A Project Report on Cg 19may

8/8/2019 A Project Report on Cg 19may

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A PROJECT REPORT ON

CORPORATE GOVERNANCE

A PROJECT REPORTUNDER THE GUIDANCE OF

PROF.R.V. RAJWADE

SUBMITTED BY

SUCHITA JOSHIM.B.A. (SEM. IV) 520857164

2009 - 2010

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

FOR THE AWARD OF THE DEGREE

OF

MBA

INHUMAN RESOURCE MANAGEMENT

SIKKIM MANIPAL UNIVERSITY

DNYANASADHANA ASIAN INSTITUTE OF CORE COMPETENCETHANE

(CENTRE CODE: 02816)

JULY 2010


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Acknowledgement

I express my sincere thanks to Mrs. Janhavi Khandekar, Principal,DNYANASADHANA ASIAN INSTITUTE OF CORE COMPETENCE, THANEand Dr. G.B.Vishe, Principal, Dnynasadhana College, Thane, for granting meopportunity of undertaking this project.

I am grateful to Prof. R.V.Rajwade for his guidance and analysis, which hascontributed greatly in improving the quality of work done during the tenure of this

project.

I wish to thank Mrs. Priti Alkari, Deputy Company Secretary of RaymondLtd. for her wholehearted support and guidance during the project.

I am also thankful to all those whose best wishes and support helped me incompletion of this project, especially my spouse, friends and my parents for guiding in

proper time.

BYSUCHITA SIDDHARTH JOSHI


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DECLARATION

I, SUCHITA SIDDHARTH JOSHI, student of Sikkim Manipal University studying

in M.B.A. (Semester IV) hereby declare that I have completed project on

CORPORATE GOVERNANCE under the subject of HUMAN RESOURCE

MANAGEMENT in the academic year 2009- 2010. The information submitted is true

and original to the best of my knowledge.

SUCHITA S. JOSHI(STUDENT)


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BONAFIDE CERTIFICATE

Certified that this project report titled CORPORATE GOVERNANCE is the

bonafide work of SUCHITA SIDDHARTH JOSHI, who carried out the project

work under my supervision.

SIGNATURE SIGNATURE

HEAD OF THE DEPARTMENT FACULTY IN CHARGE


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EXECUTIVE SUMMARY

On completion of my Masters in Law, I decided to pursue MBA. My aim was to take

up such subject that would give me an opportunity to work on subjects related to law as

well as Human resources. And hence I have chosen this topic of CorporateGovernance for my project work.

Corporate governance is a new area undertaken and implemented by companies to

derive different benefits like creating confidence in minds of all stakeholders of the

company.

This project highlights on the concept, objects and models of corporate governance. It

also throws light on why corporate governance gained momentum in India.

During my visit to Raymond Ltd I interviewed Mrs. Priti Alkari, Deputy CompanySecretary, which helped me to observe whether CG was followed in its strict sense or if

it was restricted only to a policy on paper.

My project report consists of corporate governance practices followed in two

companies. These case studies prove that corporate governance practice is followed for

the sake of compliance by one company and by other company beyond expectations of

Law, SEBI and stakeholders.

The issue of corporate governance has become a matter of concern for corporations as

they see it as a prerequisite for attracting funds from foreign financial institutions.

Moreover, investors want to ensure that the companies they invest in are not only

managed properly, but also have proper corporate governance.

Corporate governance is beyond the realm of law. It cannot be regulated by legislation

alone. Legislation can only lay down a common framework the "form" to ensure

standards. The "substance" will ultimately determine the credibility and integrity of the

process. Substance is inexorably linked to the mindset and ethical standards of the

management.


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INDEX

SR. NO. PARTICULARS PAGE NOS.1 INTRODUCTION & DEFINATIONS 2-32 ISSUES IN CORPORATE GOVERNANCE 4-53 EVOLUTION CG IN INDIA4 CONSTITUENTS OF CORPORATE GOVERNANCE5 MODELS OF CORPORATE GOVERNANCE6 ROLE AND RESPONSIBILITIES OF THE BOARD7 CODES AND LAWS8 FIELD WORK : CORPORATE GOVERNANCE IN

RAYMOND LTD.9 CASE STUDIES

10 CONCLUSION


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INTRODUCTION

In ancient India, the ruling emperors decided the concept and practice of governance.

The treatise on economic administration, Arthashastra, written roughly 315 years

before Christ, developed a complete structure of governance in a kingdom with clear

demarcation of authority, responsibility and accountability. In the Far East, Japan and

China also placed the governance in the hands of their kings.

In the post Christ period, with improved navigation and availability of vessels, the

traders from Europe, especially the Portuguese and the Dutch explored the known

expanse of the earth and gave rise to global trading entities. These entities reported to

the kings. This was the beginning of corporate governance. As we approach the 16thcentury, the most powerful trading nation, England, formed a variety of regulations and

regulatory authorities such as joint stock companies and Bank of England to govern all

trading activities on a platform of accountability, efficiency, effectiveness and stake

holders satisfaction. The concept of corporate governance was the basic platform for

these regulations and regulatory authorities and over a period of time the concept and

its practice took a firm root for all activities.

As market forces increasingly replace government controls, corporate governance is

fast gaining prominence in business circles. The issue of corporate governance has

become a matter of concern for corporations as they see it as a prerequisite for

attracting funds from foreign financial institutions. Moreover, investors want to ensure

that the companies they invest in are not only managed properly, but also have proper

corporate governance, Investors regard corporate governance as a control mechanism

that ensures the optimum use of human, physical and financial resources for an

enterprise. Further, GATT and WTO regulations call for adherence to good governance

practices.

We have come across companies which apparently were very efficiently managed but

which landed in troubles due to poor governance. There are cases in India where the

companies that are considered as blue chip companies, going in for allegedly illegal

transactions like Hawala transactions, which raise questions about the level of their

governance. In other words, the issue of corporate governance is an issue of agency

function namely how to ensure that the interests of the investors are taken care of Thisis not only in terms of return on investment by effective management, but also ensuring


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that the enterprises do not indulge in corrupt practices or acts which are unethical Such

practices may have adverse consequences on the long-term interests of the

stakeholders.

Corporate governance is concerned with the way in which corporate entities are

governed, as distinct from the way in which businesses within those companies are

managed It addresses various issues facing the boards of directors, which relate to the

interaction with top management, relationship with the owners, other stakeholders and

society at large. Ensuring better corporate performance through involvement in strategy

formulation aid policymaking corporate conformance through top management

supervision and accountability to the stakeholders come under the ambit of corporate

governance.

Corporate governance in a developing-country setting takes on additional importance.

Good corporate governance is vital because of its role in attracting foreign investment.

The extent of foreign investment, in turn, shapes the prospects for economic growth for

many developing countries. This Note presents an in-depth inquiry into corporate

governance in one such developing country, India. While India's corporate-governance

framework is advanced for a developing country, it still can be significantly improved.

Definition

The term Corporate Governance is not easy to define. The term governance relates to a

process of decision making and implementing the decisions in the interest of all

stakeholders. It basically relates to enhancement of corporate performance and ensures

proper accountability for management in the interest of all stakeholders.

