategy, major plans, setting performance


objectives, monitoring implementation and
corporate performance and overseeing major
capital expenditure , acquisitons and investments.
B. Monitoring the effectiveness of companys
governance practices and making changes as
needed.
C. Selecting, compensating, monitoring and
when necessary, replacing key executives and
succession planning.
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D. Aligning key executives and board remuneration

with larger term interests of company and its shareholders.


E. Ensuring a transparent board nomination process
with diversity of thought, experience, knowledge
,perspective and gender in the board.
F. Managing and monitoring potential of conflicts of
interest of management
G. Ensuring the integrity of the companys
accounting and financial reporting systems including the
independent audit
H. Overseeing the process of disclosure and
communications
I . Monitoring and reviewing Board Evaluation
Framework.
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3. Composition of the Board :
The Board of Directors shall have an optimum

combination of executive and non executive


directors with at least one woman director and
not less than 50% the directors comprising non
executive directors.
Where chairman is non executive director , at
least 1/3rd of the Board should be comprise of
should comprise independent directors and in
case Board does not have regular non executive
Chairman, at least one half of the Board should
comprise of independent directors.
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4. Independent Directors:
Independent director means a non executive director

other than nominee director of the company.


Person of integrity and possessing relevant expertise
and experience
Who is and was not a promoter of the co or its holding,
subsidiary or associate co
Who is not related to promoters or directors in the co,
its holding, subsidiary or associate co.
Apart from receiving directors remuneration has no
other pecuniary relationship with holding , subsidiary
or associate co during current and previous two
financial years
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None of whose relatives to have pecuniary interests
Who, neither himself nor any of his relatives

i) hold key managerial position in the co, its


holding subsidiary or associate co,( in any of three
previous financial years)
ii) has been employee , or promoter or partner in
any of three previous years of a firm of auditors or
co secretary or cost auditor , legal or consulting firm
of the co, its holding subsidiary or associate co,
with fees amounting to 10% of turnover of the co.
iii) holding with his relatives 2% or more of total
voting power
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Is a chief executive or director by whatever

name called , of a non profit org that


receives, 25% or more of its receipts from
the co., any of its promoters, directors
holding 2% or more of its voting power
Is a material supplier, service provider or
lessee or lessor of the co.
Who is not less than 21 years of age.

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Limit on Number of Independent directorship :
A. A person shall not serve as an independent director

in more than seven listed companies.


Further, any person who is whole time director in any
listed company, shall serve as an independent
director in not more than three listed companies.
Maximum tenure of independent Directors:
Independent directors shall hold office for a term up
to five consecutive years.
Shall be eligible for reappointment for further term up
to five years on passing special resolution.

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Formal Letter of appointment must be issued to

independent director and letter of appointment and


profile of independent director must be disclosed on the
website of the company and stock exchanges not later
than one working day from the date of appointment.
Performance Evaluation of Independent
directors:
The nomination committee to lay down the criteria for
performance evaluation of independent directors.
Performance evaluation criteria to be disclosed in
Annual Report
Performance evaluation to be done by the entire board .
( other than independent director concerned.)
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Separate Meetings of the independent Directors:
Independent directors of the company to have one

independent meeting without the attendance of other


directors
Independent Directors at this meeting will :
Review the performance of non independent directors
Review the performance of Chair person of the company,
Assess the quality, quantity and timeliness of
information flow between the company management
and the Board that is necessary for the Board to
effectively and reasonably perform their duties.

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Training of Independent Directors:
The company to provide training to

independent directors to familiarize


them with the business of the
company.
Details to be disclosed in Annual
report.

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Non Executive Directors Compensation and

disclosures:
All fees /compensation, if any paid to non-executive
directors, including independent directors , shall be
fixed by the Board of Directors and shall require prior
approval of shareholders in the general meeting
Other provisions with regard to Board
meetings:
The Board to meet at least 4 times in a year
Maximum gap between two meetings : 120 days
A director can not be a member in more than 10
committees
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Director can not be a chairman of more than 5

committees across all companies in which he is a


director. Further, he will inform the company about the
committee positions he occupies in other companies
and notify changes as and when they take place.
The Board to review periodically, compliance reports
of all laws applicable to the company, prepared by the
company as well as steps taken by the company to
rectify instances of non compliances.
Vacancy caused by resignation or removal of
independent director to be filled in within three
months of the resignation.
Board to satisfy itself of orderly succession plans.
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Code of conduct:
The Board shall lay down code of conduct

for directors and senior management.


All the members of Board and Senior
management must affirm compliance with
code on annual basis and CEO to give
declaration in writing to that effect in
Annual Report.
Code of conduct to incorporate duties of
directors
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Duties of Directors : Sec.166 :
Directors to Act subject to provisions of the Act, as per

Articles of the Company .


To act in good faith to promote objects of the company
for the benefit of members as a whole and in the
interests of the company, employees, shareholders,
the community and fo the protection of environment.
To exercise his duties with due and reasonable care,
skill and diligence and shall exercise independent
judgment.
Shall not involve in a situation in which he may have a
direct or indirect interest that may conflict with
interests of the co.
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Duties of directors contd.-

Shall not achieve or attempt to achieve any undue

gain or advantage either to himself or to his


relatives, partners or associates and if such director
is found guilty of making any undue gain, he shall
be liable to pay an amount equal to that gain to the
company.
Shall not assign his office and any assignment so
made shall be void.
If any director of the company contravenes the
provisions of this section such director shall be
punishable with fine which shall be not less than Rs.
1 lakh and may extend up to Rs.5 lakh.
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Schedule IV deals with code of conduct for

independent directors and includes:


Guidelines for professional conduct- standard of
ethics, integrity etc.
Role and Functions: bringing independent
judgment to bear in board deliberations on the
issues relating to strategy, performance, risk
management, resources, key appointments and
standard of conduct etc.
Duties
Manner of appointments /
reappointment/removal/resignation
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III Audit Committee:
A. Qualified and independent audit committee

to be set up subject to
1. Minimum 3 directors as members, two third
of the members to be independent directors.
2. All members to be financially literate.
Financially literate means the ability to read
and understand basic financial statements
such as Balance sheet P&L a/c and cash flows
3. Chairman of the Audit committee to be
independent director.

