Corporate Governance : Importance and Role of Corporate Governance

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CORPORATE GOVERNANCE

INTRODUCTION

What is corporate governance : Corporate governance has a broad scope. It includes both social and institutional aspects. Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored & assessed, & how performance is optimized.

Corporate governance is the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.

Corporate governance is the interaction between various participants (Shareholder, Board of Director and Company Management) in shaping corporation’s performance and the way it is proceeding towards.

Corporate governance deals with determining ways to take effective strategic decisions and developed added value to the stakeholder.

Corporate governance ensures transparency which ensures strong and balance economic development. This is also ensures that the interest of all shareholders (Majority as well as minority shareholder) are safeguard.

Corporate governance affects the operational risk and, hence, sustainability of a corporation.

The quality of a corporation’s corporate governance affects the risks and value of the corporation.

Effective, strong corporate governance is essential for the efficient functioning of markets.

Corporate Governance

Corporate Governance

WHY GOOD CORPORATE GOVERNANCE IS IMPORTANT?

 Corporate Governance is intended to increase the accountability of your company and avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt employees and shareholders, is a prime argument for the importance of solid Corporate Governance. Well- executed Corporate Governance should be similar to a police department’s internal affairs unit, weeding out and eliminating problems with extreme prejudice.

The Need, Significance or Importance of Corporate Governance is listed below.

Changing Ownership Structure:-

In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in most of the large companies. So, they have effective control on the management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable, etc. They also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance.

Importance of Social Responsibility

Today, social responsibility is given a lot of importance. The Board of Directors has to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance

Growing Number of Scams

In recent years, many scams, frauds and corrupt practices have taken place. Misuse and misappropriation of public money are happening everyday in India and worldwide. It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies have started corporate governance.

Indifference on the part of Shareholders

In general, shareholders are inactive in the management of their companies. They only attend the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse their power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company.

Globalization

Today most big companies are selling their goods in the global market. So, they have to attract foreign investor and foreign customers. They also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed the global market.

Takeovers and Mergers

Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers.

SEBI

SEBI has made corporate governance compulsory for certain companies. This is done to protect the interest of the investors and other stakeholders.

NEED OF CORPORATE GOVERNANCE

Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure.

Corporate Performance: Improved governance structures and processes ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability.

Enhanced Investor Trust: Investors consider corporate governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure and transparency are likely to invest openly in those companies. The consulting firm McKinsey surveyed and determined that global institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.

Better Access to Global Market: Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector.

Combating Corruption: Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption would certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization.

Easy Finance from Institutions: Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company.

Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfill investors’ expectations and confidence on management and corporations, and in return, increase the value of corporations.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy, thereby, placing various control systems in place to facilitate the monitoring of the related issues.

Accountability: Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust management of the company to create enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in Corporate Governance is integral to the existence of the company. Lesson 3 Conceptual framework of Corporate Governance 47 order to maintain good investor’s relation. Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to these stakeholders.

CORPORATE GOVERNANCE PRINCIPLES

Corporate governance refers to all laws, regulations, codes and practices, which defines how institution is administrated and inspected, determines rights and responsibilities of different partners, attracts human and financial capital, makes institution work efficiently, provides economic value to stack holders in the long turn while respecting the values of the community it belong. For corporate governance, the management approach should be in accordance with the following principles.

Principal 1 : Governance structure:

All Organizations should be headed by an effective Board. responsibilities and accountabilities within the organization should be clearly identified.

Principal 2 : The structure of the board and its committees :

The board should comprise independent minded directors. It should include an appropriate combination of executive directors, independent directors and non-independent non-executive directors to prevent one individual or a small group of individuals from dominating the board’s decision taking. The board should be of a size and level of diversity commensurate with the sophistication and scale of the organization. Appropriate board committees may be formed to assist the board in the effective performance of its duties.

Principal 3 : Director appointment procedure:

There should be a formal, rigorous and transparent process for the appointment, election, induction and re-election of directors. The search for board candidates should be conducted, and appointments made, on merit, against objective criteria (to include skills, knowledge, experience, and independence and with due regard for the benefits of diversity on the board, including gender). The board should ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all key officeholders.

Principal 4 : Director’s duties, remuneration and performance:

Directors should be aware of their legal duties. Directors should observe and foster high ethical standards and a strong ethical culture in their organization. Each director must be able to allocate sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and managed. The board is responsible for the governance of the organization’s information, information technology and information security. The board, committees and individual directors should be supplied with information in a timely manner and in an appropriate form and quality in order to perform to required standards. The board, committees and individual directors should have their performance evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair and consistent in determining the remuneration policy for directors and senior executives.