The Cadbury Report of 1991 on Corporate Governance considers it as a system

through which corporates are guided and directed. On the basis of this definition, the

Core Objectives of Corporate Governance can be defined as under: Strategic Focus

Predictability Transparency Participation Accountability Efficiency &

Effectiveness Stakeholder Satisfaction. The Strategy Focus defines the direction the

organization should take to meet its goals and to ensure Stakeholder Satisfaction. The

Strategic Focus should be based on Predictability as the evolution of strategies have to

consider the dynamic environment within which it has to operate and hence the

challenges from the environment need to be anticipated. A well-designed process to

evolve and deploy strategy has to have Transparency for all stakeholders so that there is


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a commitment and an understanding of the result expected from the operations. For

proper execution of any processes aimed at achieving the desired end result,

Participation of all stakeholders is important and actually necessary. The participation

should have a clear goal of Efficiency and Effectiveness of the organization as a whole

and this where Accountability is the key. All stakeholders have to have a clear

understanding of their accountability for the most effective operations of any

organization.

Corporate governance involves a set of relationships between a companys

management, its board, its shareholders and other stakeholders also the structure

through which objectives of the company are set, and the means of attaining those

objectives and monitoring performance are determined.

Preamble to the OECD Principles of Corporate Governance, 2004

fundamental objective of corporate governance is the enhancement of the long-

term shareholder value while at the same time protecting the interests of other

stakeholders. SEBI (Kumar Mangalam Birla) Report on Corporate Governance,

January, 2000

"Corporate governance is maximizing the shareholder value in a corporation while

ensuring fairness to all stakeholders, customers, employees, investors, vendors, the

government and the society-at-large. Corporate governance is about transparency and

raising the trust and confidence of stakeholders in the way the company is run. It is

about owners and the managers operating as the trustees on behalf of every shareholder

- large or small." - Shri N.R. Narayana Murthy, Chief Mentor, Infosys Limited.

Corporate governance is essentially about leadership:

leadership for efficiency;

leadership for probity;

leadership with responsibility; and

leadership which is transparent and which is accountable.

- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE

COMMONWEALTH

Corporate Governance is the application of best management practices,

Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility


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for sustainable development of all stakeholders.- The Institute of Company

Secretaries of India

Report of SEBI committee (India) on Corporate Governance defines corporate

governance as the acceptance by management of the inalienable rights of shareholders

as the true owners of the corporation and of their own role as trustees on behalf of the

shareholders. It is about commitment to values, about ethical business conduct.


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ISSUES IN CORPORATE GOVERNANCE

Corporate governance practices are a set of structural arrangements that ire emerging in

free-market economies to align the management of companies with the interests of their

shareholders (in particular) and other stakeholders, and society at large.

Corporate governance addresses three basic issues:

Ethical issues

Efficiency issues, and

Accountability issues

Ethical issues are concerned with the problem of fraud, which is becoming wide spread

in capitalist economics. Corporations often employ fraudulent means to achieve their

goals. They form cartels to exert tremendous pressure on the government to formulate

public policy, which may sometimes go against the interests of individuals and society

at large. At times corporations may resort to unethical means like bribes, giving gifts to

potential customers and lobbying tinder the cover of public relations in order to achieve

their goal of maximizing long-term owner value.

Efficiency issues are concerned with the performance of management. Management is

responsible for ensuring reasonable returns on investment made by shareholders. In

developed countries, individuals usually invest money through mutual, retirement and

tax funds. In India, however, small shareholders are still an important source of capital

for corporations as the mutual finds industry is still emerging. The issues relating to

efficiency of management is of concern to shareholders as there is no control

mechanism through which they am control the activities of the management whose

efficiency is detrimental for returns on their (shareholders) investments.

The management of a corporation is accountable to its various stakeholders.

"Accountability issues" emerge out of the stakeholders' need for transparency of

management in the conduct of business. Since the activities of a corporation influence

the workers, customers and Society at large, some of the accountability issues tire

concerned with the social responsibility that a corporation must shoulder.

The growing scale of corporations and their style of functioning have raised many new

issues that must be addressed by corporate governance. Some of these issues are: The growth of private companies


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Tire magnitude and complexity of corporate groups

The importance of institutional investors

Rise in hostile activities of predators (take over.)

Insider trading

Litigations against directors

Need for restructuring of boards

Changes in auditing practices

The emergence of private companies and the growing complexity of corporate groups

is one of the main concerns of corporate governance. Initially, limited liability

companies were incorporated to raise outside capital. Later, these corporations used

their powers as a legal person under law to acquire shares in other companies. This

resulted in the formation of new companies that took over the assets and liabilities of

the original companies before winding them up. This led to a spate of mergers and

acquisitions in the late nineteenth and twentieth centuries.

Corporate governance is also concerned with the growing influence of institutional

investors on the corporations. Issues concerning hostile takeovers particularly

management buy-outs, tire also addressed by corporate governance. Insider trading,

imbalanced boards and compliance with international accounting standards the other

issues that are addressed by corporate governance.

Jenson feels that corporations should incur some cost to ensure management

compliance. These costs result from setting up of monitoring mechanisms like boards,

which require appointment of outside independent directors to carry out checks like

audits to evaluate the performance of top management. These theories of corporate

governance laid the foundations for further studies in corporate governance.

The aim of "Good Corporate Governance" is to ensure commitment of the board in

managing the company in a transparent manner for maximizing long-term value of the

company for its shareholders and all other partners. It integrates all the participants

involved in a process, which is economic, and at the same time social.

The fundamental objective of corporate governance is to enhance shareholders' value

and protect the interests of other stakeholders by improving the corporate performance

and accountability. Hence it harmonizes the need for a company to strike a balance at

all times between the need to enhance shareholders' wealth whilst not in any way being

detrimental to the interests of the other stakeholders in the company. Further, its


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objective is to generate an environment of trust and confidence amongst those having

competing and conflicting interests.

It is integral to the very existence of a company and strengthens investor's confidence

by ensuring company's commitment to higher growth and profits. Broadly, it seeks to

achieve the following objectives:

A properly structured board capable of taking independent and objective

decisions is in place at the helm of affairs;

The board is balance as regards the representation of adequate number of non-

executive and independent directors who will take care of their interests and

well-being of all the stakeholders;The board adopts transparent procedures and practices and arrives at decisions

on the strength of adequate information;

The board has an effective machinery to subserve the concerns of stakeholders;

The board keeps the shareholders informed of relevant developments impacting

the company;

The board effectively and regularly monitors the functioning of the

management team;

The board remains in effective control of the affairs of the company at all times.

The overall endeavour of the board should be to take the organisation forward so as to

maximize long term value and shareholders'


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Evolution of corporate governance in India

Earlier the government was expected to ensure good corporate conduct. Most

shareholders believed that stringent government controls would prevent malpractices of

the corporations for fear of punishment. However, there was soon a growing realization

that government was not always the best guardian of public interest. Shareholders

began to feel the need for market driven corporate governance flint would be more

democratic and flexible. This led to the birth of self imposed corporate governance

within the corporate system. The active participation of various stakeholders like

shareholders, financial institutions, etc. have strengthened the corporate governance

mechanism and helped it to evolve beyond set of static rules.

Many factors have contributed to the evolution of corporate governance. Some of this

are-

The responsibility for ensuring good corporate conduct shifted from

government to a free-market economy.

Active participation of individual and institutional investors.

Increasing competition in global economy.

With the relaxation of direct and indirect administrative controls by the government,

alternative mechanisms became necessary to monitor the performance of corporations

in free-markets. Shareholders believed that market forces could ensure good corporate

conduct (self imposed) by way of rewarding success and punishing failures of

corporations. Many free-market economies laid down effective regulations to monitor

the corporations. However, regulations alone do not ensure good governance. To

become effective, they must be enforceable by law.