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4. Chairman of Audit Committee to be present at

AGM.
5. Audit Committee may invite such executives, as
it considered appropriate. The Finance Director, the
head of internal audit, and a representative of
statutory auditor may be present as invitees for the
meeting of the audit committee.
6. Company secretary to act as the secretary to the
committee.
Meetings of Audit Committee: Audit committee
to meet at least 4 times in a year and not more
than 4 months shall elapse btween two meetings.
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Powers of Audit Committee: These powers

include:
1. to investigate any activity within its terms of
reference
2. to seek information from any employee
3. to obtain outside legal or other professional advice.
4. to secure attendance of outsiders with relevant
expertise if it is considered necessary.
Role of Audit Committee:
Oversight of companys financial reporting process and
the disclosure of its financial information to ensure that
financial statement is correct, sufficient and credible.

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Role of audit Committee contd:
Recommendation for appointment, remuneration and

terms of appointment of auditors.


Approval of payment to statutory auditors for any
other services rendered by the statutory auditors.
Reviewing with the management annual financial
statements and auditors report thereon before
submitting to Board for approval, particularly with
reference to
i. Matters to be included in directors responsibility
statement
ii. Changes if any, in accounting policies and practices
and reasons
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3. Major accounting entries based on the exercise of

judgment by the management.


4. Significant adjustments made in the financial
statements
Arising out of audit findings.
5. Qualifications in draft audit report .
Reviewing with management, quarterly financial
statement before submitting to Board.
Reviewing with management, statement of uses /
applications of funds raised through an issue.
Review and monitor the auditors independence and
performance and effectiveness of audit process.
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Approval of any subsequent modification of transactions of

the company with related parties.


Scrutiny of inter-corporate loans and investments
Valuation of undertakings or assets of the company ,
wherever necessary.
Evaluation of internal financial controls and risk
management systems.
Reviewing with management, performance of statutory
and Internal auditors , adequacy of the internal control
systems.
Reviewing with management adequacy of internal audit
function, including structure of internal audit department,
staffing , reporting structure coverage and adequacy of
control.
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Corporate Governance
Discussion with internal auditors of any

significant findings and follow up.


Reviewing the findings with of any internal
investigations by internal auditors into matters
where there is suspected fraud or irregularity of
internal or failure of internal control systems of
a material nature and reporting the matter to
the Board.
To look into reasons for substantial defaults in
the payments to depositors, debenture holders,
shareholders ( in case of declared dividends)
and creditors.
74

NLDIMSR

Corporate Governance
To review the functioning of whistle blower

mechanism
Approval of appointment of CFO ,after assessing
qualifications, experience and background.
Carrying out any other function as is mentioned in
terms of reference of Audit Committee.
Review of information mandatorily to be
done by Audit Committee:
Management Analysis and discussion of financial
condition and results of operations
Statement of significant related party transactions
submitted by management
75

NLDIMSR

Corporate Governance
Management letters/ letters of internal

control weaknesses issued by the statutory


auditors.
Internal audit reports relating to internal
control weaknesses
Appointment, removal and terms of
remuneration of the Chief Internal auditor
shall be subject to review by the Audit
Committee.

76

NLDIMSR

Corporate Governance
IV. Nomination and Remuneration Committee:
A. The company shall set up a nomination and

remuneration committee which shall comprise of at


least three directors, all of whom should be non
executive and at least half shall be independent.
Chairman shall be an independent director.
B. Role of the Committee:
1. Formulation of criteria for determining
qualifications, positive attitudes and independence
of directors and recommending to the Board the
policy relating to the remuneration of the directors,
key managerial personnel and other employees.
77

NLDIMSR

Corporate Governance
2. Formulation of criteria for evaluation of

independent directors and the Board.


3.Devising a policy on Board diversity.
4.Indentifying persons who are qualified to
become directors and who may be appointed in
senior management in accordance with criteria
laid down and recommend to the Board their
appointment and removal. The company shall
disclose the remuneration policy and evaluation
citeria in Annual Report.
C. Chairman of nomination committee to remain
present at Annual General Meeting.
78

NLDIMSR

Corporate Governance
Subsidiary Companies:
At least one independent director on the Board of

holding company shall be director on the Board of


Directors of a material non listed Indian company.
The Audit committee of listed holding company shall
also review the financial statements in particular, the
investments made by the unlisted subsidiary company.
Minutes of Board meetings of unlisted subsidiary
company shall be placed at Board meetings of listed
holding company.
The company shall formulate a policy for determining
material subsidiary and such policy to be disclosed to
stock exchanges and in The Annual Report.
79

NLDIMSR

Corporate Governance
The term material non listed subsidiary shall mean an

unlisted subsidiary , incorporated in India, whose income


or net worth exceeds 20% of the consolidated income or
net worth respectively, of the listed holding company
and its subsidiaries in the immediately preceding
accounting year.
No company shall dispose off shares in its material
subsidiary which would reduce its shareholding to less
than 50% or cease the exercise of control over the
subsidiary without passing a special resolution in its
general meeting.
Selling, disposing and leasing of assets amounting to
more than twenty percent of the assets of the material
subsidiaries by way of pecial resolution.
80

NLDIMSR

Corporate Governance
VI Risk Management:
A. The company shall lay down procedures to inform

Board members about the risk assessment and


minimization procedures.
B. The Board shall be responsible for framing,
implementing and monitoring risk management plan
for the company.
C. The company shall also constitute a Risk
Management Committee. The Board shall define the
roles and responsibilities of the Risk Management
Committee and may delegate monitoring and
reviewing of risk management plan to the committee
and such other functions as it may deem fit.
81