Principal 5 : Risk governance and internal control:

The board should be responsible for risk governance and should ensure that the organization develops and executes a comprehensive and robust system of risk management. The board should ensure the maintenance of a sound internal control system

Principal 6 : Reporting and integrity:

The board should present a fair, balanced and understandable assessment of the organization’s financial, environmental, social and governance position, performance and outlook in its annual report and on its website.

Principal 7 : Audit:

Organizations should consider having an effective and independent internal audit function that has the respect, confidence and cooperation of both the board and the management. The board should establish formal and transparent arrangements to appoint and maintain an appropriate relationship with the organization’s auditors.

Principal 8 : Relations with share holders and other key shareholder:

The board should be responsible for ensuring that an appropriate dialogue takes place among the organization, its shareholders and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.

BENEFITS OF CORPORATE GOVERNANCE

The Benefits to Shareholders

  • Good CORPORATE GOVERNANCE can provide the proper incentives for the board and management to pursue objectives that are in the interest of the company and shareholders, as well as facilitate effective monitoring.
  • Better CORPORATE GOVERNANCE can also provide Shareholders with greater security on their investment.
  • Better CORPORATE GOVERNANCE also ensures that shareholders are sufficiently informed on decisions concerning fundamental issues like amendments of statutes or articles of incorporation, sale of assets, etc.

 

The Benefits to the National Economy

  • Empirical evidence and research conducted in recent years supports the proposition that it pays to have good CORPORATE GOVERNANCE. It was found out that more than 84% of the global institutional investors are willing to pay a premium for the shares of a well-governed company over one considered poorly governed but with a comparable financial record.
  • The adoption of CORPORATE GOVERNANCE principles – as good CORPORATE GOVERNANCE practice has already shown in other markets – can also play a role in increasing the corporate value of companies.

 

Proponents of corporate governance say there’s a direct correlation between good corporate governance practices and long-term shareholder value.  Some of the key benefits are:

  • High performance Boards of Directors;
  • Accountable management and strong internal controls;
  • Increased shareholder engagement;
  • Better managed risk; and
  • Effectively monitored and measured performance.

 

RESPONSIBILITIES OF THE BOARD OF DIRECTORS

  • Establish corporate values and governance structures for the company;
  • Ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion;
  • Establish long-term strategic objectives for the company;
  • Establish clear lines of responsibility and a strong system of accountability and performance measurement;
  • Hire the chief executive officer, determine the compensation package, and periodically evaluate the officer’s performance;
  • Ensure that management has supplied the board with sufficient information for it to be fully informed and prepared to make the decisions that are its responsibility, and to be able to adequately monitor and oversee the company’s management;
  • Meet regularly to perform its duties;
  • Acquire adequate training.

 

FIVE GOLDEN RULES OF CORPORATE GOVERNANCE

As we have iterated, this part of  the report explains our view of best corporate governance practice and the holistic approach by which we believe an organisation can ensure that a state of good corporate governance exists, or is brought into being if its existence is uncertain. It takes the view that there is an over-riding moral dimension for running a business and that the standard of governance will depend on the moral complexion of the operation.

The business’s morality or ethic must permeate the entire operation from top to bottom and embrace all stakeholders best corporate governance practice is an integral part of good management practice also permeating the entire operation, and not an esoteric specialism addressed by lawyers, auditors and sociologists

The principles of this approach are therefore framed in relation to the conventional way of looking at how a business should be properly run.

Our Five Golden Rules of best corporate governance practice is:

  1. Ethics:  clearly ethical practices applied to the business
  2. Align Business Goals: appropriate goals, arrived at through the creation of a suitable stakeholder participation in decision making model
  3. Strategic management: an effective strategy process which incorporates stakeholder value
  4. Organisation: an organisation suitably structured to give effect to the good corporate governance
  5. Reporting: reporting systems structured to provide transparency and accountability.

 

This approach recognizes that the interests of different stakeholders carry different weight, but it does not, by any means, suggest that those with a majority interest matters and the rest don’t. On the contrary, best corporate governance practice dictates that all stakeholders should be treated with equal concern and respect.

For obvious reasons, although the methodology we will propose involves taking major stakeholders into greater account when formulating strategy, it is designed to generate all round support because of the fact that every stakeholder, no matter how small, is given the opportunity to express a view, through the continuous monitoring of stakeholder perceptions.

The regulatory approach to the subject would regard governance as something on its own, to do with ensuring a balance between the various interested parties in a company’s affairs, or more particularly a way of making sure that the chairman or chief executive is under control, producing transparency in reporting or curbing over-generous remuneration packages etc.