The second factor that boosted corporate governance is the growth of global fund

management business. Institutional investors such as insurance companies, pension and

tax funds account for more than half the capital in the corporations of USA, This trend

is also growing in India. Earlier Institutional investors did not monitor the activities of

the corporations in which they invested. But the competition in the fund management

business has forced them to take an active role in governance in order to safeguard their

investments in the corporations. Now, many institutional investors express their views

strongly with regard to various matters such is financial and operational performance, business strategy, remuneration of top-level managers etc. Along with the non-


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executive directors, these institutional investors monitor the performance of

corporations.

The active investor demands good performance in the form of return oil investment and

they also expect timely and accurate information regarding the performance of the

company. Institutional investors can exert pressure on the management as they own a

considerable share in the capital and any criticism from these investors can have a

major impact oil the share prices. Investors believe that only strong corporate

governance mechanisms and practices can save them from the ever-growing power of

corporations, which call influence public policy to the detriment of investors.

The enhanced competition ill the global economy has compelled corporations to

perform better by going in for cost-cutting, corporate restructuring, mergers &

acquisitions, downsizing etc. All these activities can be carried out successfully only if

there is proper corporate governance. Thus, market forces, active individual and

institutional investor participation, and enhanced competition have helped corporate

governance to evolve beyond a set of static rules.

Unlike South-East and East Asia, the corporate governance initiative in India

was not triggered by any serious nationwide financial, banking and economic

collapse

The initiative in India was initially driven by an industry association, the

Confederation of Indian Industry

In December 1995, CII set up a task force to design a voluntary code of

corporate governance.

The final draft of this code was widely circulated in 1997.

In April 1998, the code was released. It was called Desirable Corporate

Governance: A Code.

Between 1998 and 2000, over 25 leading companies voluntarily

followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys

Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and

many others

Following CIIs initiative, the Securities and Exchange Board of India (SEBI)

set up a committee under Kumar Mangalam Birla to design a mandatory-cum-

recommendatory code for listed companies

The Birla Committee Report was approved by SEBI in December 2000


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Became mandatory for listed companies through the listing agreement, and

implemented according to a rollout plan:

2000-01: All Group A companies of the BSE or those in the S&P CNX

Nifty index 80% of market cap. 2001-02: All companies with paid-up capital of Rs.100 million or more

or net worth of Rs.250 million or more.

2002-03: All companies with paid-up capital of Rs.30 million or more

Following CII and SEBI, the Department of Company Affairs (DCA) modified

the Companies Act, 1956 to incorporate specific corporate governance

provisions regarding independent directors and audit committees.

In 2001-02, certain accounting standards were modified to further improvefinancial disclosures. These were:

Disclosure of related party transactions.

Disclosure of segment income: revenues, profits and capital employed.

Deferred tax liabilities or assets.

Consolidation of accounts.

Initiatives are being taken to (i) account for ESOPs, (ii) further increase

disclosures, and (iii) put in place systems that can further strengthen auditorsindependence.

With the goal of promoting better corporate governance practices in India, the Ministry

of Corporate Affairs, Government of India, has set up National Foundation for

Corporate Governance (NFCG) in partnership with Confederation of Indian Industry

(CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered

Accountants of India (ICAI).

Studies of corporate governance practices across several countries conducted by the

Asian Development Bank, International Monetary Fund, Organization for Economic

Cooperation and Development and the World Bank reveal that there is no single model

of good corporate governance.

The OECD Code also recognizes that different legal systems, institutional frameworks

and traditions across countries have led to the development of a range of different

approaches to corporate governance. However, a high degree of priority has been


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placed on the interests of shareholders, who place their trust in corporations to use their

investment funds wisely and effectively is common to all good corporate governance

regimes.

One area of concern is whether the accounting firm acts as both the independent auditor

and management consultant to the firm they are auditing. This may result in a conflict

of interest which places the integrity of financial reports in doubt due to client pressure

to appease management. The power of the corporate client to initiate and terminate

management consulting services and, more fundamentally, to select and dismiss

accounting firms contradicts the concept of an independent auditor. Changes enacted in

the United States in the form of the Sarbanes-Oxley Act (in response to the Enron

situation as noted below) prohibit accounting firms from providing both auditing and

management consulting services. Similar provisions are in place under clause 49 of

SEBI Act in India.

The Enron collapse is an example of misleading financial reporting. Enron concealed

huge losses by creating illusions that a third party was contractually obliged to pay the

amount of any losses. However, the third party was an entity in which Enron had a

substantial economic stake. In discussions of accounting practices with Arthur

Andersen , the partner in charge of auditing, views inevitably led to the client

prevailing.

In India, the concept of corporate governance is still in its nascent stage. The

recommendations of Kumaramangalam Birla and CII committees' reports are the first

steps in India towards ensuring better corporate governance. Prior to these

recommendations SEBI has take various steps to strengthen corporate governance in

India. Some of these steps are as follows:

Strengthening of disclosure norms for Initial Public Offers following the

recommendations of the Committee set up by SEBI under the Chairmanship of Shri Y

H Malegam;

Providing information in directors' reports for utilization of funds and variation

between projected and actual use of funds according to the requirements of the

Companies Act ' inclusion of cash flow and funds flow statement in annual reports

Declaration of quarterly results;
http://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Arthur_Andersen


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Mandatory appointment of compliance officer for monitoring the share transfer

process and ensuring compliance with various rules and regulations;

The underlying principles of corporate governance revolve around three basic inter-

related segments. These are:

Integrity and Fairness

Transparency and Disclosures

Accountability and Responsibility

The organizational framework for corporate governance initiatives in India consists of

the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of

India (SEBI). The first formal regulatory framework for listed companies specifically

for corporate governance was established by the SEBI in February 2000, following therecommendations of Kumarmangalam Birla Committee Report. It was enshrined as

Clause 49 of the Listing Agreement.

Thereafter SEBI had set up another committee under the chairmanship of Mr. N. R.

Narayana Murthy, to review Clause 49, and suggest measures to improve corporate

governance standards. Some of the major recommendations of the committee primarily

related to audit committees, audit reports, independent directors, related party

transactions, risk management, directorships and director compensation, codes of

conduct and financial disclosures.

The Ministry of Corporate Affairs had also appointed Naresh Chandra Committee on

Corporate Audit and Governance in 2002 in order to examine various corporate

governance issues. It made recommendations in two key aspects of corporate

governance: financial and non-financial disclosures: and independent auditing and

board oversight of management.


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The Main Constituents of Good Corporate Governance are:

Role and powers of Board: the foremost requirement of good corporate

governance is the clear identification of powers, roles, responsibilities and

accountability of the Board, CEO and the Chairman of the board.

Legislation: a clear and unambiguous legislative and regulatory framework is

fundamental to effective corporate governance.

Code of Conduct: it is essential that an organization's explicitly prescribed

code of conduct is communicated to all stakeholders and is clearly understood

by them. There should be some system in place to periodically measure and

evaluate the adherence to such code of conduct by each member of the

organization.

Board Independence: an independent board is essential for sound corporate

governance. It means that the board is capable of assessing the performance of

managers with an objective perspective. Hence, the majority of board members

should be independent of both the management team and any commercial

dealings with the company. Such independence ensures the effectiveness of the

board in supervising the activities of management as well as make sure thatthere are no actual or perceived conflicts of interests.