NLDIMSR

Corporate Governance
VII . Related Party Transactions:
A. Related party transaction is a transfer of

resources, services or obligations between a


company and a related party, regardless of whether
a price is charged.
B. Parties are considered to be related if one party
has the ability to control the other party or exercise
significant influence over the other party, directly or
indirectly in making financial /or operating decisions .
An entity is is related if following conditions apply:
A) if entity and co are members of same group
( parent/ subsidiary or fellow subsidiary)

82

NLDIMSR

Corporate Governance
B) if entity is associate or joint venture of the other

party
C) Both entities are joint ventures of same third
party
The co has to formulate a policy on materiality of
related party transactions and also on dealing with
related party transactions.
Transactions with related party are material if
transaction, individually or with transactions entered
during the year together, exceed five percent of the
annual turn over or twenty percent of net worth of
the co as per audited b/s which ever is higher.

83

NLDIMSR

Corporate Governance
All material party transactions shall require approval

of the Audit Committee.


All related party transactions shall require approval
of shareholders through special resolution and the
related parties shall abstain from voting on such
resolutions.
VIII: Disclosures :
A. Related party transactions
B. Disclosure of Accounting Treatment
C. Remuneration of Directors
D. Management Discussion & Analysis

84

NLDIMSR

Corporate Governance
Communication to Shareholders
Disclosure of Resignation of Directors
Disclosure of formal letter of appointment to

independent directors
Disclosure in Annual report about training to
independent directors /evaluation of directors
Disclosure on utilization of proceeds from public
issues etc.
IX. CEO/CFO Certification.
X . Report on Corporate Governance
XI. Compliance : certificate/ quarterly report
to Stock exchange authorities.
85

NLDIMSR

Corporate Governance
Information to be placed before

Board of Directors ( As per


Annexure 1A of Clause 49):
1. Annual operating plans and budgets of

any updates.
2.Capital budgets and updates.
3.Quarterly results for company and its
operating divisions or business segments.
4. Minutes of meetings of all audit
committees and other committees of Board.
86

NLDIMSR

Corporate Governance
5. Information on recruitment and

remuneration of senior officers just below


the board level, including appointment
and removal of CFO and co. secretary.
6. Show cause, demand, prosecution and
penalty notices which are materially
important.
7. Fatal or serious accidents, dangerous
occurencies , any material affluent or
pollution problems.
87

NLDIMSR

Corporate Governance
8. Any material default in financial

obligations to and by the company or


substantial non payment for goods sold by
the company.
9. Any issue which involves any public or
product liability claims of substantial nature
including any order or judgement passing
strictures on the conduct of the company .
10. Details of any joint ventue or
collaboration agreement.
88

NLDIMSR

Corporate Governance
11. Transactions that may involve

substantial payment towards goodwill,


brand equity or intelletual property.
12. Significant labour problems and
proposed solution including wage
settlement, implementation of VRS
scheme if any.
13. Sale of investments, subsidiaries,
assets which is not in normal course of
business.
89

NLDIMSR

Corporate Governance
14. Quarterly details of foreign

exchange exposure and steps taken


by the management to limit the risk of
adverse exchange risk.
15. Non compliance of any regulatory ,
statutory or even listing requirements
and shareholder services such as
payment of dividends or delay in
transfer of shares etc.
90

NLDIMSR

Corporate Governance
Institutional Activism : CII , jointly with

Institutional Investors Advisory Services


(IIAS) conducted survey on Institutional
Investors perception of corporate
Governance in India Companies : Their
findings are as under :
How important is corporate Governance
in overall assessment of a target
companies :
84.2% Very important
15.8% Some what imporatant.
91

NLDIMSR

Corporate Governance
What is most important parameter

evaluated before investing ? ( On a


rating scale of 4 being highest )
Quality of Financial Reporting : 3.84
Reputation of promoter
: 3.74
Reputation of Management
: 3.58
Reputation of Board of Directors : 3.16

92

NLDIMSR

Corporate Governance
How do you percieve companies with good

corporate Governance in terms of shareholder


returns?
94.7 % associated good corporate governance with
high shareholder returns

5.3% with low returns.


Have you invested in any co. purely because they
have high standards of corporate Governance ?
Only 26.3% have invested purely on good corporate
governance as basis of investment
73.7% on the basis of other variables
Corporate Governance is necessary but not
sufficient condition for investment
93

NLDIMSR

Corporate Governance
Classification of BSE 500 on the BASIS OF

Ownership structure :
Promoter controlled : 72%
PSUs
: 13 %
MNCs
: 9%
Professional Cos
: 6%
Level of corporate Governance rating 4 being
highest :
MNcs
: 3.67
Professonal cos
: 3.17
PSUs
: 1.75
Promoters Controlled:
1.35

94

NLDIMSR

Corporate Governance
Perceived shareholder returns acros distinct

set of companies: Rating with 4 being highest:


Professional companies : 3.73
MNCs
: 3.09
Promoter conrolled
: 2.27
PSUs
: 1.36
Likely hood of investing Rating with 4 being
highest
Professional Cos : 3.92
MNCs
: 3.45
Promoter controlled: 2.78 PSUs : 2.33
95

NLDIMSR

Corporate Governance
Best Companies : : Rating with 8 BEING

HIGHEST
Tata Group : 7
HDFC
:5
Infosys
:5
HUL
:3
Nestle
:3
L & T
:3

96

NLDIMSR

Corporate Governance
Voting on shareholder resolutions :
Are you ready to invest in non voting

shares of companies?
Yes : 72.2%
No.27.8%
Do you have an internal team in your
co to help finalise the voting decision?
Yes : 60 %
No : 40%
97

NLDIMSR

Corporate Governance
For what percentage of your portfolio

companies do you exercise voting rights?:


