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CORPORATE Excellence Through
Presented By:
Anushree Chandekar Saumitra Marathe M.M.S. (2 Yrs.)
I Sem.
I. I. P. S. D.A.V.V.
INDORE
CONTENTS
1. Corporate Governance: AN INTRODUCTION
1. 2. 3. 4.
Concept of Corporate Governance Definition of Corporate Governance Objective of Corporate Governance Constituents of Corporate Governance
2. GENESIS OF Corporate Governance CODE IN INDIA: 1. Cadbury committee (UK) 2. Blue Ribbon committee (USA) 3. CII Recommendations 4. Kumar Mangalam Birla committee report 3. Corporate Governance: ANALYSIS OF CLAUSE 49 OF LISTING AGREEMENT: 1. Board composition 2. Audit committee 3. Remuneration of Director 4. Board procedure 5. Management 6. Shareholders 7. Report on Corporate Governance & compliance certificate
4. STATUS REPORT ON Corporate Governance: 1. Case studies 5. CONCLUSION
PURPOSE
We believe that any business conduct can be ethical only when it rests on the 9 core values of honesty, integrity, respect, fairness, purposefulness, trust, responsibility, citizenship & caring. Our two-fold motive is to choose the topic like Corporate Governance is that is at first we felt that somewhere these 9 values are loosing their sight. Indian capital market & for that matter Indian corporate sector though works on technical management principles but ultimately company’s philosophy rests on a single pillar i.e. ethics & values. Entire Corporate Governance philosophy is based on these 9 core values. Corporate Governance code applicable to listed companies is a beginning
whereby it aims to provide fair representation, full disclosure, a glimpse of transparency, ability, responsibility, integrity, faith & justice. Secondly we find that in today’s competitive era where everything is materialistic, measured in monetary people tend to manipulate things as per their convenience for serving their own ends, so is the law. Even though Corporate Governance has provided a code of conduct for effective governing of company, but people tend to search for loopholes & to face this situation investors’ awareness is extremely important. We tend to present this topic before general public because we being the investor or might be the future investors spending our hard earned money should be aware of manipulations & along with it have the courage & awareness to protect one’s right. So, it is rightly said, “The best way to make your dreams come true is to wake up.”
CORPORATE GOVERNANCE An Introduction
Global opinion is now converging very much in favour of ethics in all aspects of society-politics, istration, and judiciary, business as well as family & personal life. As the corporate governance deals with this ethical aspect of corporate form of business enterprise, so the issues involving corporate governance are taking high profile globally & have come to the force recently in India. The concept of corporate governance stipulates parameters of ability, control & reporting function of Board of Directors & encomes the relationship among various shareholders & other stakeholders. Corporate governance is the term that is in use in abundance in corporate circles & seminar halls. As referred by corporate pundits it means the establishment of structural framework or reforming the existing framework to ensure the governing of the company to best serve the interest of all the stakeholders.
The Concept As the name itself suggests, the term corporate governance is made of two words viz. “Corporate” & “Governance”. The concept of corporate governance is rounding around these two words in their true sense. The word company in technical sense can be defined as a legal entity formed & ed under the Companies Act. In fact the Corporate/ Company is not merely a legal institution. It is rather a legal device for attainment of any social or economic end. It is therefore, a combined political, social, economic & legal institution. It is defined as “an intricate, centralized, economic istrative structure run by professional managers who hire capital from the investors”. The expression governance used to denote the mechanism employed
to direct & control the affairs of any system, organization or institution. The concept of governance has assumed importance in the corporate entity of business, principally because in corporate entity, there is a divorce between capital & management. Those who provide the funds & those who manage the fund in a corporate entity are not necessarily the same people. The fund providers always want to be assured that the funds provided by them are safe & growing & that they are capable of taking informed decisions. This assurance is provided through the mechanism of corporate governance embodied in functioning of corporate form of business enterprise. Thus, one can conclude that corporate governance referred to as system of regulating, controlling & directing the affairs of corporate form of business enterprise in such a way so as to best serve the interest of all the stakeholders. Corporate governance is concerned with the establishment of a system where by the directors are entrusted with responsibilities & duties in relation to the direction of corporate affairs. It is concerned with morals, ethics, values & parameters of conduct & behavior of the company & its management.
Definition There is no universally agreed definition of corporate governance. Different people have different definition of corporate governance. Some people think of it as a concept, which aims to assure shareholder that their money is in safe hands. Other thinks of it in of contributions it makes to the efficiency & growth of business enterprise & countries economy. All these views are valid. The concept of corporate governance has two hinges(1) Protection & enhancement of corporate wealth. (2) Complete transparency, integrity & ability of the management, with an increasingly greater focus on investor protection &
public interest. According to Cadbury Committee - Corporate governance is the system by which companies are directed & controlled. Board of Directors is responsible for the governance of their companies. The shareholders role in governance is to appoint the directors & the auditors & to project on appropriate governance structure is in place. The responsibility of Board include setting the companies strategic aims, providing the leadership to put them into effect, supervising the management of the business & reporting to the shareholders on their stewardship. According to CII Code – Corporate governance deals with laws, procedures, practices & implicit rules that determine company’s ability to take managerial decisions vis-à-vis its elements particularly its shareholders, creditors, state & employees. Corporate governance refers to an economic, legal & institutional environment that allows companies to diversify, grow, restructure & exit & do everything necessary to maximize long-term shareholders value. It is a system of making management able to the shareholders for the effective management of the company, in the interest of the company & also with adequate concern for ethics & values. In fact, the term corporate governance is much wider than the term corporate management or istration. It implies authority of setting the objectives & goals, formulating policies, strategic action plan & monitoring their implementation. Objectives The basic objective of corporate governance, according to Kumar Mangle Brita Committee report is “The enhancement of long-term shareholders value at the same time protecting the interest of other stakeholders”. This brings into focus the need for a company to strike a balance
between the goal of enhancing shareholders wealth without harming the interest of other stakeholders in the company; viz. suppliers, customers, creditors, bankers, employees of the company, the government & the society at large. Good corporate governance is a must, not only in order to gain credibility & trust, but also as a part of strategic management for survival, consolidation & growth. Corporate governance has following objectives: ü Enhancement of long shareholders value. ü ability of management. ü Define clearly the rights, roles, responsibilities & ability of all stakeholders especially management & the Board of Directors. ü Continuous disclosure of materials financial & non- financial information & transparency. ü High quality of ing practices. ü Protection of investors’ interest. ü Bring about high level of public confidence in business, industry & the capital market.