Board Skills: in order to be able to undertake its functions effectively, the

board must possess the necessary blend of qualities, skills, knowledge and

experience so as to make quality contribution. It includes operational or

technical expertise, financial skills, legal skills as well as knowledge of

government and regulatory requirements.

Management Environment: includes setting up of clear objectives andappropriate ethical framework, establishing due processes, providing for

transparency and clear enunciation of responsibility and accountability,

implementing sound business planning, encouraging business risk assessment,

having right people and right skill for jobs, establishing clear boundaries for

acceptable behaviour, establishing performance evaluation measures and

evaluating performance and sufficiently recognizing individual and group

contribution.


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Board Appointments: to ensure that the most competent people are appointed

in the board, the board positions must be filled through the process of extensive

search. A well defined and open procedure must be in place for reappointments

as well as for appointment of new directors.

Board Induction and Training: is essential to ensure that directors remain

abreast of all development, which are or may impact corporate governance and

other related issues.

Board Meetings: are the forums for board decision making. These meetings

enable directors to discharge their responsibilities. The effectiveness of board

meetings is dependent on carefully planned agendas and providing relevant

papers and materials to directors sufficiently prior to board meetings.

Strategy Setting: the objective of the company must be clearly documented in

a long term corporate strategy including an annual business plan together with

achievable and measurable performance targets and milestones.

Business and Community Obligations: though the basic activity of a business

entity is inherently commercial yet it must also take care of community's

obligations. The stakeholders must be informed about the approval by the

proposed and on going initiatives taken to meet the community obligations.

Financial and Operational Reporting: the board requires comprehensive,

regular, reliable, timely, correct and relevant information in a form and of a

quality that is appropriate to discharge its function of monitoring corporate

performance.

Monitoring the Board Performance: the board must monitor and evaluate its

combined performance and also that of individual directors at periodic intervals,

using key performance indicators besides peer review.

Audit Committee: is inter alia responsible for liaison with management,

internal and statutory auditors, reviewing the adequacy of internal control and

compliance with significant policies and procedures, reporting to the board on

the key issues.

Risk Management: risk is an important element of corporate functioning and

governance. There should be a clearly established process of identifying,

analysing and treating risks, which could prevent the company from effectively

achieving its objectives. The board has the ultimate responsibility for identifying major risks to the organization, setting acceptable levels of risks and


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ensuring that senior management takes steps to detect, monitor and control

these risks.

A good corporate governance recognizes the diverse interests of shareholders, lenders,

employees, government, etc. The new concept of governance to bring about quality

corporate governance is not only a necessity to serve the divergent corporate interests,

but also is a key requirement in the best interests of the corporates themselves and the

economy.

Also, irrespective of the model, there are three different forms of corporate

responsibilities which all models do respect:

Political Responsibilities: the basic political obligations are abiding by

legitimate law; respect for the system of rights and the principles of

constitutional state.

Social Responsibilities: the corporate ethical responsibilities, which the

company understands and promotes either as a community with shared values

or as a part of larger community with shared values.

Economic Responsibilities: acting in accordance with the logic of competitive

markets to earn profits on the basis of innovation and respect for the

rights/democracy of the shareholders which can be expressed in terms of

managements' obligation as 'maximizing shareholders value'.


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MODELS OF CORPORATE GOVERNANCE

1] Anglo - American Model

Many models of corporate governance try to involve various stakeholders like

shareholders, employees and financial institutions in the governance of the company. In

this section we will discuss the Anglo -American, German Japanese, and Indian models

of corporate governance.

In this model of corporate governance, shareholders elect the board of directors. They

take up the advisory role. Shareholders usually control a private corporation through

the board of directors. The board of directors performs three functions on behalf the

shareholders: representation, direction and oversight. The Board appoints and

supervises the officers (managers) who take care of the daily activities of the

organization.

The structural framework of the Anglo-American model as laid down by the legal

system is shown in the Figure below. Employees, suppliers and creditors are

stakeholders in the corporation. The creditors have a lien on the assets of the

corporation The Board of Directors designs the policy of the corporation, which is then

implemented by the management, using a well-designed information system the board

monitors the implementation of this policy in the organization. This model is most

suitable for a production or manufacturing organization as it facilitates efficient

monitoring of production, exchange and performance.


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2] German model of corporate governance

In the Gentian model of corporate governance, even though the shareholders own the

corporation, they do not directly control the governance mechanism. Half of the

members on the supervisory board are elected by file labor unions while the remaining

are elected by the shareholders (owners). In this model the employees are not just

stakeholders, but also have a say in the governance mechanism.

Thus, employees become responsible for the policies that are to be implemented by

them for attaining the objectives (profit, market share, high volumes ... etc) of the

organization. Tire supervisory board, which is appointed jointly by the shareholders

and the labor unions (employees), appoints and monitors the management board. This

management board conducts the day-to-day operations of the organization

independently. But, it has to report to the supervisory board. One of the Unique features

of this model is that the labor relations' officer finds a place on the management board,

This ensures workers participation in the governance mechanism This model of

corporate governance and the relationship between various constituents is as shown in

Figure below.

3 ] Japanese Model

In the Japanese model of corporate governance, the financial institutions have a major say in the governance mechanism. The shareholders, along with the banks, appoint the


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members of the board. In this model even the president is appointed on the basis of a

consensus between the shareholders and the banks. The president consults the board

and their relation is hierarchical in nature. Usually the board ratifies whatever decisions

the president takes. The financial institutions that finance the business have a crucial

role in it even though the shareholders are the owners of the business. In this model, the

executive management (board of directors) carries out file management function.

Sometimes the financial institutions monitor the management function by nominating

the managerial personnel. The banks even have the power to suspend the board in case

of an emergency. This model is as shown in the Figure below.

4] Indian Model

The Indian model of corporate governance is a mix of the Anglo-American and

German models. Corporations in India can be grouped into three categories: private

companies, public companies, banks and other corporations.

The founder, his family, and associates closely hold the private companies and they

exercise maximum control over the activities of the company The businesses of private

companies like that of the Tata group, the Reliance group, or the Birla group, are

financed by retained earnings or/and debt. The role of external equity finance is

minimal.

In the case of public enterprises, the central and state governments choose tile members

of the board. Even after the disinvestment of some public sector companies, thegovernment continues to have a considerable hold over the activities of the company.


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Here the interests of the stakeholders are given low priority, large public sector

enterprises are run to serve the interests of the government rather than aiming for

efficiency and maximizing long-term owner value.

ROLE AND RESPONSIBILITIES OF THE BOARDROLE OF DIRECTORS

A director assumes two roles while governing the activities of an organization. They

are:

The performance role

The conformance role

Performance Role

In this role, the director performs various activities that are aimed at improving [fie

overall performance of the corporation. Firstly, a director act as a source of knowhow,

expertise and external information, secondly, he caters to needs of the corporation for

networking, representing and adding status.

The director brings into the corporation the knowledge and experience required to solve

the problems that the board faces, Outside directors sometimes play the role of

-specialists," drawing upon their expertise, knowledge and skills in different areas such

as finance marketing, law, and engineering. The outside directors appointed by the

corporations on their boards usually play the role of specialists. The outside directors

act as the eye of the board to the external world. They bring in information related to

international markets, the financial or technological environment etc, which is not

readily accessible to the corporation. Generally outside directors are hand picked from

influential groups in the society. Corporations use them to gain access to these groups.