60% would exercise voting rights for more than
75% of their portfolio cos.
33.3% exercise voting rights for 50% of their
portfolio companies.
Most critical corporate actions : Rating with
highest being 3:
Related party transaction : 2.79
M&As
2.71
Dilution of Equity
2.64 Change in
Business : 2.57
98

NLDIMSR

Corporate Governance
Most frequently opposed corporate actions

as being percieved to destroy shareholder


value:
Intra group mergers : 80%
Intra group Loans
: 60%
Issue of preferential warrants : 40%
Board appointments
: 20%
Executive pay
: 10%
Entering new business
: 10%
99

NLDIMSR

Corporate GOVERNANCE
Engagement with Investee compnaies :
Engagement once a month or on quarterly basis

for significant investments:


For companies where investment were above a
self reported minimum threshold : 25 % of the
investors met senior management of investee co
every month,
While 44% of the investos met senior
management of investee co every quarter.
Engagement qquarterly or half yearly basis for
smaller investment: 13% monthly, 33% quarterly
and 47% every six months.
100

NLDIMSR

CORPORATE govenance
How do you respond to a companys

proposal that you disagree with ? :


64% of the investors try to engage with the
company and reach a consensus
29% of investors responded that they exit the
co.
What is the maximum time frame within
which you expect companies to address
corporate governance concerns?
Institutional investors have low
tolerance for bad corporate governance.
101

NLDIMSR

Corporate Governance
What has been your experience when you attempted to

drive corporate governance in investee companies :


Excellent success rate : 10%
Company responded positively : 70%
Not responded positively
: 20%
Clause 49 and the effectiveness of Corporate governance
mechanism :
83% of respondents indicated that clause 49 is serving its
limited purpose.
62 % of respondents stated that existing framework of
regulation in India is in effective for enforcing rights and
obtaining remedies for corporate governance key issues like
sale of business , intragroup mergers, issue of preferentaial
warrants etc which are not addressed by the regulations.
102

NLDIMSR

Corporate Governance
To summarise, investors percieve companies with

good corporate governance as generating high


shareholder returns, although corporate governance
may only be necessary but not sufficient for
generating high shareholder returns.
Investors are amenable to trading off slightly lower
corporate governance levels for slightly better
shareholder returns, if they believe their investee
compnay is capable of doing so.
However, institutional shareholders have low
tolerance for bad corporate governance, and often
stand ready to leave the company when it commits
an act of bad corporategvernance.
103

NLDIMSR

Corporate Governance
Those investors who are ready to stay in the

investment prefer to drive better corporate


governance in investee companies , report
positive response from their investees. The
most contentious issues reported by
institutional investors are intra group mergers
and related party transactions.
Clause 49 only tries to institute a system of
checks and balances in a company but does not
address the most contentious issues faced by
investors. Hence, corporate governance in India
will improve only if it is enforced legally.
104

NLDIMSR

Corporate Governance
Self Regulation :
Code of Conduct at Tata Group of

companies :
Please read the mail forwarded.

105

NLDIMSR

Corporate Governance : Role of


Directors
Establish Vision, Mission and Values :
Determine the companys Vision and

Mission to guide and set the pace for its


current operations and future development.
Determine the values to be promoted
throughout the company.
Determine and review company goals.
Determine company policies.

106

NLDIMSR

Corporate Governance : Role of


Directors
Set strategy and Structure :
Review and evaluate present and future

opportunities, threats and risks in the external


environment and current and future strengths,
weaknesses and risks relating to the company.
Determine strategic options, select those to be
pursued and decide means to implement and
support them.
Determine the business strategies and plans that
underpin the corporate strategy.
Ensure that companys organizational structure
and capability are appropriate for implementing
chosen strategies.
107

NLDIMSR

Corporate Governance: Role of


Directors
Delegate to the Management:
Delegate authority to management, and

monitor and evaluate the implementation


of policies, strategies and business plans.
Determine monitoring criteria to be used
by the board.
Ensure that the internal control are
effective.
Communicate with senior management
108

NLDIMSR

Corporate Governance: Role of


Directors
Exercise accountability to shareholders

and
be
responsible
to
relevant
stakeholders:
Ensure that communications both to and from
shareholders and relevant stakeholders are
effective.
Understand and take into account the interest
of shareholders and relevant stakeholders.
Monitor
relations with shareholders and
relevant stakeholders by gathering appropriate
information and evaluation thereof.
Promote goodwill and support of shareholders
and NLDIMSR
relevant stakeholders.
109

Corporate Governance: Role of


Directors
Responsibilities:
Exercise
power in

proper way: In
furtherance of the reason for which they
were given those powers.
Act in Good Faith: Act in a way which they
honestly believe to be in best interest of
the company. In the event of conflict,
interest of the company shall prevail.
Act with due skill and care.
Consider the interest of the employees of
the company
110

NLDIMSR

Corporate Governance: Role of


Directors
Four most common mistakes made:
Failure to document reasons for decisions.
Failing to qualify the experts upon which the

director relies: To ensure reasonable reliance,


directors must have a basis for believing that
matters treated by experts are within his or her
professional or expert competence.
Failing to take the time for preparation and
reflection that someone less sophisticated
would take. Speed may be carelessness and
not efficiency.
Buying into the fallacy that if board cant do
every thing, it should not do anything
111

NLDIMSR

Corporate Governance: Role of


Directors
How to minimize risk of bad decisions

112

resulting in breach of duty to take care?