The essence of success in business is:

  • having a clear and achievable goal
  • having a feasible strategy to achieve it
  • creating an organization appropriate to deliver
  • having in place a reporting system to guide progress.

 

Best corporate governance practice is about achieving the stakeholders’ goal, and delivering success in an ethical way. Hence it follows that it must entail a holistic application of good management.

COMPONENTS OF CORPORATE GOVERNANCE

TRANSPARENCY

Transparency is no longer just an option, but nearly a legal requirement that a company has to comply with.

For a company, this means it allows its processes and transactions observable to outsiders. It also makes necessary disclosures, informs everyone affected about its decisions, and complies with legal requirements.

WHY TRANSPARENCY???

    1. Aside from stopping the next illegal moneymaking scheme, transparency also builds a good reputation of the company in question. When shareholders feel they can trust a company, they are willing to invest more, and this greatly helps in lowering cost of capital.
    2. Transparency is a critical component of corporate governance because it ensures that all of a company’s actions can be checked at any given time by an outside observer. This makes its processes and transactions verifiable, so if a question does come up about a step, the company can provide a clear answer.
    3. Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance.

FACTS TO BE CONSIDERED UNDER THE HEAD “TRANSPARENCY”:

  1. How transparent is your corporate board?
  2. Are directors’ actions readily verifiable by internal and external audit?
  3. Is their leadership visible from the top to all the way down?
  4. Is transparency applicable to everyone?

Transparency should have no exceptions, especially when your company’s goals are involved. All stakeholders — from employees to investors — have the right to know about the direction your company is headed for.

ACCOUNTABILITY

It takes more than transparency to build integrity as a company. It also takes accountability, which can also mean answerability or liability.

WHY ACCOUNTABILITY???

  1. Shareholders are deeply interested in who will take the blame when something goes wrong in one of a company’s many processes. And even when everything goes smoothly as expected, knowing that someone will be held accountable for future mishaps increases shareholders’ confidence, which in turn increases their desire to invest more.
  2. Accountability is more than that. It’s about having ownership over one’s actions whether the consequences of those actions are good or bad. Thus, accountability covers not only failings, but also accomplishments.
  3.  When the idea of accountability is approached with this positive outlook, people will be more open to it as a means to improve their performance. This applies from the staff all the way up to the corporate board.

 

FACTS TO BE CONSIDERED UNDER THE HEAD “ACCOUNTABILITY”:

  1. How’s the level of accountability in your corporate board?
  2. Are your directors there to simply fill in a seat while leafing through their board packs and board books, or are they actively engaged in decisions and strategies for your company?

 

SECURITY

A company is expected to make their processes transparent and their people accountable while keeping their enterprise data secure from unauthorized access. There is simply no compromise for this. Companies that experience security breaches involving the exposure of their clients’ personal information quickly lose their credibility.

WHY SECURITY???

  1.  Even with accountability and transparency, a company without inadequate security measures will have a hard time attracting shareholders. After all, any scandal — even a breach caused by third-party hackers — can have a negative effect on a company’s stock market performance.
  2. The increasing threat of cyber crime in recent years puts security at a high priority for many companies. Complying with security standards isn’t enough — a company needs to imbibe a culture of security to ensure that trade secrets, corporate data, and client information are all kept safe from unauthorized access from inside and out. Security is not just an IT concern anymore, unlike in the past.
  3. Directors should be made aware of the seriousness of cyber crime and the gravity of its consequences. A security breach — especially involving client information — can make the public easily lose their trust. Trust is a big factor which will be considered by shareholders before making an investment in a company.

 

FACTS TO BE CONSIDERED UNDER THE HEAD “SECURITY”:

  1. How high is the awareness level of your company’s directors when it comes to security?
  2. How high is the awareness level of your company’s employees when it comes to security?

 

REGULATORY FRAMEWORK IN INDIA AND MANDATES

Corporate Governance extends beyond corporate law. Its fundamental objective is not mere fulfillment of the requirements of the law but in ensuring commitment of the Board in managing the company in transparent manner by involving ethics for maximizing long – term shareholder value. While enough laws exist to take care of many of these investor grievances, the implementation and inadequacy of penal provisions have left lot to be desired. The real onus of achieving the desired level of Corporate Governance thus lies in the proactive initiatives taken by the companies themselves and not in the external measures.

In India, the legal and regulatory framework of Corporate Governance is broadly contained in the Companies Act 2013, and Clause 49(Revised) of the Listing Agreement of Stock Exchanges.