Constituents Board of Directors
Management
Shareholders
♦ Setting objectives. ♦ Implementation of ♦ Formulating policies & policies. action plans. ♦ Achieving the objectives set by the ♦ Monitoring the Board of Directors. performance. ♦ Creating & enhancing ♦ Transforming the objectives into end wealth & resources. results. ♦ Responsible & able to shareholders.
♦ Appointment of Directors & Auditors. ♦ Obtain necessary information ♦ Need for appropriate governing structure. ♦ To see necessary disclosures having been made. ♦ Earning reasonable rate of returns.
Genesis Of Corporate Governance Code in India
While corporate governance is fairly recent issue, the concept itself is quite old. The modern avatar of Corporate Governance concept started with the appointment of Cadbury Committee in the U.K. in 1992. The code was developed following the collapse of some prominent companies. This committee recommended a code of best practices based on principle of transparency, integrity & ability. In U.S. also Blue Ribbon Committee has been constituted to suggest the ways & means to improve the effectiveness of Audit Committee. The discussion on Corporate Governance in India has gained momentum during the later part of 90’s in the light of the liberalisation & globalisation in the Indian market. The Confederation of Indian Industries (CII) headed by Shri Rahul Bajaj prepared a report titled ”Desirable Corporate Governance – A code”. This is the first Indian paper of its kind on
the subject of Corporate Governance. The code has recommended transparent corporate disclosure norms for all companies beyond a specified ceiling of the paid up share capital. The code also recommended that the development of capital market is dependent on good Corporate Governance, without which investors are not likely to repose confidence in companies. Companies following this code are more likely to attract investors. Many companies have voluntarily established high standards of Corporate Governance results of which are self-evident. As the Corporate Governance is Internationally considered as a major instrument for investors’ protection, need was felt for a comprehensive approach to accelerate the adoption of globally accepted practices of Corporate Governance. In the above-mentioned context, the SEBI setup a committee under the chairmanship of Shri K. M. Birla on May 7, 1999. The report of the K.M. Birla committee was considered & adopted by the SEBI board in its meeting held on Jan 25, 2000. The major areas of recommendations of KMB Committee are composition of board of directors, Constitution & functioning of Audit committee, remuneration of directors, disclosure requirements. Corporate Governance: Analysis of Clause 49 of Listing Agreement I. Board of directors: The board of directors is able to the shareholders for creation & protection of shareholders’ value & responsible to them for adequate, timely & transparent reporting. Therefore, in order to discharge this function properly following provisions are inserted by way of part 1 of Clause 49 of Listing Agreement. • Board of Directors the company shall have an optimum combination of executive &
non-executive directors with not less than 50% of Board of Directors comprising of nonexecutive directors. KMB committee has observed that there is a practice in most of the Indian companies to fill their board with the representatives & relatives of promoters & there is a very little scope for outside directors unless the promoters handpick them. The committee observed that presently the boards in India comprise the following group of directors namely – • Promoter Directors • Executive Directors • Non-executive Directors • Independent Directors among non-executive directors The term independent director has been specifically explained in Clause 49 as a director who does not have any pecuniary relationship with the company, its constituents & its subsidiaries. As the non-executive directors, especially independent Directors have wider perspective & independence to decision-making thus bring an independent judgment to bear on the board’s deliberations. In order to ensure that board fulfills its oversight role objective & holds the management able, the independence of Directors is a must. • The number of independent Directors would depend whether the chairman is executive or non-executive. In a case of non-executive chairman, at least one-third of board should comprise of independent Directors & in case of an executive chairman, at least half of the board should comprise of independent Directors. II. Audit Committee: One of the primary objectives of ushering of good Corporate Governance is ensuring proper
ability to the stakeholders & in present scenario to the shareholders & investors. The KMB committee has rightly observed that: A system of good Corporate Governance promotes relationship of ability between the principal actors of sound financial reporting- The board, the management & the Auditors. In order to properly assess the board in discharge of its functions of ability & transparency, the part-2 of Clause 49 contains comprehensive provisions regarding constitution and composition of Audit committee, frequency of its meetings & quorum, its powers & its role. A. Composition of Audit committee: • A qualified & independent committee shall be setup & that committee shall have minimum three , all being non-executive Directors, with majority of them being independent, & with al least one Director having financial and ing knowledge. • The chairman of the committee shall be an independent Director. • The chairman shall be present at AGM to answer shareholders’ queries. • The Audit Committee should invite such of the executives, as it considers appropriate to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executive of the company. The finance Director, head of internal Audit & when required, a representative of the external Auditor shall be present as invitees for the meetings of audit committee. B. Frequency of the meetings of the committee: • The Audit committee shall meet at least thrice a year. One meeting shall be held before finalization of s & one at every six months. C. Powers of the Audit committee:
• § § § §
Clause 49 specifically vested this committee with the following specific powers: To investigate any activity within its of reference To seek information from any employee To obtain outside legal or other professional advice. To secure attendance of outsiders with the relevant expertise, if it considers necessary.