Document the analysis that goes into decisions
and the recommendations to the board.
Maintain records which show that the board
was familiar with the experience of its experts
prior to their retention and select and retain
experts in a manner which will preclude
receiving advice tainted by conflict of interest.
Take enough time to analyze data before
making decisions.
Consider cost effective alternatives to obtain
additional insight and liability protection when
facing an important decision.
NLDIMSR

Corporate Governance: Scandals


and Directors Responsibility
Are

directors
responsible
for
scandals?
US experience:
World Com Inc. : Bernard Ebbers
CEO has just been sentenced for 25
years in prison for orchestrating the
record $11 billion accounting fraud. At
the trial he denied any knowledge of
massive book cooking at world com.
113

NLDIMSR

Corporate Governance: Scandals


and Directors Responsibility
John Rigas founder of cable giant Adelphia got

15 years in prison for looting his company and


his son Timothy the formers chief financial
officer, got 20 years in prison.
L. Dennes Kozlowski the former Tyco Chief and
his own former finance chief will serve at least 8
1/3 years and perhaps as many as 25 years after
they were convicted of stealing $600 million
from Tyco.
Former Cendant Corp. Vice Chairman E. Kirk
Shelton was slapped with 10 years in prison for
his role in accounting scandal that cost the
investors and the company more than $3 Billion.
114

NLDIMSR

Corporate Governance: Scandals


and Directors Responsibility
The judges when they see the real victims and see that

115

there is really strong fraud in these companies, they


are going to make somebody pay the price and some
paid literally:
A New York judge signed off settlement deals that
forced investment banks, auditor Arthur Anderson and
former world com officials to cough up $6.1 billion,
much of which will be divided between 8,30,000
investors and institutions who lost money in the
accounting fraud. That settlement includes $25 million
paid by former World Com board members out of their
own pockets, and forfeiture of homes owned by Ebbers
and former World Com finance chief Scott Sullivan.
And Investment Banks and former directors agreed to
pay $7 Billion in a similar settlement over Enron
collapse, including $13 million paid personally by 10
former board members.
NLDIMSR
Source: http://accounting.smartpros.com

Corporate Governance
Issues in Corporate Governance:
How independent does the board of

Directors need to be to enforce


accountability?
To whom should the management be
accountable?
Who should be on the Board?
How
should investors
go
about
enforcing accountability?
116

NLDIMSR

Corporate Governance
Issues in Corporate Governance:

Who will watch the watchers?


How should a company align

the
interest of all of its employees with that
of the company?
Are we relying too much upon rules to
encourage good governance?
What does it mean to govern when
target is moving one?

117

NLDIMSR

Corporate Governance
Problems in Corporate Governance:
Vanishing Companies: Between 1991

and 1996, out of 3900 companies which


offered IPO, 2500 have vanished
There are over 1.36 lakhs companies
which are defaulting in complying with
requirements of Company Law
There are about 2481 sick companies
There is significant no of companies
which have not paid any dividends
since 1996
118

NLDIMSR

Corporate Governance
Reasons for Poor Corporate

Governance in India: Feudal mid set


that exists in India
Manifold restrictions set by Government
Lack of concern for society
Sense of insecurity that prevails amongst
the very people who are supposed to
inspire a sense of confidence about the
company among the stake holder
population
Greed and Ego
119

NLDIMSR

Corporate Governance: ENRON


Case
Auditors and Analysts who are external

to the company and the Board of


Directors who are internal to the
company have failed in discharging their
duties.
Five issues have been identified:
Chairman & CEO
Audit Committee
Independence and Conflict of Interest
Flow of Information
Too many directorships
120

NLDIMSR

Corporate Governance: ENRON


Case
Chairman and CEO:
In Enron, Kenneth Lay was both Chairman

& CEO. For a brief while the two positions


were
separated
when
Jeff
Skilling
functioned as CEO and when he resigned
in August 2001, Lay again took both roles.
Mr. Lay claimed that he did not know too
much of details of accounting fabrication
that was going on.
For Lay and former CEO Jeffrey Skilling and
former top accountant Richard Causey
consequences of conviction are dire.
121

NLDIMSR

Corporate Governance: ENRON


Case
Independence and Conflict of Interests:
Good governance requires that outside

directors maintain their independence and


do not take any benefit from their board
membership
except
remuneration.
Otherwise it can create conflicts of interests.
Enron had majority of directors who were
independent but they compromised their
independence. Six of 14 outside directors
suffered conflict of interests.
122

NLDIMSR

Corporate Governance: ENRON


Case
Conflict of Interest:
Herbert S Winokur, is also Director of the

Natco group which is a supplier to Enron


and its subsidiaries. He is also the
Chairman
of
the
Boards
Finance
Committee which recommended that the
Board suspend the companys ethics code.
The involvement of these directors
receiving other benefits compromised their
independence making one wonder whether
they acted in the best interest of Enron.

123

NLDIMSR

Corporate Governance: ENRON


Case
Conflict of Interest:
John Mendelsohn was the President of MD

Cancer centre at the university of Texas.


Enron and related entities donated $1.5mn
(Rs. 7.2 Crores) to the centre since 1985.
William Powers, who also headed special
investigation team, was the Dean of Texas
law school. Enron had given $3 million (Rs.
14.4 crores) to the university since he
became Dean. The law firm that works for
Enron, Vinson & Elkins, has endowed a
chair at the law school.
124

NLDIMSR

Corporate Governance: ENRON


Case
Conflict of Interest:
Robert Belfer, Chairman of Belfer Management

125

bought a stake in energy company from an Enron


partnership thereby providing funds to start
another.
Wendy Gramm (spouse of Republican Senator)
was formerly the Chairman of commodities
Futures Trading Commission of the Federal Govt.
Enrons trading in energy derivatives was exempt
from regulation of CFTC. Shortly after that
decision, she quit the commission and joined the
Enrons Board. He is presently Director of
Regulatory Studies Programme at George Mason
University. Enron donated $50,000 (Rs 24 Lacs)
to that centre.
NLDIMSR

Corporate Governance: ENRON


Case
Conflict of Interests:
Lord John Wakeham, a former Minister for

Energy in U.K. was paid $7200 (Rs. 34.5 lakh


for services as a consultant to Enrons
European Unit. When he was minister, he
gave consent for building the countrys largest
power plant at Teeside.