Key Changes introduced by companies act, 2013:

1 . Board Composition

  • Number of Directors
  • Companies need to have following class of directors: Resident Director, Independent Director and woman Director

 

2.  Committees of the Board

  • Audit committee(177)
  • Nomination & Remuneration committee (178)
  • Stakeholders Relationship Committee
  • CSR Committee
  • Risk Management
  • Internal Financial Committee & its adequacy
  • Prevention of Sexual harassment of women at workplace; any other

 

3. Board Meeting and Processes

Note: Companies Act, 2013 has introduced significant changes regarding the board composition and has a renewed focus on board processes, whilst certain of these changes may overly prescriptive, a closer analysis leads to a compelling conclusion that the emphasis on board processes, which over a period of time would institutionalize good corporate governance and not make governance over-dependent on the presence of certain individuals on board.

Clause 49: Listing Agreement

Clause 49 of the Listing Agreement with the stock exchanges, largely derived from the Sarbanes & Oxley Act, is applicable only to the listed companies. The main objects of Clause 49 of the Listing Agreement are to improve the quality of Corporate Governance by insuring appointment of independent directors; strengthening the role of Audit Committee; disclosure and transparency in financial reporting. It makes the CEO and CFO responsible for putting in place risk management and internal control system in critical areas of operations of their companies. Following are some of its provisions especially with respect to

  • The Board of Directors;
  • Audit Committee;
  • Subsidiary Companies;
  • Disclosures;
  • CEO/CFO Certification;
  • Report on Corporate Governance;
  • Compliance

 

CEO/CFO Certification:

Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

  • Effectiveness and efficiency of operations,
  • Reliability of financial reporting, and
  • Compliance with applicable laws and regulations.

 

The Naresh Chandra Committee for the first time required the signing officers, to declare that they are responsible for establishing and maintaining internal controls which have been designed to ensure that all material information is periodically made known to them; and have evaluated the effectiveness of internal control systems of the company. Also, that they have disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these deficiencies. Clause 49 requires the CEO and CFO to certify to the board the annual financial statements in the prescribed format and establishing internal control systems and processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust risk management and internal control systems for their organization’s business processes. The Companies Act, 2013 and revised Clause 49 have also brought much rigour into internal controls certification by making it as one of the parts of Directors’ Responsibility Statement.

Subsidiary Companies

The rationale behind having separate provisions with respect to subsidiary companies in the Revised Clause 49 was the need for the board of the holding company to have some independent link with the board of the subsidiary and provide necessary oversight. Hence, the recommendation of Narayana Murthy Committee to make provisions relating to the composition of the Board of Directors of the holding company to be made applicable to the composition of the Board of Directors of subsidiary companies and to have at least one independent director on the Board of Directors of the holding company on the Board of Directors of the subsidiary company, were incorporated in the Revised Clause 49 of the Listing Agreement. Besides the Audit Committee of the holding Company is to review the financial statements, in particular investments made by the subsidiary and disclosures about materially significant transactions ensures that potential conflicts of interests with those of the company may be taken care of. The definition of ‘subsidiary’ is also widened by the Companies Act, 2013 to include joint venture companies and associate companies.

Audit Committee

The audit committee’s role flows directly from the board’s oversight function and delegation to various committees. It acts as an oversight body for transparent, effective anti-fraud and risk management mechanisms, and efficient Internal Audit and External Audit functions financial reporting. As per section 177 of the Companies Act, 2013 read with Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014, every listed company and all other public companies with paid up capital of Rs. 10 crores or more; or having turnover of Rs. 100 crores or more; or having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 Crores or more, to have an Audit Committee which shall consist of not less than three directors and such number of other directors as the Board may determine of which two thirds of the total number of members shall be directors, other than managing or whole-time directors.

The revised Clause 49 expands the role of the Audit Committee with enhancing its responsibilities in providing transparency and accuracy of financial reporting and disclosures, robustness of the systems of internal audit and internal controls, oversight of the company’s risk management policies and programs, effectiveness of anti-fraud and vigil mechanisms and review and administration of related party transactions of the organization.