D. Role of Audit committee: • The Audit committees role is to act as catalyst for effective financial reporting. As the committee acts as a bridge between the board, the statutory auditors & internal auditors, the Audit committee has been charged with the responsibilities of monitoring the financial reporting & disclosure. Part-D of Part-II of Clause 49 specifically list out certain areas, where committee has to play its role. § Oversight of the company’s financial reporting process & the disclosure of its financial information to ensure that the financial statement is correct, sufficient & credible. § Recommending the appointment & removal of external auditor, fixation of audit fees & also approval for payment for any other services. § Reviewing with the management the annual financial statements before submission to the board, focusing primarily ono Any changes in ing policies and practices. o Significant adjustments arising out of audit. o Compliance with ing standards. o Compliance with Stock Exchange & legal requirements concerning financial statements. § Reviewing the companies financial & risk management policy.
III. Remuneration of Directors: • The Board of Directors shall decide the remuneration of the non-executive Director. • There shall be separate section on the Corporate Governance in the annual report which contain the following disclosures on the remuneration of the Directors: § All elements of remuneration package of all Directors ie. Salary, benefit, bonuses, stock options, pensions etc. § Details of fixed components & performance linked incentives. § Service contract, notice period & severance fees. § Stock options details if any. IV. Board procedure: • The board meeting shall be held at least four times a year with maximum time gap of four months. • Details of the minimum information to be placed before the Board of Directors: § Annual operating plans & budgets & any updates. § Capital budgets & any updates. § Quarterly results for the company & operating divisions or business segments. § Minutes of meetings of audit committee & other committees of the board. § The details of t ventures or collaboration agreement. § Transactions involving substantial payments towards intangible assets. • A Director shall not be a member of more than 10 committees or act as a chairman of more than 5 committees across all the companies in which he is a Director. • Every Director shall annually inform the company about the committee position he occupies
in other companies & notify changes as & when they take place. V. Management: The management is one of the important constituents of Corporate Governance. While the onus of laying down the policies is with the Board of Directors, the function of implementing the policies, managing day-to-day affairs of the company, ensuring compliance with all regulations & laws, facilitating the working of the board & its committees & providing timely & accurate information rests with the management. Part V of Clause 49 prescribes that: • As a part of Directors’ report a ‘Management Discussion & Analysis Report’ should form the part of annual report including the following matters viz.: § Industry structure & developments § Opportunities & threats § Segment-wise or Product-wise performance § Internal control system & their adequacy • Disclosures relating to all material financial & commercial transactions, where management has personal interest. VI. Shareholders: The shareholder is the most important constituent of Corporate Governance. It is the shareholders prerogative to appoint the directors & the auditors & therefore, it is expected that the shareholders exercise all the care & efficiency in selecting the Directors & the auditors & take informed decisions. Further, they are the beneficiaries of all the disclosures. Therefore, they should demand complete information from the board.
In order to enable the shareholders to exercise this function, part VI of Clause 49 requires: • In case of appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: § A brief resume of the director § Nature of his expertise in specific functional areas. § Names of companies in which the person also holds the directorship. • Certain information like quarterly results, presentation made by companies to analysts shall be put on company’s web sites, or shall be sent to the stock exchanges on which the company is listed. Information to the stock exchanges shall be sent in such form so as to enable them to put it on their web site. • Company shall form Board Committee to be designated as ‘Shareholders/Investors Grievances Committee’ under the chairmanship of a non-executive Directors for grievance redressing of shareholders/investors like transfer of shares, non-receipt of balance sheet, nonreceipt of declared dividend etc. VII. & VIII. Report on Corporate Governance & Compliance Certificate: • To make informed the shareholders of the status of Corporate Governance practices followed by the company it is necessary that a part of annual report contain a separate section on Corporate Governance. • Part VIII requires that: § Company shall obtain a certificate from the auditors regarding compliance of Clause 49. § The aforesaid certificate shall be annexed with the Directors’ report, which is sent annually to all shareholders of the company.
§
The same certificate should also be sent to the stock exchanges.
Status Report on Corporate Governance: A Critical Analysis The advent of Corporate Governance code has introduced a breeze of fresh air in the corporate world. At present, it is a buzzword, which is being discussed in various conferences & seminars across the country. A concept, though quite old, but with a new face, was introduced by Cadbury committee showed its streak to Indian corporate sector, which started working on it & ultimately the recommendations of KMB committee were accepted & made mandatory for each listed company. Now each eye is focused on it, it has filled the air with Adrenaline & the code is being viewed as an important step to pull the Indian corporate sector from dusk to dawn, from grave depths to great heights, sub-standard position to global competitiveness, from management autocracy to corporate democracy. But, the question is, whether it will live up to the expectations of its makers is very difficult to judge, & at present, it is rather impossible to answer. While going through the survey & analysis, we had a deep insight into various provisions of the code in context to the Indian economy, Indian corporate philosophies, investors’ behaviour & the famous Indian bureaucracy. So far, it is found that the rosy picture that the law present is entirely different from the bitter reality.
• The foremost observation about the code is that it is not a ball game made to be played on the Indian turf. KMB committee made its recommendations on the basis of Cadbury committee report without testing under Indian corporate environment. It adopted the Cadbury committee recommendations without much modification, which is a very strange mistake. Reasons being: There is a big difference between developed capital markets like in US & UK & than that of India. There the prime investment by general public is in capital market rather than banks, P.F., Saving Schemes etc. while the situation is totally opposite in India. Here the investor is not a long-term investor but he is a speculator, in spite of the fact that equity shares are globally known as the most productive investment in the long run. Hence he is interested in earning big returns in short run and ultimately resorts to speculations. A typical Indian investor does not even know the correct names of the companies in which he has invested his money, leave the case of knowing its EPS, Market Cap., Debt-Equity ratio etc. Thus he is not at all interested in attending meetings of the company, receiving timely information about company affairs & to have a probe into the causes of its non-performance. He is so dormant that he doesn’t even wake up when company continuously runs into losses & doesn’t pay dividend. Another major factor of such behaviour is the unsecured feeling among the investors about the ability to provide justice as & when required. Due to this unsecured feeling the investor tries to seclude himself & restricts himself from raising questions on authenticity & credibility of the decisions taken. For instance, if a listed company does not follow the clauses of listing agreement, the worst thing that can happen is that the trading of its shares will be suspended or the company can be de-listed. The obvious consequence is that the ultimate burden will fall on the investor, as the company remains secured with its intact capital. In contrast, the scene in developed capital market is totally different. There the investors are well aware of their rights & duties, which help them to judge the authenticity & credibility of the
divisions taken at the right time. This thought has been strengthened further by the survey conducted by McKinsey & co. & institutional investors Inc.