126

NLDIMSR

Corporate Governance: ENRON


Case
Too many Directorship:
Being a Director, needs time and efforts.

Although a Board might meet only four or


five times a year, the director needs to
have time to read and reflect overall
material provided to and make informed
decisions.
Good
governance suggests that an
individual sitting on too many boards will
not have time to do a good job.
Raymond Troubh, one of the director holds
directorship of 11 companies.
127

NLDIMSR

Corporate Governance: ENRON


Case
Audit Committee: The Board works through sub committees and

audit committee is one of them. It not only oversees the work of


the auditors but is also expected to independently inquire into
the workings of the organization and bring lapses to the
attention of full board. The Enron audit committee failed in this
regard.
Prof. Robert Jaedicke, a former accounting professor and Dean of
Stanford University Business School, was Chairman of Audit
Committee. Jaedicke, in addition to not performing his role as
Chairman of Audit Committee, seconded the motion in the board
to suspend the code of ethics of the company in order to allow
an employee to set up special partnership. Setting up that entity
amounted to a conflict of interest and was specifically prohibited
by the company code.
Apart from Jaedicke, the Audit Committee comprised of five
persons three of whom resided outside the country.
An Audit Committee is almost a working committee and needs
to meet more frequently than a full board. Having non-residents
on the committee hampered its functioning. One of the
members,
Ronnie Chan missed 75% of the meetings in 2001.
NLDIMSR
128

Corporate Governance: ENRON


Case
Flow of Information: Board is expected to take informed

decisions for which it needs important information in a


timely manner.
In case of Enron directors are pleading ignorance of the
murky deals as way of excusing themselves of the liability.
The special investigation committee report says:
The Board was denied important information that might
have led it to action, but the Board also did not fully
appreciate the significance of some of the specific
information that came before it.
If they did not have sufficient information, they should have
gone seeking for it.
Report suggests that Enron operated about 3500 special
purpose Entities, that is, partnership that shifted debt and
losses of Enrons balance sheet.
If the directors did not understand what was being reported
to them, it was their job to educate themselves more about
it by asking the right questions and getting more
NLDIMSR This, they failed to do.
129
information.

Corporate Governance
Comparative study :
USA, UK, Germany and Japan

130

NLDIMSR

Corporate Governance
Comparative study :
Ownership
Control Rights
Governance Rules
Market for corporate Control

131

NLDIMSR

Corporate Governance
1. Ownership :
USA : More than 50% of equity

shareholding with Institutional


investors ie, pension funds, insurance
funds, banks trusts etc.
About 30% of shareholding with private
shareholders including founders.
Liquid market for holdings and rights of
trading stocks in the market retained.

132

NLDIMSR

Corporate Governance
UK : 67 % of equity shareholding

with institutional shareholders


including insurance cos, pension
funds, unit trusts etc.
About 20% of shareholding with
private shareholders.
Retention of liquid market and right
of trading of stocks freely in the
market
133

NLDIMSR

Corporate Governance
Germany : 40 % of equity holding by large

companies, followed by
Institutional holding 11%
Banks
10%
Private Shareholders 11%
Balance by Govt and others
Smaller companies : Family owned
Substantial cross holding amongst companies
No role / limited role of private investors
Illiquid holdings
Strong control of com. Banks via proxy voting
on behalf of individual shareholders.
134

NLDIMSR

Corporate Governance
Japan : Corporate cross shareholding

by affiliated companies and major


banks
60 to 80 % shareholding with
institutional shareholders Insurance
cos, trusts and pension funds
20 to 30 % shareholding with private
shareholders
Shareholders unwilling to trade for
short term gains.
135

NLDIMSR

Corporate Governance
2. Control Rights :
USA :Management and control

operations of corporations delegated


to professional managers
UK: Management and control of
operations delegated to professional
managers under governance and
supervision of the Board.

136

NLDIMSR

Corporate Governance
Control Rights cotd:
Germany : Management and control of

operations delegated to Management


Board ( Vorstand) under supervision and
governance of Supervisory Board
( Aufsichtsrat)
Japan : Control rights by President and
operating committee of top
management although decision making
as per bottom up consensus method
137

NLDIMSR

Corporate Governance
3.Governance Rules :
USA :
Board members including CEO appointed by

shareholders
Audit committee with independent Directorship
set up compulsory as precondition for listing
Companies to ensure 50 % outstanding shares
voting at AGM
Proxy voting by mail permitted
Proportional representation for minority
shareholders interest
Preemptive right to issue new shares to retain
proportional holdings.
138

NLDIMSR

Corporate Governance
Governance Rules : Contd:
UK: Board members appointed by

shareholders
Audit committee of at least 3 non
executive directors compulsory as
listing requirement
No requirement of quorum on AGM

139

NLDIMSR

Corporate Governance
Governance Rules : Contd.
Germany : Two tier Board system :

Supervisory Board : (Aufsichtsrat ) :


Discharging all supervisory functions with
equal shareholders as well as employee /
union representatives.
Management Board : (Vorstand ) : With Senior
Executives directing the functions of Direction
and Management.
Considerable autonomy to Management
Board.
Effectiveness and functioning of Management
Board monitored by supervisory Board.
140

NLDIMSR

Corporate Governance
Governance Rules contd :
JAPAN : Single tier majority of all inside

directors Board with employee directors.


Powerful Govt intervention by Ministry of
Finance for industrial acticvity and capital
flows.
Statutory auditors ( Kausayaku )
appointed by shareholders
Appointment of 3-members audit
committee.
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4. Market for corporate control:
USA : Very strong capital markets
Role of Banks in governance not

important
Management take take overs
including hostile take over are
common.

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Corporate Governance
Market for corporate control Contd:
UK : Active and strong capital

market
M&As : Quite strong, active and
common
UK Banks not interested to take
equity stakes hence insignificant
role in corporate governance.
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Market for Corporate Control :
Germany : No market control for

corporates by stock exchange.