The directors represent the company on public forums or committees. They act with the

media on behalf of the corporation.

The presence of outside directors who are renowned in various fields enhances the

status, reputation and credibility of the board. This boosts customer/shareholder

confidence in the company.

Conformance Role

In this role the director is concerned with ensuring that the company follows the

policies and procedures laid down by the board. Directors usually accomplish this by

questioning and supervising the executive management. Conformance role is a very

tricky role as it involves, monitoring and evaluating their own performance, (in case of

majority/All-executive boards.


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What Should a Board Do?

1. Exercise leadership, enterprise, integrity and judgment in directing the corporation so

as to achieve continuing prosperity for the corporation and to act in the best interests of

the business enterprise in a manner based on transparency, accountability and

responsibility.

2. Ensure that through a managed and effective process board appointments are made

that provide a mix of proficient directors, each of whom is able to add value and to

bring independent judgment to bear on the decision-making process;

3. Determine the corporation's purpose and values, determine the strategy to achieve its

purpose and to implement its values in order to ensure that it survives and thrives, and,

ensure that procedures and practices are in place that protect the corporation's assets

and reputation;

4. Monitor and evaluate the implementation of strategies, policies, management

performance criteria and business plans;

5. Ensure that the corporation complies with all relevant laws, regulations and codes of

best business practice;

6. Ensure that the corporation communicates with shareholders and other stakeholders

effectively;

7. Serve the legitimate interests of the shareholders of the corporation and account to

them fully;

8. Identify the corporation's internal and external stakeholders and agree on a policy, or

policies, that indicate how the corporation should relate to them;

9. Ensure that no one person or a block of persons has unfettered power and that there

is an appropriate balance of power and authority on the board which is, inter alia,

usually reflected by separating the roles of the chief executive officer and Chairman,

and by having a balance between executive and non-executive directors,

10. Regularly review processes and procedures to ensure the effectiveness of the

board's its internal systems of control, so that its decision-making capability and the

accuracy of its reporting and financial results are maintained;

11. Regularly assess its performance and effectiveness as a whole, and that of the

individual directors, including the chief executive officer,

12. Appoint the chief executive officer and at least participate in the appointment of

senior management, ensure the motivation and protection of intellectual capital intrinsic


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to the corporation, ensure that there is adequate training in the corporation for

management and employees, and a succession plan for senior management;

13. Take care that all technology and systems used in the corporation are adequate to

properly run the business and ensure that it remains a meaningful competitor;

14. Identify key risk areas and key performance indicators of the business enterprise

and monitor these factors;

15. Ensure annually that the corporation will continue as a going concern for the next

fiscal year.

Independent outside directors is in good position to analyze issues that are brought to

the notice of the board from a perspective that is different from that of the executive

directors. This independent evaluation of the top management's performance

overcomes the danger of adoption of a narrow vision of the executive board.

RESPONSIBILITIES OF DIRECTORS

The company law lays down the duties and responsibilities of the board of directors.

Directors also have certain duties and responsibilities, which are embedded in the laws

of insolvency, consumer protection, employment act, mergers and monopolies, and

other securities and stock exchange rules. The responsibilities of the directors may

differ from country to country, but there are some responsibilities that are common to

directors all over the world. These are:

Responsibilities to shareholders

Obligation to maintain honesty and integrity.

The shareholders of a company appoint the directors. Hence, the basic responsibility of

the directors is towards the shareholders. Directors fulfill this responsibility by

providing strategic direction to the company by setting appropriate policies and

monitoring the performance of the top management. Directors are also accountable to

the shareholders. They have to give the shareholders regular reports and accounts,

which are duly audited, Directors are expected to be honest in their dealings with the

shareholders and to take decisions that will benefit the organization as a whole. All the

shareholders must be given adequate and accurate information regarding every issue

that could affect their interests.

LEGAL ASPECTS AND LIABILITIES OF DIRECTORS


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The Companies Act makes directors liable for the following:

- Misrepresentations in offer documents and annual accounts

- Failure to refund subscription money to investors

- Contravention of the law

Duties of Directors

- Exercise care in the discharge of functions as directors.

- Attend board meetings and devote sufficient time and attention to the affairs of the

company.

- Not to be negligent and not to commit or let others commit tort-liable acts Act in the

best interest of the company and its stockholders and customers

- Not to misuse power

- Protect interests of creditors

- Maintain confidentiality

- Not to make secret profits and make good loss, if accrued due to breach of duty, of

negligence.

- Not to exercise powers for a collateral purpose.

- Not to waste company assets.

THE ROLE OF THE CHAIRMAN

The role of the chairman is to manage the board and ensure that its policies are put into

practice by the management. He also has to work closely with the company secretary to

address legal issues. The chairman must have a good understanding of the financial

standing of the company. He must keep a strict watch on the company's actual

performance. The chairman should have a clear idea of where the company stands and

where it is headed.

He should also have clear understanding of the way in which a company is managed He

must identify shortcomings and see that the board discusses these. A chairman should

play a proactive role and should be in a position to identify a problem even before the

CEO recognizes or senses it. By being proactive the chairman can help the CEO take

corrective action before things get out of hand, The chairman also plays crucial role in

maintaining good relations between the board and the company' stakeholders. In the

process of maintaining such relations lie ensures that the board makes decisions in

accordance with the interest of shareholder and all other stakeholders of the company.

The primary responsibility of the chairman lies in catering to the internal needs of the board and its conduct. He has to handle people from varied fields who serve the board


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A chairman must have good interpersonal relations. For ensuring functioning of it

board a chairman should forge good relationships with the CEO, executive and not

executive directors.

Relationship with the CEO

The chairman must have a good relationship with the CEO. This will not only give him

broad understanding of 'what is going on in the organization, but also allow him

determine whether the CEO is working towards achieving the set targets or not.

Strained relations between the CEO and chairman may turn out to be detrimental the

company. Differences with the chairman may compel the CEO to withhold information

from him.

Relationship with Executive Directors

It is the responsibility of the chairman to ensure that the executive directors report the

activities of the organization in an honest way. The information presented to the

executive directors determines the effectiveness of the contribution of the no executive

directors.

Relationship with non-executive Directors

Cordial relations with the non-executive directors enable the chairman to motivate,

them to make decisions that are beneficial to the company. A good chairman should

have the ability to attract and maintain good non-executive directors on his board.

FUNCTIONS OF THE CHAIRMAN

Some of the functions of a chairman, apart from the roles and responsibilities discussed

above are:

- To set standards and ensure that policies and practices are in place.

- To ensure that the directors take good decisions.

- To make sure that directors are continuously upgraded to the levels required

investors to meet the current and future needs of the company.

- To act decisively in times of crisis

- To act as a representative of the company.

THE ROLE OF CEO


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The primary role of a CEO is to run the organization in an efficient

manner to produce the desired results. Apart from running the business effectively, the

CEO is expected to have a constructive working relationship with the chairman and the

directors.

Relation with the Chairman

The CEO should establish a constructive working relationship with the chairman. This

requires a high degree of trust, respect, and an ability to communicate openly with each

other. When the CEO and chairman know each others strengths and weakness they can

work closely, complementing each others strengths to set the future course of the

company.

Relation with Directors

The CEO should maintain cordial relationships with the directors to ensure that they

Act in the interest of the whole organization instead of pursuing the narrow interests of

the owners (shareholders, employees, banks, government etc.) The CEO can use his

good relations with the directors to motivate them to participate actively in improving

the performance of various departments of the organization.