Board of Directors

The Desirable Corporate Governance Code by CII (1998) for the first time introduced the concept of independent directors for listed companies and compensation paid to them. The Kumar Mangalam Birla Committee (2000) then suggested that for a company with an executive Chairman, at least half of the board should be independent directors, else at least one-third. The revised Clause 49 based on the report by the Narayana Murthy Committee further elaborates the definition of Independent Directors; and also requires listed companies to have an optimum combination of executive and non-executive directors, with non-executive directors comprising of at least 50% of the Board. The Companies Act, 2013 introduces the requirement of appointing a resident director and a woman director. The term ‘Key Managerial Personnel’ has been defined in the Companies Act, 2013 comprising of Chief Executive Officer, Managing director, Manager, Company Secretary, Whole-time director, Chief Financial Officer; and any such other officer as may be prescribed. The Companies Act, 2013 has also introduced new concepts such as performance evaluation of the board, committee and individual directors. The revised Clause 49 (in 2013) now also states that all compensation paid to non –executive directors, including independent directors shall be fixed by the Board and shall require prior approval of shareholders in the General meeting and that limit shall be placed on stock options granted to non executive directors. Such remuneration and stock option is required to be disclosed in the annual report of the company. The independent directors are also required to adhere to a ‘Code of Conduct’ and affirm compliance to the same annually.

Disclosures

Related Party Transactions

  1. Details of all material transactions with related parties shall be disclosed quarterly along with the compliance report on corporate governance.
  2. The company shall disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report.

 

Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the undertaking business transaction in the Corporate Governance Report.

EVOLUTION IN CORPORATE GOVERNANCE NORMS

  • Appointment of Women Director.
  • Tenure of Independent Directors and performance evaluation.
  • Formal letter of appointment to independent directors.
  • Separate meeting of independent directors and training of IDs.
  • Succession plan for board/ senior management.
  • Disclosure in Annual Report about Remuneration Policy and evaluation criteria.
  • Compulsory Whistle Blower Mechanism.
  • Constitution of Nomination and Remuneration Committee.
  • Related Party Transactions.
  • Corporate Social Responsibility(CSR).

 

Composition of the Board

The Board shall have optimum combination of Executive Directors (EDs) and Non-Executive Directors (NEDs) with at least one-woman director on the Board of the company AND not less than 50% of the Board comprising NEDs. Requirement of Woman Director is to align with Section 149(1) of the Companies Act, 2013. As per new Companies Act, 2013 Non-Listed companies having:

– Paid-up share capital of Rs.100 Cr. or more   OR

– Turnover of Rs.300 Cr. or more

Need to have Woman Director before 31st March 2015.

Independent Directors

– Where Chairman is NED – at least 1/3rd of the Board.

– Where Chairman is Executive – at least 1/2 of the Board

– Also Where Chairman is NED but is a promoter or is related to any promoter or person occupying management position at the Board level or at one level below the Board – at least 1/2 of the Board

Related to any promoter:

  1. If the promoter is a listed entity, its directors other than the IDs or its nominees shall be deemed to be related to it;
  2. If the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.

 

Exclusion of Nominee Director from the definition of Independent Director.

(This is to align the definition of Independent Director under Listing Agreement with Section 149(6) of the Companies Act, 2013.)

Independent Directors – Definition of Independent Director

The definition of Independent Director has been widened in scope. Listed companies must determine the independence of existing directors in the light of new definition. This is to   align with the definition of Independent Director under Listing Agreement with Section 149(6) of the Companies Act, 2013.

Maximum Tenure of Independent Directors (ID) –

  • An Independent Director shall hold office for a term up to five consecutive years on the Board of a Company and shall be eligible for re-appointment for another term of up to 5 consecutive years on passing of a special resolution by the Company.
  • Provided that a person who has already served as an ID for five years or more in a company shall be eligible for re-appointment, on completion of his present term, for one more term of up to five years only.
  • Provided further that an ID, who completes his above mentioned term shall be eligible for appointment as ID in the company only after the expiration of three years of ceasing to be an ID in the company.

 

This is broadly in line with Section 149 of the Companies Act, 2013. However, as per Companies Act, 2013 two tenures of five years each can be taken by an independent director. Any tenure of an ID on the date of commencement of this Act shall not be counted as a term.

Performance evaluation of Independent Directors(ID)

  1. The Nomination Committee shall lay down the evaluation criteria for performance evaluation of IDs.
  2. The company shall disclose the criteria for performance evaluation, as laid down by the Nomination Committee, in its Annual Report.
  3. The performance evaluation of ID shall be done by the entire Board of Directors (excluding the director being evaluated).
  4. On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the ID. This is to align with Schedule IV of the Companies Act, 2013 which provides mechanism for evaluation of IDs.

 

Separate meeting of the Independent Directors (IDs)

(a) The IDs of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management. All the IDs of the company shall strive to be present at such meeting.

The IDs in the meeting shall, inter-alia:

  1. Review the performance of non-independent directors and the Board as a whole;
  2. Review the performance of the Chairperson of the company, taking into account the views of executive directors and non executive directors;

Assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties. (This is to align with Schedule IV of the Companies Act, 2013.)