Direct holding of shares by
individuals discouraged due to tax
on dividends
Increased M&A activity due to
German unification.
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Market for Corporate Control

contd
Japan : No market for corporate
control
Friendly M&As not uncommon.
Minimal hostile takeover activity.

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Corporate Social Responsibility

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Corporate Social
Responsibility

What is corporate social responsibility?


Pet projects of CEO ? Medical camp /

distribution of woolen rugs during winter season


or plastic sheets/ umbrellas during monsoon ?
Is it corporate philanthropy aimed at
propaganda activity?
The modern corporate leaders look at corporate
social responsibility as creative opportunity to
fundamentally strengthen their businesses
while contributing to society at the same time
Business partnering with society.
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Requirement of CSR in Companies Act 2013
Sec.135 : Corporate Social Responsibility :
Corporate Social Responsibility Committee:
Every company with net worth of Rs. 500 crores or more
Or Turnover of Rs. 1,000/- crore
Or a Net Profit of Rs. Five crore or more during any

financial year
Shall constitute a Corporate Social Responsibility
Committee of Board consisting of three or more directors
, out of which at least one director shall be independent.
Board of Directors report to members at AGM to disclose
constitution of Corporate Social Responsibility Committee

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Corporate Social Responsibility Committee:
The committee shall formulate and recommend to

the Board Corporate Social responsibility Policy


and
Indicate the activities to be undertaken by the
company as specified in Schedule VII .
Recommend the amount of expenditure to be
undertaken
Monitor the Corporate Social Responsibility Policy
of the Company.
Board to report the activities in its Report as well
as place it on the web site of the company.
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Board to ensure that the CSR activities are

undertaken.
Board to ensure that company spends in every
financial year
At least two percent of the average net profits of the
company made during the three preceding financial
year , in pursuance of CSR policy of the company.
For taking up CSR activities, company shall give
preference to local area around it where it operates.
If Board fails to spend this amount, the Board should
specify the reasons why it could not send in its
financial report to the members of the company.

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Schedule VII :
Activities which may be included by companies in their

corporate social responsibility policies:


i. eradicating extreme hunger and poverty.
ii. Promotion of education.
iii. Promoting gender equality and empowering women.
iv. Reducing child mortality and improving maternal
health
v. combating human immununo deficiency virus,
acquired immune deficiency syndrome, malaria and
other diseases
vi. Ensuring environmental sustainability.

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Schedule vii :
vii. Employment enhancing vocational skills.
viii. Social business projects.
ix. Contribution to Prime Ministers National

Relief Fund or any other fund set up by


central/ state govt for socio economic
development and relief and welfare of
scheduled castes, scheduled tribes,
backward classes, minorities and women.
x. Such other matters as may be prescribed.
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Corporate Social
Responsibility

Before looking into academic aspects of

CSR, let us look at practical examples of


companies engaged in CSR:
Lupin - Winner of CSR award in 2003 :
Co has set up Lupin Human Welfare and Research
Foundation (LHWRF) an NGO .
LHWRF has set up 125 schools either singly or
with Govt help, provided for drinking water
facilities in 80 villages and helped 25,000 people
cross the poverty line.
NGO is headed by Sita Ram Gupta Ex Asst Eng of
RSEB.
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Responsibility

Guptas model is simple. He first

creates a local body at village level.,


typically 11 to 21 members depending
on population of village. The village
chooses the members of the local body
but it must compulsorily have women
as well as representation of scheduled
caste and scheduled tribe.
This local body figures out what is the
priority there and LHWRF delivers it.
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Responsibility

Example of Lakshman Singh aged 58 years bee

farmer :
He was a poor bee farmer earning a few thousand
rupees from bee farming.
He attended a seven day programme organised
by Lupin on bee farming.
Gupta helped him in getting Rs.10000/- loan from
local bank to buy five honey combed bee boxes.
Singhs income kept growing- presently earning
Rs.10 lakhs a year ( in 2003) and his customers
included Dabur. There are many like singh
whomake 4-5 lakhs from bee farming.
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Responsibility

There are countless others whose wives

have not died during child birth as Lupin


built a road connecting village to a hospital
and numerous children who have gone to
school.

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Corporate Social
Responsibility

Winner No.2 : Canara Bank : Lending a helping

hand :
In 1960, way before nationalisation, Canara bank
provided educational loans at cheaper rates.
About 47000 employees of Canara Bank donate
Rs.3 /-per month to a social cause of their choice
Rs.16.9 lakh annually.
Apart from this, Bank contributes Rs. 10 crores,
nearly 1% of its profits.
Like Lupin, Canara bank CSR projects fall mostly
within the ambit of community development. Its main
thrust is on giving vocational skills to unemployed
people.
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Corporate Social
Responsibility

Since 1988, Cananra Bank has trained 1.3 lakh

people.
One big initiative is Rural Entrepreneurship
Development Institutes and set up 20 such
vocational centres across India in partnership
with Syndicate Bank and Dharmastala
Manjunatheshwara Educational Trust.
Example of Ramakrishna who came out from
such centre runs a shop at Bidadi near
Jogaradoddi and makes Rs. 10000/- month
selling wooden carvings.
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Corporate Social
Responsibility

Winner No.3 : Gujarat Ambuja Cement s: No

charity please
Ambuja Cement Foundation : a non profit
organisation set up by Gujarat Ambuja Cement in
1993 and now extends across seven states,
touching the lives of 4.5 lakhs people in nearly
300 villages.
ACF does not associate with corporate
philanthropy. Every project it undertakes involves
some contribution by stakeholders .
ACF projects are simple and need based. So,
water harvesting gains priority in Saurashtra.
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Responsibility

In Bhuj ( Kutch District) : It did not adopt

any village during earthquake for


rehabilitation . Instead, it set up masonry
camps so that locals could build houses
and have career options.
ACF also cleared 12 wells near the coast of
saline water.
ACF encouraged a mentally challenged girl
Hunny Saini to play badminton. She won a
gold medal at Dublin Spectal Olympics.
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Responsibility

Other CSR Practices : ITC : CSR as business

model :
ITCs Commitment Beyond the Market initiative is
mutually beneficial model where social development
is integrated with its businesses including cigarettes,
paper and paper boards, food products and hotels.
While its farm and social forestry projects aim at
increasing forest cover and ecological balance, for
ITC, it creates a source of timber .
Its watershed development projects improve soil
content in dry land, it gives ITC a bigger sourcing
area for agricultural inputs.