Functions of the CEO

In addition to the roles discussed above, a CEO is expected to be able.

To assist the executive directors in Formulating strategic proposals that have to

be

endorsed by the board.

To provide leadership and direction to all his executive directors.

To develop a plan for implementing the strategy formulated by the board and/or

Management.

To act as representative of the executive directors when interacting with the

non-executive directors.

To present the company to major investors, the media and government.

To be a source of inspiration, leadership and direction to the employees,

customers and suppliers.

To be able to identify the situations that requires intervention.


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FUNCTIONS OF THE BOARD

The primary function of the Board of directors is to take responsibility for the

performance of the corporation and work to promote its interests on behalf of the

shareholders, to whom it is accountable. Corporate boards oversee the performance of

the corporation, its CEO and the top-level managers. The board ensures that timely and

accurate reports are provided oil corporate performance, including the financial

conditions and non-financial indicators of the corporation. It monitors corporate

performance by closely following the progress of the corporation towards the pre-set

goals and targets. The board provides strategic guidance to the corporation; it studies

the future trends so that the corporation has the necessary and adequate resources to

secure its long-term position. The board has to maintain good relations with the

stakeholders and try to keep the shareholders happy. Apart from carrying out the above

functions, the board enacts various performance and conformance roles.

Kumarmangalam Committee Recommendations - Composition of Audit

Committee

The composition of the audit committee is based on the fundamental premise of

independence and expertise. The Committee therefore recommends that

the audit committee should have minimum three members, all being non executive

directors, with the majority being independent, and with at least one director having

financial and accounting knowledge;

the chairman of the committee should be an independent director.

the chairman should be present at Annual General Meeting to answer shareholder

queries;

the audit committee should unite such of the executives, as it considers appropriate

(and particularly the head of the finance function) to be present at the meetings of the

Committee but on occasions it may also meet without the presence of any, executives

of the company, Finance director and head of internal audit and when required, a

representative of the external auditor should be present as invitees for the meetings of

the audit committee;

the Company Secretary should act as the secretary to the committee.

(These are mandatory recommendations.)

Strategic Role of the Board:


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The primary role of the board is to supervise the quality of strategic thinking of the

executive committee. When necessary, the board can take corrective measures to guide

the top management to develop strategies to achieve corporate goals.

The board has a final say in the strategy that decides the fate of the company. The

board has the right to either pass the decisions taken by the executives or question the

effectiveness of these strategies. Hence it is the responsibility of the executives to come

up with proposals for the board to agree on, to improve oil using their collective

experience and expertise in various fields of business, The board, therefore, plays key

role & in leading and directing the organization. Effective boards are familiar with the

activities of the organization and can, as a result, play a major role in guiding the

strategic decision making process of the company. At times, non-executive director on

the board identify and warn the CEO about operational issues that may lead to crisis

situation. The board performs its role in strategy development in the following levels.

Systematic level strategy

Structural and portfolio strategy

Implementation strategy

Systematic level strategy

Systematic level strategy , formulation is based on the board's understanding of what is

happening in the national, international and global environment. The board's

knowledge about the external environment extends too many areas: socio-political

environment, potential market trends, the impact of changes in technology and the

international competitive forces that have in effect on the company. Since the board

members scan the external environment regularly, they can provide the

executives/management crucial inputs for effective decision-making.

Structural and portfolio strategy is concerned with decisions regarding the structure

of the company and the businesses that it should enter into. The board addresses issue

like what changes can be done in the structure of the company to achieve the growth

aspirations of the board. This level of strategic thinking involves discussions among the

board of directors and the management, relating to acquisitions, mergers, strategic

alliances or sale of a part of the business.

Implementation strategy is concerned with the board's role in ensuring that the

strategy is feasible. 'The board ensures that a broad game plan for implementing the


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policies and strategies is in place, so that the management can deliver the desired

results.

Policy Making Role of the Board

The board of directors frames guidelines or policies to ensure that the business plans

and management decisions conform to the corporate strategy. These policies cover all

the key areas like marketing, finance, personnel, operations, customer relations and

research and development. The board develops broad policies for the above areas and

the executives of the organization draw up derived policies (pricing, advertising, sales

and distribution in the marketing field). These policy statements are usually, published

and made available to employees.

Monitoring and Supervisory Role

The board monitors and supervises the corporation to ensure that it adopts the right

strategic direction. It regularly checks whether the business is following the policies

laid down for achieving the goals and inquires into the causes of deviations, if any. The

board reviews the plans, policies and strategies of the corporation in the light of the

changing competitive environment. If necessary it makes changes in the corporations'

strategies. For effective executive supervision, a board has to monitor all the activities

or the company that are crucial for ensuring consistent growth and building market

share. For example, the board of a manufacturing company may have to monitor the

activities concerned with financial performance, market performance, product and

services performance, technological performance, management and organizational

performance, employee relations, acquisitions and divestments, corporate social

responsibility etc.

COMMITTEES OF THE BOARD

The board relies on independent outside directors to monitor management performance.

Some important committees usually set up by the board, comprising outside directors,

are:

Audit committee

Remuneration committee

Nomination committee

Audit Committee


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The committee usually consists of independent directors who report to the board. These

committees act as a link between the board and the external auditors. The audit

committee looks into all the matters raised by the external auditors relating to the

management systems and tries to resolve any objections that the auditors raise about the

published financial accounts. Some of the functions of a corporate audit committee are:

To discuss with independent auditors any problems that they experience in completing

the audit.

To review file interim and final accounts in toto

Powers and Functions of the Audit Committee

Being a committee of the board, the audit committee derives its powers from the

authorization of the board. The Committee recommends that such powers should

include powers:

1 .To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or oilier professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

(This is a mandatory recommendation)

Functions:

As the audit committee acts as the bridge between the board, the statutory auditors and

internal auditors, the Committee recommends that its role should include the following:

1. Oversight of the company's financial reporting process and the disclosure of its

financial information to ensure that the financial statement is correct, sufficient and

credible.

2. Recommending the appointment and removal of external auditor, fixation of audit

fee and also approval for payment for any other services.

3. Reviewing with management the annual financial statements before submission to

the board focusing primarily on:

a. Any changes in accounting policies and practices.

b. Major accounting entries based on exercise of. judgment by management.

c. Qualifications in draft audit report.

d. Significant adjustments arising out of audit.

e. The going concern assumption.

f. Compliance with accounting standards


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g. Compliance with stock exchange and legal requirements concerning financial

statements.

h. Any related party transactions i.e. transactions of the company of material nature,

with promoters or the management, their subsidiaries or relatives etc. that may have

potential conflict with the interests of company at large.

4. Reviewing with the management, external and internal auditors, the adequacy of

internal control systems.

5. Reviewing the adequacy of internal audit function, including the structure of the

internal, audit department, staffing and seniority of the official heading the department,

reporting structure, coverage and frequency of internal audit.

6. Discussion with internal auditors of any significant findings and follow-up thereon.

7. Reviewing the findings of any internal investigations by the internal auditors into

matters here there is suspected fraud or irregularity or a failure of internal control

systems of a material nature and reporting the matter to the board.

8. Discussion with external auditors before the audit commences, of the nature and

scope of audit. Also post-audit discussion to ascertain any area of concern.

9. Reviewing the company's financial and risk management policies.

10. Looking into the reasons for substantial defaults in the payments to the depositors,

debenture holders, shareholders (in case of non-payment of' declared dividends) and

creditors.