Investors View on Good Corporate Governance
This survey shows that out of 100 major investors nearly two-third of the investors voted in favour of well-governed companies, which gave them 16% rise in dividend rate. The dormant behaviour of investors gives companies a liberty to make use of this opportunity for doing scams & frauds, starting from little neglects like non-dispatch of notices of meetings, annual reports, balance sheets etc., then taking a step further by appointing their favorite persons at important places & ultimately deploying the company’s funds for their own use. • Another important fact about Indian corporate sector is that it comprises of 11,000-12,000 listed companies, nearly 5,85,000 non-listed companies & 248 PSUs. While the code under
discussion is applicable on listed companies, non-listed companies & PSUs cover the major sector, which should be the first target on the hit list. Especially PSUs & Govt. deptt need Corporate Governance code or any other code as near to as circumstances it, for converting themselves from loss making corporations to Govt. cash cows. The code is needed to these corporations in comparison to only listed companies. • After much analysis, it is very much clear that the code under discussion is not made in consonance with its parent act that is Companies Act 1956, SEBI & RBI Rules & Regulations etc. Some of its clauses are in repugnancy with above mentioned laws & legislations. If we step-wise analyse the Clause 49 of listing agreement, we will find the following areas of debate: o With the growing trend towards non-executive & independent Directors’ on board, the Indian code introduced the same concept. While this may be germane to measure objectivity in board’s decision, its practical application may be beset with inability to accommodate certain family aspirations & also likely paucity of competent non-executive Directors qualifying to be independent. Further, the criteria of independence need further discussion. o Audit has been empowered to recommend to the board regarding appointment of external auditors, fixation of audit fees & approval for payment of other services. But it is pertinent to note that the ultimate authority to appoint auditors & to fix his audit fees rests with shareholders. o Part III of Clause 49 requires the companies to undertake that the board shall decide the remuneration to non-executive Directors. In fact, this requirement seems to be superfluous as there is already a more stringent provision exists u/s 309 of the Companies Act 1956. As per Sec. 309, the companies are required to get approval of central Govt. & also the approval of shareholders by way of a resolution ed in general meeting for paying remuneration other than by way of commission to such Directors.
o The irony of the situation lies in the certification of Corporate Governance report. At present it is the chartered ant who is authorized to certify the report, but experts feel that the authority who has extension knowledge on corporate laws & legislation & its procedural aspects is company secretary. Hence, it is highly questionable that the authorities reside with other person. So it is recommended to authorize company secretary to certify the report.
CASE STUDY
The basic motive of Corporate Governance code is maintaining high standards of transparency & disclosure norms so as to gain trust & confidence of investors. The companies who comply with this ethical code of conduct also follow the principle of fair representation & full disclosure in all of its dealings & communication.
CASE STUDY 1:
INFOSYS TECHNOLOGIES LTD. This case study reveals the disclosure made in annual report of the company regarding the composition & category of Directors as of Mar 31st 2000 & attendance of each Director at the board meetings & the last AGM. Composition & Category of Directors as of Mar 31st 2000 Category No. Of Directors % Founder Directors 5 50 Non-executive, independent 5 50 Directors TOTAL 10 100 Attendance of each Director at the board meetings & the last AGM. No. Of Board meetings No. Of board meetings Last AGM attendance held attended (Yes/No) Susim M. Data 9 5 Y Deepak M. Satwalekar 9 3 Y 9 3 Y Prof. Marti G. 9 5 Y Subrahmanyam Philip Yeo (Ret. In 9 N.A. Feb.2000) Directors
N.R. Narayanmurthi Nandam M. Nilekani N.S. Raghavan (ed on Oct.29, 99) GopalKrishnan S. K. Dinesh Shibulal S.D.
9 9
8 9
Y Y
9
9
Y
9 9 9
9 9 8
Y Y Y
CASE STUDY 2:
HDFC Ltd. The following data & figures demonstrate some of the disclosures made under the Corporate Governance report for the better understanding of the investor regarding income inflow & outflow, assets profile etc.
ASSETS PROFILE
CONCLUSION
“A little neglect may breed great mischief …for want of a nail, the shoe
was lost; for want of shoe the horse was lost & for the want of horse, the rider was lost A& for want of rider the war was lost.”
-Benjamin Franklin Little neglects add up to mischiefs & mischiefs ultimately lead to bigger frauds & scams & corporate enterprise are no exception. The basic rationale for high standards of Corporate Governance stems from the inherent characteristics of the investors along with the form of organization. The investor is the key factor around which the whole cycle of Corporate Governance revolves. The Indian investor is like a sleeping volcano residing in very inner core of the earth crust. The complete basket of laws, rules, regulations, the Corporate Governance code, its provisions, its objects, aims of transparency, responsibility, ability, integrity, protection rest on a single milestone i.e. Investor. Its high time for Indian investors to get themselves involve in real flow. It’s the prerogative of investors to demand & force the board of directors & management to follow norms, rules, and laws, make them able for frailties & flaws & in the long run enhance shareholders value while at the same time protection of interest of other stakeholders for survival & growth.
REFERENCES:
1. 2. 3. 4. 5.
63rd Secretarial modular training programme (New Delhi) http://www.sebi.gov.in http://www.bseindia.com http://www.nseindia.com http://www.business-today.com
EXPERTS VIEW:
1. 2. 3. 4. 5.
Mr. D. K. JAIN (FCS, ICSA London) Mr. Sunil JAIN (ACS, AICWA) Ms. Kavita Sethi (CS, BCC finance LTD) Mr. Abhishek Singhai (CS, M.P. Glychem) Mr. Dinesh Kumar Sharma (ACS)
Presented By:
Anushree Chandekar Saumitra Marathe M.M.S. (2 Yrs.)