Non-Executive Directors’ compensation and disclosures

All fees/compensation, if any paid to Non-EDs; including IDs shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to Non-EDs, in any financial year and in aggregate. Prior approval of shareholders shall not apply to payment of sitting fees, if made within the limits prescribed under the Companies Act, 2013. IDs shall not be entitled to any Stock Option.(This is to align with Section 149(9) of the Companies Act, 2013.)

Code of Conduct

Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO. The Code of Conduct shall suitably incorporate the duties of IDs as laid down in the Companies Act, 2013.This is to align with Schedule IV of the Companies Act, 2013.

Liability of Independent Director

For the first time – it has been clarified that an independent director shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently with respect of the provisions contained in the Listing Agreement. Similar provisions are also mentioned in the Companies Act, 2013.

Compulsory whistle blower mechanism.

The Company shall establish a Vigil Mechanism for directors and employees to report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethical policy. The mechanism should also provide for adequate safeguard against victimization of director(s)/ employee(s) who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases .The details of establishment of vigil mechanism shall be disclosed by the company on its website and in the Board’s Report. Similar requirement u/s 177(9) of the Companies Act, 2013 for listed companies to establish a Vigil Mechanism for Directors and Employees to report genuine concerns.

Risk Management

The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. The Board shall be responsible for framing, implementing and monitoring the risk management plan for the company. 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 the risk management plan to the committee and such other functions as it may deem fit.

Related Party Transactions

  1. 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.
  2. The company shall formulate a policy on materiality of related party transactions and also on dealing with Related Party Transactions. Provided that a transaction with a related party shall be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds 5% of the annual turnover or 20% of the net worth of the company as per the last audited financial statements of the company, whichever is higher.
  3. All Related Party Transactions shall require prior approval of the Audit Committee.
  4. All material Related Party Transactions shall require approval of the shareholders through related parties special resolution and this shall abstain from voting on such resolutions.

 

Management

As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position:

  1. Industry structure and developments.
  2. Opportunities and Threats.
  3. Segment–wise or product-wise performance.
  4. Outlook.
  5. Risks and concerns.
  6. Internal control systems and their adequacy.
  7. Discussion on financial performance with respect to operational performance.
  8. Material developments in Human Relations front including.
  9. Resources / Industrial front, number of people employed.

 

Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares ,commercial dealings with bodies, which have shareholding of management and the irrelative etc.)

Explanation: For this purpose, the term “senior management” shall mean personnel of the company who are members of its core management team excluding the Board of Directors. This would also include all members of management one level below the executive directors including all functional heads.

The Code of Conduct for the Board of Directors and the senior management shall be disclosed on the website of the company.

Disclosure in Annual Report

The following shall be disclosed in the Annual Report:

(1) Training imparted to IDs.

(2) Establishment of Vigil Mechanism (Also in Board Report).

(3) Remuneration Policy and the evaluation criteria.

Report on Corporate Governance

– There shall be a separate Section on Corporate Governance in the Annual Report of the Company with a detailed Compliance Report on Corporate Governance.

– Non-compliance of any mandatory clause to be specifically highlighted.(Suggested list including non-mandatory requirements is appended to Clause 49).

– A Quarterly Compliance Report is to be submitted to Stock Exchanges within 15 days of the close of the Quarter.

Compliance

The Company shall obtain a certificate from either the auditors or practicing CS of-compliance with the conditions of Corporate Governance and annex the same with the Directors’ Report.

 

 MAJOR INCIDENCES IN INDIAN CORPORATE-LEGAL SECTOR

  1. Reebok India Case
  2. Vodafone wins $2.2 Billion Tax Bill Battle
  3. Diageo’s $2.1 billion deal for Mallya’s United Spirits
  4. Emkay Global’s bad orders trigger brief halt on NSE
  5. Kingfisher Airlines Loses License to fly
  6. Axis Bank Partners with Tata General Insurance
  7. INR 1,800 crore wiped off Adani Enterprise Ltd stocks after rumour fuelled by blogger
  8. Hero Motors finally drops Honda
  9. Sahara told to repay small investors
  10. Cyrus Mistry remove from the post of chairman- TATA GROUP

 

Few of them are detailed hereunder:

Case law:

CYRUS MISTRY’S w.r.t. TATA GROUP

Details:

Mistry who was dismissed as Tata Sons chairman on October 24 by its board alleged “lack of corporate governance” and “failure on the part of directors to discharge the fiduciary duty” owed to shareholders of Tata Sons and other Group companies. Following Mistry’s e-mail, proxy advisory firms feel that the reporting and governance structures between Tata Trusts, Tata Sons and other operating companies needs to be clearly defined. The e-mail seems to be suggesting that Ratan Tata regards Tata group as a fiefdom, and Independent Directors aren’t truly independent and assertive. Minority investors of listed operating companies need the reassurance that Tata Sons is just the dominant shareholder and one individual isn’t running the whole group, said Shriram Subramanian, founder and managing director of In Govern Research Services.