To inform the board about the effectiveness of Internal controls and the quality of

financial reporting as pointed out by the independent auditors.

To make recommendations regarding the audit fee, selection and replacement of

auditors.

Remuneration Committee

Shareholders are becoming concerned about the lack of transparency regarding the

remuneration of directors and top-level managers. The board sets up the remuneration

or compensation committee to objectively review the remuneration packages of the

executive directors and other top-level managers. This committee, which is made up of

independent directors, chalks out the remuneration policy. Such a policy checks the

unreasonable increase of executive remuneration.


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The remuneration committee designs a transparent remuneration policy that can attract

and retain directors and top management and motivate them to achieve the long-term

goals of the organization.

Nomination Committee

These committee are usually set up to select the new non-executive directors. Usually,

it is headed by the chairman and it shortlists and interviews the final candidates.

A code is a set of rules, which are accepted as general principles, or a set of written

rules, which state how people in a particular organization or country should behave,

Thus, it is a set of standards agreed on by a group of people who do a particular job. A

regulation is an official rule that lays down how things should be done. Both codes and

regulations are "sets of rules" or "principles" or "standards" that are intended to control,

guide, or manage behavior or the conduct of individuals working in organizations, the

basic difference being that codes are "self-imposed or self regulated" sets of rules,

while regulations are "official," i.e. imposed by the State (government).

Many corporate governance codes were developed by non-governmental organizations.

Stock exchanges, investor groups and professional associations were responsible for

promoting and commissioning codes or principles for corporate governance. In addition

to the codes developed by non-governmental organizations, governments also issue

rules or guide lines on matters concerning, governance through capital market

regulatory organizations like SEBI.


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REPORTS OF COMMITTEES ON CORPORATE GOVERNANCE

Losses suffered by investors and leaders in the recent past (throughout the world) raised

concern about standards of financial reporting and accountability of management.

Many believed that these losses could have been avoided if companies had transparent

reporting practices and good corporate governance. In recent e-governments and

corporates have made sincere efforts to design corporate codes govern the functioning

of corporations. Some of the important reports on corporate governance published in

India and abroad are:

Kumar Mangalam Birla Committees

CII Committee Report

Cadbury Committee ReportOECD Report

Cadbury Committee Report

A committee was set up under the chairmanship of Adrian Cadbury in July 1991 the

Financial Reporting Council, the London Stock Exchange and the accountant

profession to took into the financial aspects of corporate governance. The committee

first submitted its report for public scrutiny on 27 May, 1992. The recommendations

made by the Cadbury Committee are as follows

Decision -making power should not be vested in a single person. i.e. there

should be a separation of the roles of chairman and chief executive.

Non-executive directors should act independently while giving their judgment

issues of strategy, performance, allocation of resources and designing codes

conduct.

A majority of directors should be independent non-executive directors, i.e. III,

should not have any financial interests in the company.

The term of a director should not exceed three years. This can be extended on

with the prior approval of the shareholders.

There should be full transparency in matters relating to directors emoluments.

There should be a judicious mix of salary and performance related pay.

A Remuneration committee made up wholly or largely to non-executive

director should decide on the pay of the executive directors.

The Interim company report should give the balance street information and

should. be reviewed by the auditor.


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The pension funds should be managed distinct from the company.

There should be a "professional and objective" relationship between the boar

and the executives.

Information regarding the audit fee should be made public and there should tregular rotation of auditors.

The recommendations made by the Cadbury committee were widely accepted by

corporates in U.K. and they became a reference point for many other committees,

which were set up by various governments all over the world. Refer to Appendix II for

summary of the Cadbury report.

Kumarmangalam Birla Committee Report

Kumar Mangalam Birla headed the committee appointed by, the Securities and

Exchange Board of India (SEBI) on May 7, 1999. The committee was formed to

promote and raise the standards of corporate governance. The objective of this

committee was to:

Suggest suitable amendments to the listing agreement executed by the stock

exchanges with the Companies and any other measures to improve the standards of

corporate governance in the listed Companies, in areas such as continuous disclosure of

material information, both financial and non-financial, manner and frequency of such

disclosures, responsibilities of independent and outside directors;

Draft a code of corporate best practices; and

Suggest safeguards to be instituted within the companies to deal with insider

information and insider trading.

The Kumara Mangalam Birla Committee identified the shareholders, the board of

directors and the management of a company as the three constituents that have a key

role to play in corporate governance. This committee tried to identify the roles and

responsibilities of each of the above mentioned constituents in ensuring effective

corporate governance. Some of the recommendations made by Kumara Mangalam

Birla committee are as follows.

1. The Board should have an optimum combination of Executive and non-

executive directors and at least 50% of the Board should comprise of non-

executive directors. Further, at least one-third of the Board should comprise of

independent directors where Chairman is non-executive and at least half of the

Board should be independent in case of an executive Chairman,


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2. A qualified and all independent "Audit Committee" should be set up by the

Board of the company. This would go a long way in enhancing the credibility of

the financial disclosures of a company and promoting transparency.

3. The Board should set up a "Remuneration Committee" to determine on their

behalf and on behalf of the shareholders with agreed terms of reference, the

company's policy of specific remuneration packages for executive directors

including pension rights and any compensation payment.

4. The Board should set up a committee under the chairmanship of a non-

executive/ independent director to specifically look into shareholder issues

including share transfer and redressing of shareholder complaints.

5. To expedite the process of share transfers, the Board should delegate the power

of share transfer to an officer or a committee or to the registrar and share

transfer agents. The delegated authority should attend to share transfer

formalities at least once in a fortnight.

6. The Corporate Governance section of the Annual Report should make

disclosures on remuneration paid to directors in all forms including salary,

benefits, bonuses, stock options, pension and other fixed as well as performance

linked incentives paid to the directors.

7. The Board meetings should be held at least four times in a year, with a

maximum time gap of four months between any two meetings and all

information recommended by the SEBI Committee should be placed at the

Board.

8. As a part of the disclosure related to management, in addition to the Directors'

Report, Management Discussion and Analysis Report should form part of the

Annual Report to the shareholders.

9. All company related information like quarterly results, presentation made by

Companies to analysts may be put on company's website or may be sent in such

a form so as to enable the stock exchange on which the company is listed to put

it on its own website.

10. There should be a separate section on Corporate Governance in the Annual

Report, with details on the level of compliance by the Company. Non-

compliance of any mandatory recommendations with reasons thereof and the

extent to which the no-mandatory recommendations have been adopted should be specifically highlighted. The Non-executive Chairman of the Company


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should be entitled to maintain an office at the Company's expense and also

allowed reimbursement of expenses incurred in performance of his duties. This

will enable him to discharge the responsibilities effectively (This is a non-

mandatory recommendation).

11. No Director should be a member in more than 10 committees or act as chairman

of more than five committees across all Companies in which he is a Director.

Furthermore, it should be a mandatory annual requirement for every Director to

inform the company about the committee positions he occupies in other

Companies and changes.

12. The Company should provide a brief resume, expertise in specific functional

areas and names of Companies, in which the person also holds the directorship

and the membership of committees of the board, while appointing a new

director or re-appointing an existing director. These should form part of the

notice to shareholders.

13. Disclosures to be made to the Board by the management relating to all material

financial and commercial transactions, where they have personal interest that

trial may a potential conflict with the interest of the company at large. These

include dealing in company shares, commercial dealings with both, which have

shareholding of management and their relatives, etc.