I Sem.
I. I. P. S. D.A.V.V.
INDORE
CONTENTS
1. Corporate Governance: AN INTRODUCTION
1. 2. 3. 4.
Concept of Corporate Governance Definition of Corporate Governance Objective of Corporate Governance Constituents of Corporate Governance
2. GENESIS OF Corporate Governance CODE IN INDIA: 1. Cadbury committee (UK) 2. Blue Ribbon committee (USA) 3. CII Recommendations 4. Kumar Mangalam Birla committee report 3. Corporate Governance: ANALYSIS OF CLAUSE 49 OF LISTING AGREEMENT: 1. Board composition 2. Audit committee 3. Remuneration of Director 4. Board procedure 5. Management 6. Shareholders 7. Report on Corporate Governance & compliance certificate
4. STATUS REPORT ON Corporate Governance: 1. Case studies 5. CONCLUSION
PURPOSE
We believe that any business conduct can be ethical only when it rests on the 9 core values of honesty, integrity, respect, fairness, purposefulness, trust, responsibility, citizenship & caring. Our two-fold motive is to choose the topic like Corporate Governance is that is at first we felt that somewhere these 9 values are loosing their sight. Indian capital market & for that matter Indian corporate sector though works on technical management principles but ultimately company’s philosophy rests on a single pillar i.e. ethics & values. Entire Corporate Governance philosophy is based on these 9 core values. Corporate Governance code applicable to listed companies is a beginning
whereby it aims to provide fair representation, full disclosure, a glimpse of transparency, ability, responsibility, integrity, faith & justice. Secondly we find that in today’s competitive era where everything is materialistic, measured in monetary people tend to manipulate things as per their convenience for serving their own ends, so is the law. Even though Corporate Governance has provided a code of conduct for effective governing of company, but people tend to search for loopholes & to face this situation investors’ awareness is extremely important. We tend to present this topic before general public because we being the investor or might be the future investors spending our hard earned money should be aware of manipulations & along with it have the courage & awareness to protect one’s right. So, it is rightly said, “The best way to make your dreams come true is to wake up.”
CORPORATE GOVERNANCE An Introduction
Global opinion is now converging very much in favour of ethics in all aspects of society-politics, istration, and judiciary, business as well as family & personal life. As the corporate governance deals with this ethical aspect of corporate form of business enterprise, so the issues involving corporate governance are taking high profile globally & have come to the force recently in India. The concept of corporate governance stipulates parameters of ability, control & reporting function of Board of Directors & encomes the relationship among various shareholders & other stakeholders. Corporate governance is the term that is in use in abundance in corporate circles & seminar halls. As referred by corporate pundits it means the establishment of structural framework or reforming the existing framework to ensure the governing of the company to best serve the interest of all the stakeholders.
The Concept As the name itself suggests, the term corporate governance is made of two words viz. “Corporate” & “Governance”. The concept of corporate governance is rounding around these two words in their true sense. The word company in technical sense can be defined as a legal entity formed & ed under the Companies Act. In fact the Corporate/ Company is not merely a legal institution. It is rather a legal device for attainment of any social or economic end. It is therefore, a combined political, social, economic & legal institution. It is defined as “an intricate, centralized, economic istrative structure run by professional managers who hire capital from the investors”. The expression governance used to denote the mechanism employed
to direct & control the affairs of any system, organization or institution. The concept of governance has assumed importance in the corporate entity of business, principally because in corporate entity, there is a divorce between capital & management. Those who provide the funds & those who manage the fund in a corporate entity are not necessarily the same people. The fund providers always want to be assured that the funds provided by them are safe & growing & that they are capable of taking informed decisions. This assurance is provided through the mechanism of corporate governance embodied in functioning of corporate form of business enterprise. Thus, one can conclude that corporate governance referred to as system of regulating, controlling & directing the affairs of corporate form of business enterprise in such a way so as to best serve the interest of all the stakeholders. Corporate governance is concerned with the establishment of a system where by the directors are entrusted with responsibilities & duties in relation to the direction of corporate affairs. It is concerned with morals, ethics, values & parameters of conduct & behavior of the company & its management.
Definition There is no universally agreed definition of corporate governance. Different people have different definition of corporate governance. Some people think of it as a concept, which aims to assure shareholder that their money is in safe hands. Other thinks of it in of contributions it makes to the efficiency & growth of business enterprise & countries economy. All these views are valid. The concept of corporate governance has two hinges(1) Protection & enhancement of corporate wealth. (2) Complete transparency, integrity & ability of the management, with an increasingly greater focus on investor protection &
public interest. According to Cadbury Committee - Corporate governance is the system by which companies are directed & controlled. Board of Directors is responsible for the governance of their companies. The shareholders role in governance is to appoint the directors & the auditors & to project on appropriate governance structure is in place. The responsibility of Board include setting the companies strategic aims, providing the leadership to put them into effect, supervising the management of the business & reporting to the shareholders on their stewardship. According to CII Code – Corporate governance deals with laws, procedures, practices & implicit rules that determine company’s ability to take managerial decisions vis-à-vis its elements particularly its shareholders, creditors, state & employees. Corporate governance refers to an economic, legal & institutional environment that allows companies to diversify, grow, restructure & exit & do everything necessary to maximize long-term shareholders value. It is a system of making management able to the shareholders for the effective management of the company, in the interest of the company & also with adequate concern for ethics & values. In fact, the term corporate governance is much wider than the term corporate management or istration. It implies authority of setting the objectives & goals, formulating policies, strategic action plan & monitoring their implementation. Objectives The basic objective of corporate governance, according to Kumar Mangle Brita Committee report is “The enhancement of long-term shareholders value at the same time protecting the interest of other stakeholders”. This brings into focus the need for a company to strike a balance
between the goal of enhancing shareholders wealth without harming the interest of other stakeholders in the company; viz. suppliers, customers, creditors, bankers, employees of the company, the government & the society at large. Good corporate governance is a must, not only in order to gain credibility & trust, but also as a part of strategic management for survival, consolidation & growth. Corporate governance has following objectives: ü Enhancement of long shareholders value. ü ability of management. ü Define clearly the rights, roles, responsibilities & ability of all stakeholders especially management & the Board of Directors. ü Continuous disclosure of materials financial & non- financial information & transparency. ü High quality of ing practices. ü Protection of investors’ interest. ü Bring about high level of public confidence in business, industry & the capital market.