Mistry’s e-mail has alleged that despite making losses of Rs 1000 crore, Tata’s low-cost Nano has not been shut down due to emotional reasons and also due to the fact that it will “stop the supply of the Nano gliders to an entity that makes electric cars and in which Ratan Tata has a stake”.

Mistry also said that the amendments to articles of association of Tata Sons have created a flux in the decision-making process. “I have often presented to the trustees, before and after Tata Sons board meetings. This has created alternative power centres without any accountability or formal responsibility….” Mistry added.  Apart from this, Mistry has alleged that the conduct of two directors of Tata Sons-Nitin Nohria and Vijay Singh has “created the added risk of contravening insider trading regulations”. Both Nohria and Singh could not be contacted.

J N Gupta, managing director of Stakeholders Empowerment Services (SES) said that governance issues raised by Mistry if true will not only impact the shareholders but will also hit the Tata brand. He said Mistry’s e-mail has raised important questions on the independence of the independent directors and their conduct on all the boards of Tata firms.

“Sebi (Securities and Exchange Board of India) may have to examine the allegations of insider trading in his (Cyrus Mistry’s) e-mail. Governance at present is lip service be it in India or the US. Independent directors typically take up such roles for monetary compensation. And independence is a character that the law cannot infuse. Law can only infuse fear,” said Gupta.

Experts feel that the boardroom battle between Ratan Tata and Cyrus Mistry and the corporate governance issues emanating from this dispute will hurt corporate India.

“The way the events have unfolded, it seems that it is a case of oppression of minority shareholders and the board has failed to perform its duties. It is a palace coup because some independent directors were appointed in the last six months. The right thing would have been to follow correct corporate norms and value systems by appointing a committee to look at all the allegations and counter allegations and then take a decision,” said Mohandas Pai, chairman of Manipal Global Education.

Case Law:

REEBOK INDIA SUFFERS A MAJOR SCAM

Details:

Reebok India, owned by Adidas AG, alleged a Rs.870 crore fraud by its former managing director (MD) Subhinder Singh Prem and former Chief Operating Officer (COO) Vishnu Bhagat, in a criminal complaint filed at the Gurgaon police’s Economic Offence Wing in May, 2012. In March 2013, Adidas, the parent company, announced a 153 million Euros loss on account of the Reebok India episode.

The two were accused of criminal conspiracy and fraudulent practices including stealing products by setting up “secret warehouses”. There has been a grave failure of corporate governance as well since the company has also alleged that the former officials fudged accounts and indulged in fictitious sales causing a multi-crore dent to the company. In its FIR, Reebok has said that it carried out an internal investigation after certain fraudulent activities were noticed – which again points to the importance of internal checks for malpractices and corruption.

Gurgaon police had arrested Singh and Bhagat along with three others — Sanjay Mishra, Prashant Bhatnagar and Surakshit Bhat. Allegedly, these individuals have been siphoning off funds by creating ghost distributors across the country and generating forged bills over the last five years.

JUDGEMENT

Agencies probing the alleged Rs 870 crore corporate fraud in the operation of Reebok India have detected a systemic “mismanagement” in the business planning and running of the company.

The Income Tax department has alleged tax evasion of Rs 140 crore in the case. The IT department’s first goal is to ensure that the company later does not claim any “bad debt”. A bad debt is that amount that is owed to a business or individual and has to be written off by the creditor as a loss because the debt cannot be collected because of a host of reasons.

As soon as the scam came to light, affairs of the company came under close government scrutiny. While the IT department documents investigated the accounts and imports of the firm, the Serious Fraud Investigation Office is probing the entire governance affairs of the company under Section 235 of the Companies Act. A forensic audit was conducted by the German arm of Ernest & Young – which revealed many falsifications of documents and books.

It is interesting to note that accounting officials of the firm and the auditors were not held liable for their “deliberate” or “mistaken oversight” in identifying the irregularities in the account books which led to the alleged financial irregularities.

CASE LAW:

KINGFISHER AIRLINES LOSES LICENSE TO FLY

Details:

The financially troubled Kingfisher Airlines lost its flying permit after a deadline to renew its suspended license expired. The Directorate General of Civil Aviation (DGCA) has suspended Kingfisher Airlines license to fly till further orders pursuant to Clause 15 (2) of Schedule XI of the Aircraft Rules, 1937, after the airline failed to deliver a viable financial and organizational revival plan.