14. The half yearly declaration of financial performance including summary of the

significant events in last six months, should be sent to each household of

shareholders.

15. The financial institutions should under normal circumstances have no direct role

in the decision making of the board of the company. They should not have

nominees on the board, merely by virtue of their financial exposure in the

company. There is however a ground for the term lending financial institutions

to have nominees on the boards of the borrower Companies, to protect their

interests as creditors. In such cases, the nominee directors should take an active

interest in the activities of the board and assume equal responsibility, as any

other director on the board.

16. A separate section on compliance with the mandatory recommendations of

Clause 49 should form part of the report and details of non-compliance should

be highlighted.


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17. A certificate from the auditors on compliance should form part of the Annual

Report and Annual Return and a copy his to be sent to the Stock Exchanges.

CII Report

The liberalization of the Indian economy and the growth of international competition

made Indian industry recognize the importance or corporate governance for enhancing

its ability to compete in the global market place.

In this context the Confederation of Indian Industry (CII) took the initiative to draft

some codes of corporate governance. A national task force on corporate governance

was set up in mid 1996 under the leadership of Mr. Rahul Bajaj, ex president, CII and

CMD, Bajaj Auto Ltd. Some of the recommendations made by the CII committee on

corporate governance are given below:

1. The full board should meet a minimum of six times a year, preferably it all

interval of two months, and each meeting should have agenda items that require

at least half a day's discussion.

2. Any listed company with a turnover of Rs. 100 crore and higher should have

professionally competent, independent, non-executive directors, who should

constitute at least 30% of the board if the chairman of the company is a non

executitive director, or at least 50% of the board if the chairman and managing

director is the same person.

3. No single person should hold directorships in more than ten Companies. This

ceiling excludes directorships in subsidiaries (where the group has over 50%

equity stake) or associate Companies (where the group has over 25% but no

more than 50% equity stake).

4. For non-executive directors to play a material role in corporate decision making

and maximizing long term shareholder value, they need to become active

participants on the board, not passive advisors; have clearly defined

responsibilities within the board such as the audit committee, and know-how to

read a balance sheet, profit and loss account, cash flow statements and financial

ratios and have some knowledge of various company laws. This, of course,

excludes those who are invited to join boards as experts in other fields such as

science and technology.

5. To secure better effort from non-executive directors, companies should pay a

commission over and above the sitting fees for the use of professional inputs.The present commission or 1% of net profits (if the company has a managing


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director), or 3% (if there is no managing director) is sufficient; Consider

offering stock options, so as to relate rewards to performance. Commissions are

rewards on current profits. Stock options ire rewards contingent upon future

appreciation of corporate value. Art appropriate mix of the two can align a non-

executive director towards keeping ant eye oil short-term profits as well as

long-term shareholder value.

6. While re-appointing members of the board, Companies should give the

attendance record of [be concerned directors. If a director his not been present

(absent with or without leave) for 50% or more meetings, then this should be

explicitly stated in the resolution that is put to vote. As a general practice, one

should not re-appoint any director who has not had the time to attend even one

half of the meetings.

7. Key information that must be reported and placed before the board must

contain:

Annual operating plans aid budgets, together with up-dated long term

plans

Capital budgets, manpower and overhead budgets

Quarterly results for the company as a whole and its operating divisions

or business segments

Internal audit reports, including cases of theft and dishonesty of a

material nature

Show cause, demand and prosecution notices received from revenue

authorities that are considered to be materially important. (Material

nature of any exposure that exceeds 1% of the companys net worth)

Fatal or serious accidents, dangerous occurrences, and any effluent or pollution

problems

Default in payment of interest or non-payment of the principal on any

public deposit, and/or to any secured creditor or financial institution

Defaults such as non-payment of inter-corporate deposits by or to the

company. or materially substantial non-payment for goods sold by the

company

Any issue which involves possible public or product liability claims of a

substantial nature, including any judgment or order which may have


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either passed strictures on the conduct of the company, or taken an

adverse view regarding another enterprise that can have negative

implications for the company

Details of any joint venture or collaboration agreement Transactions that involve substantial payment towards goodwill, brand

equity or intellectual property

Recruitment and remuneration of senior officers just below the board

level, including appointment or removal of the chief financial officer

and the company secretary

Labor problems and their proposed solutions

Quarterly details of foreign exchange exposure and the steps taken bymanagement to limit the risks of adverse exchange rate movement, if

material.

8. Listed Companies with either a turnover of over Rs. 100 crore a paid-up capital

of Rs. 20 crore should set up audit committees within two years.

Audit committees should consist of at least three members, all drawn from a

company's non-executive directors, who should have adequate knowledge of

finance, accounts and basic elements of company law.

To be effective, the audit committee should have clearly defined terms of

reference and its members must be willing to spend more time on the company's

work vis-a-vis other non-executive directors.

Audit committees should assist the board in fulfilling its functions relating to

corporate accounting arid reporting practices, financial and accounting controls,

and financial statements and proposals that accompany the public issue of any

security- and thus provide effective supervision of the financial reporting

process.

The audit committee should periodically interact with the statutory auditors and

the internal auditors to ascertain the quality and veracity of the company's

accounts as well as the capability of the auditors themselves.

For the audit committee to discharge its fiduciary responsibilities with due

diligence, it must be incumbent upon the management to ensure that members

of the committee have full access to financial data of the company, its

subsidiary and associated Companies, including data on contingent liabilities,

debt exposure, current liabilities, loans and investments.


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By the fiscal year 1998-99, listed Companies with either a turnover of over Rs.

100 crore or a paid-up capital of Rs. 20 crore, should have in place a strong

internal audit department, or air external auditor to carry out internal audits;

without this, any audit committee will be toothless.

9. Under "Additional Shareholder's Information", listed Companies should give

data on high and low monthly averages of share prices in a major stock

exchange where the company is listed for the reporting year; greater detail on

business segments, up to 10% of turnover, giving share in sales revenue, review

of operations, analysis of markets and future prospects.

10. Consolidation of group accounts should be optional and subject to the financial

institutions allowing Companies to leverage on the basis of the groups assets

and the income tax department using the group concept in assessing corporate

income tax. If a company chooses to voluntarily consolidate, it should not be

necessary to annex the accounts of its subsidiary Companies under Section 212

of the Companies Act. However, if a company consolidates, then the definition

of group" should include the parent company and its subsidiaries (where the

reporting company owns over 50% of the voting stake)

11. Major Indian Stock Exchanges should gradually insist upon a compliance

certificate, signed by the CEO and CFO which clearly states that, the

management is responsible for the preparation, integrity and fair presentation of

the financial statements and other information in the annual report and which

also suggest that the company will continue in business in the course of the

following year, the accounting policies and principles confirm to standard

practice, and where they do not, full disclosure has been made of any material

departures, the board has overseen the company's system of internal accounting

and administrative controls systems either directly or through its audit

committee (for Companies with a turnover of Rs. 100 crore or paid-up capital of

Rs. 20 crore).

12. For all Companies with a paid-up capital of Rs. 20 crore or more, the quality

and quantity of disclosure. A Companies GDR issue should be the norm for any

domestic issue.

13. Government must allow far greater funding to the corporate sector against the

security of shares and other paper.


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14. It would be desirable for financial institutions as pure creditors to re write their

covenants to eliminate having nominee directors except in the event of serious

and systematic debt default and in cases of the debtor compa

Documents

A Project Report on Cg 19may