Constituents Board of Directors
Management
Shareholders
♦ Setting objectives. ♦ Implementation of ♦ Formulating policies & policies. action plans. ♦ Achieving the objectives set by the ♦ Monitoring the Board of Directors. performance. ♦ Creating & enhancing ♦ Transforming the objectives into end wealth & resources. results. ♦ Responsible & able to shareholders.
♦ Appointment of Directors & Auditors. ♦ Obtain necessary information ♦ Need for appropriate governing structure. ♦ To see necessary disclosures having been made. ♦ Earning reasonable rate of returns.
Genesis Of Corporate Governance Code in India
While corporate governance is fairly recent issue, the concept itself is quite old. The modern avatar of Corporate Governance concept started with the appointment of Cadbury Committee in the U.K. in 1992. The code was developed following the collapse of some prominent companies. This committee recommended a code of best practices based on principle of transparency, integrity & ability. In U.S. also Blue Ribbon Committee has been constituted to suggest the ways & means to improve the effectiveness of Audit Committee. The discussion on Corporate Governance in India has gained momentum during the later part of 90’s in the light of the liberalisation & globalisation in the Indian market. The Confederation of Indian Industries (CII) headed by Shri Rahul Bajaj prepared a report titled ”Desirable Corporate Governance – A code”. This is the first Indian paper of its kind on
the subject of Corporate Governance. The code has recommended transparent corporate disclosure norms for all companies beyond a specified ceiling of the paid up share capital. The code also recommended that the development of capital market is dependent on good Corporate Governance, without which investors are not likely to repose confidence in companies. Companies following this code are more likely to attract investors. Many companies have voluntarily established high standards of Corporate Governance results of which are self-evident. As the Corporate Governance is Internationally considered as a major instrument for investors’ protection, need was felt for a comprehensive approach to accelerate the adoption of globally accepted practices of Corporate Governance. In the above-mentioned context, the SEBI setup a committee under the chairmanship of Shri K. M. Birla on May 7, 1999. The report of the K.M. Birla committee was considered & adopted by the SEBI board in its meeting held on Jan 25, 2000. The major areas of recommendations of KMB Committee are composition of board of directors, Constitution & functioning of Audit committee, remuneration of directors, disclosure requirements. Corporate Governance: Analysis of Clause 49 of Listing Agreement I. Board of directors: The board of directors is able to the shareholders for creation & protection of shareholders’ value & responsible to them for adequate, timely & transparent reporting. Therefore, in order to discharge this function properly following provisions are inserted by way of part 1 of Clause 49 of Listing Agreement. • Board of Directors the company shall have an optimum combination of executive &
non-executive directors with not less than 50% of Board of Directors comprising of nonexecutive directors. KMB committee has observed that there is a practice in most of the Indian companies to fill their board with the representatives & relatives of promoters & there is a very little scope for outside directors unless the promoters handpick them. The committee observed that presently the boards in India comprise the following group of directors namely – • Promoter Directors • Executive Directors • Non-executive Directors • Independent Directors among non-executive directors The term independent director has been specifically explained in Clause 49 as a director who does not have any pecuniary relationship with the company, its constituents & its subsidiaries. As the non-executive directors, especially independent Directors have wider perspective & independence to decision-making thus bring an independent judgment to bear on the board’s deliberations. In order to ensure that board fulfills its oversight role objective & holds the management able, the independence of Directors is a must. • The number of independent Directors would depend whether the chairman is executive or non-executive. In a case of non-executive chairman, at least one-third of board should comprise of independent Directors & in case of an executive chairman, at least half of the board should comprise of independent Directors. II. Audit Committee: One of the primary objectives of ushering of good Corporate Governance is ensuring proper
ability to the stakeholders & in present scenario to the shareholders & investors. The KMB committee has rightly observed that: A system of good Corporate Governance promotes relationship of ability between the principal actors of sound financial reporting- The board, the management & the Auditors. In order to properly assess the board in discharge of its functions of ability & transparency, the part-2 of Clause 49 contains comprehensive provisions regarding constitution and composition of Audit committee, frequency of its meetings & quorum, its powers & its role. A. Composition of Audit committee: • A qualified & independent committee shall be setup & that committee shall have minimum three , all being non-executive Directors, with majority of them being independent, & with al least one Director having financial and ing knowledge. • The chairman of the committee shall be an independent Director. • The chairman shall be present at AGM to answer shareholders’ queries. • The Audit Committee should invite such of the executives, as it considers appropriate to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executive of the company. The finance Director, head of internal Audit & when required, a representative of the external Auditor shall be present as invitees for the meetings of audit committee. B. Frequency of the meetings of the committee: • The Audit committee shall meet at least thrice a year. One meeting shall be held before finalization of s & one at every six months. C. Powers of the Audit committee:
• § § § §
Clause 49 specifically vested this committee with the following specific powers: To investigate any activity within its of reference To seek information from any employee To obtain outside legal or other professional advice. To secure attendance of outsiders with the relevant expertise, if it considers necessary.
D. Role of Audit committee: • The Audit committees role is to act as catalyst for effective financial reporting. As the committee acts as a bridge between the board, the statutory auditors & internal auditors, the Audit committee has been charged with the responsibilities of monitoring the financial reporting & disclosure. Part-D of Part-II of Clause 49 specifically list out certain areas, where committee has to play its role. § Oversight of the company’s financial reporting process & the disclosure of its financial information to ensure that the financial statement is correct, sufficient & credible. § Recommending the appointment & removal of external auditor, fixation of audit fees & also approval for payment for any other services. § Reviewing with the management the annual financial statements before submission to the board, focusing primarily ono Any changes in ing policies and practices. o Significant adjustments arising out of audit. o Compliance with ing standards. o Compliance with Stock Exchange & legal requirements concerning financial statements. § Reviewing the companies financial & risk management policy.