The debt-ridden carrier was grounded since October 2012 after repeated strikes by workers over unpaid wages. Kingfisher owes various public sector banks $1.4bn (£870m) in debts and has been trying to raise funds after lenders refused to give fresh loans.

JUDGEMENT

The airline now owes money to staff, airports, tax authorities and its lenders and may have to be liquidated.

CASE LAW:

SAHARA TOLD TO REPAY $3 BILLION TO SMALL INVESTORS.,

Details:

Unlisted conglomerate Sahara, one of India’s biggest business groups was ordered by the Supreme Court of India after a prolonged legal battle with capital markets regulator SEBI to refund 174 billion rupees raised by “dubious” means from 22 million small investors. From 2008-11, they received 174 billion rupees through what is known as an optionally fully convertible debentures. The Sahara was also asked to pay 15 percent interest to the investors of the fund which has been illegally raised from the public without resorting to proper legal procedure.

JUDGEMENT

The Supreme Court, whose order reaffirmed an earlier ruling that the fundraising did not meet the rules, ordered two unlisted Sahara group firms to refund money they had raised with the interest within three months. The judgment closed a much exploited loophole of the corporate fundraising laws in India and underscored an increasing assertiveness by India’s judiciary and regulators as businesses and financial markets expand at a fast pace in Asia’s third-largest economy.

ROLE OF COMPANY SECRETARY IN CORPORATE GOVERNANCE:

While the duty of recording accurate and sufficient documentation to meet legal requirements (record management) is of primary importance, the Corporate Secretary is also a confidante and resource to the Board and senior management, providing advice and counsel on board responsibilities and logistics. In recent years the Corporate Secretary has emerged as a senior, strategic-level corporate officer who plays a leading role in the company’s corporate governance.

  • Acting as a primary point of contact and source of advice and guidance for, particularly, non-executive Directors as regards the Company and its activities in order to support the decision making process;
  • Advise the Board on its roles and responsibilities;
  • Facilitate the orientation of new Directors and assist in Director training and development;
  • Maintain key corporate documents and records;
  • Responsible for corporate disclosure and compliance with State Corporation Laws (SCL), stock exchange listing standards and SEC reporting and compliance;
  • Oversee Stakeholder Relations including stock issuance and transfer operations; stakeholder correspondence; prepare and distribute proxy statement;
  • Manage process pertaining to the annual shareholder meeting;
  • Subsidiary management and governance;
  • Monitor corporate governance developments and assist the Board in tailoring governance practices to meet the Board’s needs and investor expectations;
  • Serve as a focal point for investor communication and engagement on corporate governance issues;
  • Together with the Human Resources Director, keeping in touch with the debate on Corporate Social Responsibility and stakeholders, and monitoring all developments in this area and advising the Board in relation to its policy and practices with regard to Corporate Social Responsibility and its reporting on that matter;

 

The roles and responsibilities of a Corporate Secretary include, but are not limited to the above mentioned.

CONCLUSION

It is evident from above that it is essential that good governance practices must be effectively implemented and enforced preferably by self-regulation and voluntary adoption of ethical code of business conduct and if necessary through relevant regulatory laws and rules framed by Govern­ment or its agencies such as SFBI, RBI.

The effective implementation of good governance practices would ensure investors confidence in the corporate companies which will lead to greater investment in them ensuring their sustained growth. Thus good corporate governance would greatly benefit the companies enabling them to thrive and prosper.

Further, in the context of liberalization and globalization there is growing realization in the emerging economies including India that a country’s business environment must be maintained and operated in a manner that is conducive to investors’ confidence so that both domestic and foreign investors are induced to make adequate investment in corporate companies. This will be conducive to rapid capital formation and sustained growth of the economy.

Some persons regard certain good corporate practices as ‘irritants’ to the growth of their busi­nesses since they require the implementation of minimum standards of corporate governance. How­ever, fact of the matter is that the observance of practices of good corporate governance will ensure investors’ confidence in the companies which have record of good corporate governance.

Further, it needs to be emphasized that practices and principles of good corporate governance have been evolved which stimulate business rather than stifle it. In fact in good corporate governance structure what is ensured is that companies must preferably follow voluntarily ethical code of busi­ness conduct which are conducive to the expansion of investment in them and ensure good outcome in terms of rates of return.

 

Author is CS YOGESH GUPTA & can be reached at [email protected] or 7742681270

 

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