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Responsibility

e Choupal : By providing on line market related

information , ITC not only empowers farmers, but also


gains from more reliable and better quality inputs.
The company has written CSR policy and it has
identified special people to head respective projects.
The Board reviews he projects once a year and
corporate management committee headed by CEO
Deveshwar reviews twice a year.
In the year 2003-04 , it spent Rs.17.94 crores on
various projects, including on women empowerment
and education.

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Corporate Social
Responsibility

Wipro : Moulding a gneration :


The Applying Thought in Schools project aims to

enhance the quality of learning of school going


children by providing six months training
programme for teachers and school principals.
The focus is on encouraging independent and
creative thinking building problem solving skills
and helping children become what they want.
Wipro started the project closer home I five
schools in Bangalore and then taken it to 80
schools across 10 states and trained 1800
teachers at a cost of 1.44 crore.
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Responsibility
Winners of CSR awards in 2006:
Winner : SAIL : It has specific CSR policy
Spends 2% of distributable surplus on projects

including education, water, roads and connectivity,


Health care issues.
Ist Runner up : Neyvelli Lignite Corporation :
Major focus re employability of project affected
persons. It also looks at income generation of
destitute, women and people affected with disability.
2nd Runner up : TCL : Works through trusts and
societies that take up development work in the areas
of natural resource management livelihood
development , health care and education.
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Responsibility

Awards for the year 2009 :


Winner : Tata Steel

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Responsibility

Survey state of CSR in India :


Why do corporates take up

CSR aciviies ?
Philanthropy
50%
Image building 42%
Employee morale 30%
Ethics
30%

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Responsibility

What are the major CSR

activities ?
Healthcare
Blood donation
Education
Opening schools
Relief Camps

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17%
16%
12%
10%
10%

Corporate Social
Responsibility

Target Groups:
Weaker sections of society
Company employees
Children
Rural community
Disaster affected
Community near workplace
Ailing / sick people
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43 %
37%
34%
29%
27%
23%
20%

Corporate Scial Responsibility


How do corporates implement

CSR activities?
Donating money
Staff deputation
Staff volunteering
Company products
Enabling employment
Company facilities
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81%
24%
20%
19%
17%
25%

Why some coporates do not


Corporate Social

take up CSR activities ?


Responsibility
Absence of policy
Lack of time
Difficulty of tracking and
monitoring
No performance bench marks
Lack of continuity in action
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Responsibility

Reasons for not having corporate

policy on CSR :
Never thought of it
Already contributing

44%
39%
No specific reason
39%
Small size
24%
Decision with upper mgt
21%
Financial reasons
21%
Doing business honestly
15%
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Responsibility

McKinsey Survey on Global CEOs about CSR :


Do you believe that society has higher expectations

for business to take public responsibilities than it


had 5 years ago
Response of CEOs who said yes (in % )
By Region :
Europe : 96
America : 95
Rest of the world :98
By type of co :
Public : 97
Private 91
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Responsibility

Which of the following stake holder groups have/ will

have the greatest impact on the way your company


manages societal expectations? :
Now
In
the next 5 years
Employees
48
39
Customers
44
50
Governments
30
32
Local Communities
27
29
Regulators / Govt agencies
26
25
Media/ opinion leaders
22
24
NGOs
20
27

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Responsibility

Stake holders impacting business :

years
Boards
Investment community
Organised labour
Suppliers

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Now
19
16
7
6

In next 5
16
19
7
5

Corporate Social
Responsibility

Trends influencing societys expectations of business :


Which of the following trends do you think are most important

of business?
Increasing Environmental Concern :
61
Demand Supply gap of natural resources
38
Emergence of China / India on global market place : 37
Increasing Technological connectivity
33
Decreasing Trust in Business
18
Growing influence of NGOs
14

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Responsibility

Trends influencing societys expectations:

Contd
Backlash against Globalisation

12
Over burdened Public Sector
Off shoring
12
Protectionism
06
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12

Corporate Social
Responsibility

Which of the following global environmental, social and


political issues are the most critical to address for the
future success of the business ?
Educational systems and talent constraints : 50%
Poor public governance ( weak states,
Conflict zones, corruption)
: 44%
Climate Change
: 38%
Making globalizations benefits available
: 36%
to poor ( Bottom of pyramid product devl, marketing
and distribution)

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Responsibility
Security of energy supply :

35
Access to clean water, sanitation :
12
HIV/ AIDS and other public health issues
08

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Responsibility
Barriers to CEO engagement :

Which of the following barriers do you believe keep you,

as a CEO , from implementing and integrated and


strategic company :
Competing strategic priorities
: 43
Complications of implementing strategy
across various business functions
:
39
Lack of recognition from Fin. Markets
: 25
Differing definitions of CSR across regions / cultures : 22
Failure to recognize link to value drivers
: 18

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Responsibility

Difficulty in engaging with external groups

: 17
Lack of effective communication
infrastructure :13
Lack of Board support
: 07
Employee resistance
: 04

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Responsibility
Performance Gap :

Which of the following activities should your company

implement to address environmental, social and


governance issues?
What co what
co Performance
Particulars
should do is doing
Gap
Fully embed these issues
into strategy and operations
72
50
22
Have Board discuss and act
69
45
24
Engage in industry collaborations 56
43
13
Embed these issues in global SCM 59
27
32

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