III. Remuneration of Directors: • The Board of Directors shall decide the remuneration of the non-executive Director. • There shall be separate section on the Corporate Governance in the annual report which contain the following disclosures on the remuneration of the Directors: § All elements of remuneration package of all Directors ie. Salary, benefit, bonuses, stock options, pensions etc. § Details of fixed components & performance linked incentives. § Service contract, notice period & severance fees. § Stock options details if any. IV. Board procedure: • The board meeting shall be held at least four times a year with maximum time gap of four months. • Details of the minimum information to be placed before the Board of Directors: § Annual operating plans & budgets & any updates. § Capital budgets & any updates. § Quarterly results for the company & operating divisions or business segments. § Minutes of meetings of audit committee & other committees of the board. § The details of t ventures or collaboration agreement. § Transactions involving substantial payments towards intangible assets. • A Director shall not be a member of more than 10 committees or act as a chairman of more than 5 committees across all the companies in which he is a Director. • Every Director shall annually inform the company about the committee position he occupies
in other companies & notify changes as & when they take place. V. Management: The management is one of the important constituents of Corporate Governance. While the onus of laying down the policies is with the Board of Directors, the function of implementing the policies, managing day-to-day affairs of the company, ensuring compliance with all regulations & laws, facilitating the working of the board & its committees & providing timely & accurate information rests with the management. Part V of Clause 49 prescribes that: • As a part of Directors’ report a ‘Management Discussion & Analysis Report’ should form the part of annual report including the following matters viz.: § Industry structure & developments § Opportunities & threats § Segment-wise or Product-wise performance § Internal control system & their adequacy • Disclosures relating to all material financial & commercial transactions, where management has personal interest. VI. Shareholders: The shareholder is the most important constituent of Corporate Governance. It is the shareholders prerogative to appoint the directors & the auditors & therefore, it is expected that the shareholders exercise all the care & efficiency in selecting the Directors & the auditors & take informed decisions. Further, they are the beneficiaries of all the disclosures. Therefore, they should demand complete information from the board.
In order to enable the shareholders to exercise this function, part VI of Clause 49 requires: • In case of appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: § A brief resume of the director § Nature of his expertise in specific functional areas. § Names of companies in which the person also holds the directorship. • Certain information like quarterly results, presentation made by companies to analysts shall be put on company’s web sites, or shall be sent to the stock exchanges on which the company is listed. Information to the stock exchanges shall be sent in such form so as to enable them to put it on their web site. • Company shall form Board Committee to be designated as ‘Shareholders/Investors Grievances Committee’ under the chairmanship of a non-executive Directors for grievance redressing of shareholders/investors like transfer of shares, non-receipt of balance sheet, nonreceipt of declared dividend etc. VII. & VIII. Report on Corporate Governance & Compliance Certificate: • To make informed the shareholders of the status of Corporate Governance practices followed by the company it is necessary that a part of annual report contain a separate section on Corporate Governance. • Part VIII requires that: § Company shall obtain a certificate from the auditors regarding compliance of Clause 49. § The aforesaid certificate shall be annexed with the Directors’ report, which is sent annually to all shareholders of the company.
§
The same certificate should also be sent to the stock exchanges.
Status Report on Corporate Governance: A Critical Analysis The advent of Corporate Governance code has introduced a breeze of fresh air in the corporate world. At present, it is a buzzword, which is being discussed in various conferences & seminars across the country. A concept, though quite old, but with a new face, was introduced by Cadbury committee showed its streak to Indian corporate sector, which started working on it & ultimately the recommendations of KMB committee were accepted & made mandatory for each listed company. Now each eye is focused on it, it has filled the air with Adrenaline & the code is being viewed as an important step to pull the Indian corporate sector from dusk to dawn, from grave depths to great heights, sub-standard position to global competitiveness, from management autocracy to corporate democracy. But, the question is, whether it will live up to the expectations of its makers is very difficult to judge, & at present, it is rather impossible to answer. While going through the survey & analysis, we had a deep insight into various provisions of the code in context to the Indian economy, Indian corporate philosophies, investors’ behaviour & the famous Indian bureaucracy. So far, it is found that the rosy picture that the law present is entirely different from the bitter reality.
• The foremost observation about the code is that it is not a ball game made to be played on the Indian turf. KMB committee made its recommendations on the basis of Cadbury committee report without testing under Indian corporate environment. It adopted the Cadbury committee recommendations without much modification, which is a very strange mistake. Reasons being: There is a big difference between developed capital markets like in US & UK & than that of India. There the prime investment by general public is in capital market rather than banks, P.F., Saving Schemes etc. while the situation is totally opposite in India. Here the investor is not a long-term investor but he is a speculator, in spite of the fact that equity shares are globally known as the most productive investment in the long run. Hence he is interested in earning big returns in short run and ultimately resorts to speculations. A typical Indian investor does not even know the correct names of the companies in which he has invested his money, leave the case of knowing its EPS, Market Cap., Debt-Equity ratio etc. Thus he is not at all interested in attending meetings of the company, receiving timely information about company affairs & to have a probe into the causes of its non-performance. He is so dormant that he doesn’t even wake up when company continuously runs into losses & doesn’t pay dividend. Another major factor of such behaviour is the unsecured feeling among the investors about the ability to provide justice as & when required. Due to this unsecured feeling the investor tries to seclude himself & restricts himself from raising questions on authenticity & credibility of the decisions taken. For instance, if a listed company does not follow the clauses of listing agreement, the worst thing that can happen is that the trading of its shares will be suspended or the company can be de-listed. The obvious consequence is that the ultimate burden will fall on the investor, as the company remains secured with its intact capital. In contrast, the scene in developed capital market is totally different. There the investors are well aware of their rights & duties, which help them to judge the authenticity & credibility of the
divisions taken at the right time. This thought has been strengthened further by the survey conducted by McKinsey & co. & institutional investors Inc.
Investors View on Good Corporate Governance
This survey shows that out of 100 major investors nearly two-third of the investors voted in favour of well-governed companies, which gave them 16% rise in dividend rate. The dormant behaviour of investors gives companies a liberty to make use of this opportunity for doing scams & frauds, starting from little neglects like non-dispatch of notices of meetings, annual reports, balance sheets etc., then taking a step further by appointing their favorite persons at important places & ultimately deploying the company’s funds for their own use. • Another important fact about Indian corporate sector is that it comprises of 11,000-12,000 listed companies, nearly 5,85,000 non-listed companies & 248 PSUs. While the code under
discussion is applicable on listed companies, non-listed companies & PSUs cover the major sector, which should be the first target on the hit list. Especially PSUs & Govt. deptt need Corporate Governance code or any other code as near to as circumstances it, for converting themselves from loss making corporations to Govt. cash cows. The code is needed to these corporations in comparison to only listed companies. • After much analysis, it is very much clear that the code under discussion is not made in consonance with its parent act that is Companies Act 1956, SEBI & RBI Rules & Regulations etc. Some of its clauses are in repugnancy with above mentioned laws & legislations. If we step-wise analyse the Clause 49 of listing agreement, we will find the following areas of debate: o With the growing trend towards non-executive & independent Directors’ on board, the Indian code introduced the same concept. While this may be germane to measure objectivity in board’s decision, its practical application may be beset with inability to accommodate certain family aspirations & also likely paucity of competent non-executive Directors qualifying to be independent. Further, the criteria of independence need further discussion. o Audit has been empowered to recommend to the board regarding appointment of external auditors, fixation of audit fees & approval for payment of other services. But it is pertinent to note that the ultimate authority to appoint auditors & to fix his audit fees rests with shareholders. o Part III of Clause 49 requires the companies to undertake that the board shall decide the remuneration to non-executive Directors. In fact, this requirement seems to be superfluous as there is already a more stringent provision exists u/s 309 of the Companies Act 1956. As per Sec. 309, the companies are required to get approval of central Govt. & also the approval of shareholders by way of a resolution ed in general meeting for paying remuneration other than by way of commission to such Directors.
o The irony of the situation lies in the certification of Corporate Governance report. At present it is the chartered ant who is authorized to certify the report, but experts feel that the authority who has extension knowledge on corporate laws & legislation & its procedural aspects is company secretary. Hence, it is highly questionable that the authorities reside with other person. So it is recommended to authorize company secretary to certify the report.
CASE STUDY
The basic motive of Corporate Governance code is maintaining high standards of transparency & disclosure norms so as to gain trust & confidence of investors. The companies who comply with this ethical code of conduct also follow the principle of fair representation & full disclosure in all of its dealings & communication.
CASE STUDY 1:
INFOSYS TECHNOLOGIES LTD. This case study reveals the disclosure made in annual report of the company regarding the composition & category of Directors as of Mar 31st 2000 & attendance of each Director at the board meetings & the last AGM. Composition & Category of Directors as of Mar 31st 2000 Category No. Of Directors % Founder Directors 5 50 Non-executive, independent 5 50 Directors TOTAL 10 100 Attendance of each Director at the board meetings & the last AGM. No. Of Board meetings No. Of board meetings Last AGM attendance held attended (Yes/No) Susim M. Data 9 5 Y Deepak M. Satwalekar 9 3 Y 9 3 Y Prof. Marti G. 9 5 Y Subrahmanyam Philip Yeo (Ret. In 9 N.A. Feb.2000) Directors
N.R. Narayanmurthi Nandam M. Nilekani N.S. Raghavan (ed on Oct.29, 99) GopalKrishnan S. K. Dinesh Shibulal S.D.
9 9
8 9
Y Y
9
9
Y
9 9 9
9 9 8
Y Y Y
CASE STUDY 2:
HDFC Ltd. The following data & figures demonstrate some of the disclosures made under the Corporate Governance report for the better understanding of the investor regarding income inflow & outflow, assets profile etc.
ASSETS PROFILE
CONCLUSION
“A little neglect may breed great mischief …for want of a nail, the shoe
was lost; for want of shoe the horse was lost & for the want of horse, the rider was lost A& for want of rider the war was lost.”
-Benjamin Franklin Little neglects add up to mischiefs & mischiefs ultimately lead to bigger frauds & scams & corporate enterprise are no exception. The basic rationale for high standards of Corporate Governance stems from the inherent characteristics of the investors along with the form of organization. The investor is the key factor around which the whole cycle of Corporate Governance revolves. The Indian investor is like a sleeping volcano residing in very inner core of the earth crust. The complete basket of laws, rules, regulations, the Corporate Governance code, its provisions, its objects, aims of transparency, responsibility, ability, integrity, protection rest on a single milestone i.e. Investor. Its high time for Indian investors to get themselves involve in real flow. It’s the prerogative of investors to demand & force the board of directors & management to follow norms, rules, and laws, make them able for frailties & flaws & in the long run enhance shareholders value while at the same time protection of interest of other stakeholders for survival & growth.
REFERENCES:
1. 2. 3. 4. 5.
63rd Secretarial modular training programme (New Delhi) http://www.sebi.gov.in http://www.bseindia.com http://www.nseindia.com http://www.business-today.com
EXPERTS VIEW:
1. 2. 3. 4. 5.
Mr. D. K. JAIN (FCS, ICSA London) Mr. Sunil JAIN (ACS, AICWA) Ms. Kavita Sethi (CS, BCC finance LTD) Mr. Abhishek Singhai (CS, M.P. Glychem) Mr. Dinesh Kumar Sharma (ACS)
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