Corporate Governance Project 25.09.2013

7/28/2019 Corporate Governance Project 25.09.2013

1/89

Corporate Governance and its Principles

a) Objective of Study:

To provide overview structure through which corporations set and pursue their

objectives, while reflecting the context of the social, regulatory and marketenvironment.

Corporate Governance is a mechanism for monitoring the actions, policies and

decisions of corporations it also involves the alignment of interest of corporation and

all other stakeholders.

b) Broad Action Plan: To govern Board and management structure and process.

To look after corporate responsibility and compliance.

Financial transparency and information disclosure to stakeholders.

Ownership structure and exercise of Internal control and transparence.

Recent development and evolution in Corporate Governance.


2/89

The Details of the Project are as follows

1. Name of the Font : Book Antiqua

2. Size of the Font: 12

3. Spacing between the lines : 1.5

4. Total Pages : Between 80 to 125 pages

5. Total Copies : 1 Hard and 1 Soft Copy

6. Hard Bound with Golden Embossed : Sample available in

Library

7. Last Date of submission of the Project : 28th Sept, 2013

TITLE

A PROJECT SUBMITTED INPART COMPLETION OFMASTERS IN MARKETING MANAGEMENT

TOTIMSR

BYNAME OF THE STUDENT

UNDER THE GUIDANCE OFPROF _____________

TIMSRBATCH

ADDRESS


3/89

CERTIFICATE

This is to certify that the study presented by _____________(name of student)

to __________________ (name of Institute) in part completion of

____________________(Course) under ________________(Title) has been done

under my guidance in the year ___________ (Batch)

The Project is in the nature of original work that has not so far been

submitted for any other course in this institute or any other institute.

Reference of work and relative sources of information have been given at the

end of the project

Signature of the Candidate

Forwarded through the Research Guide

Signature of the Guide

(Name of the Guide)

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY

OBJECTIVE

CONTENT LIST

Sr.No Topic Page No

The Project should necessarily contain the following topic

Findings

Conclusion & Summary

Scope of Future Study

Bibliography of References


4/89

CONTENTS

Sr. No Title Page No.1 Introduction

- Meaning of Corporate Governance.- Principles of Corporate Governance.- The Scope and Objectives of

Corporate Governance.- Drivers of Good Corporate

Governance.2 Framework

- Separation of Management fromOwnership, and Ownership structureof Companies.

- Significant development since1970s,

- Development for Listed Companies- New Frontiers for Corporate

Governance.3 Corporate Governance Reportings

- Best Practice,- Types of Reporting- Financial Transparency and

information disclosure.4 Functions of Boards

- Appointment of IndependentDirectors

- Corporate Transparency- Assessment of Directors, Boards and

Companies.5 Evolution of Corporate Governance.

- Whistle Blower Mechanism- Corporate Social Responsibility

Reporting.- Sustainability Reporting.

6 Indian Companies Corporate Governance Report.- HCL- Reliance Industries.- TATA Group

-Infosys

7 Annexure- Report on Sir Adrian Cadbury

Committee on Financial Aspects ofCorporate Governance (1992)

- Revised Clause 49 of the ListingAgreement.

- Report of Kumar Mangalam BirlaCommittee on Corporate


5/89

Governance. (year 2000)- Sarbanes Oxley Act 2002- Report on N. R Narayana Murthy

Committee on CorporateGovernance. (year 2003)

8 Case Study

- Failure of Enron.- Satyam Computer Services Limited.

9 Discussion and Conclusion10 Bibliography of References


6/89

Introduction

Meaning of Corporate Governance.

Corporate governance refers to the system by which corporations are directed and controlled.

The governance structure specifies the distribution of rights and responsibilities among differentparticipants in the corporation (such as the board of directors, managers, shareholders, creditors,

auditors, regulators, and otherstakeholders) and specifies the rules and procedures for making

decisions in corporate affairs. Governance provides the structure through which corporations set

and pursue their objectives, while reflecting the context of the social, regulatory and market

environment. Governance is a mechanism for monitoring the actions, policies and decisions of

corporations. Governance involves the alignment of interests among the stakeholders.

Corporate governance has also been defined as "a system of law and sound approaches by which

corporations are directed and controlled focusing on the internal and external corporate structures

with the intention of monitoring the actions of management and directors and thereby mitigating

agency risks which may stem from the misdeeds of corporate officers.

In contemporary business corporations, the main external stakeholder groups are shareholders,debtholders, tradecreditors, suppliers, customers and communities affected by the corporation's

activities. Internal stakeholders are theboard of directors,executives, and other employees.

Corporate governance is a set of rules that define the relationship between stakeholders,

management, and board of directors of a company and influence how that company is operating. At

its most basic level, corporate governance deals with issues that result from the separation of

ownership and control. But corporate governance goes beyond simply establishing a clear

relationship between shareholders and managers.

The presence of strong governance standards provides better access to capital and aids economicgrowth. Corporate governance also has broader social and institutional dimensions. Properly

designed rules of governance should focus on implementing the values of fairness, transparency,

accountability, and responsibility to both shareholders and stakeholders. In order to be effectively

and ethically governed, businesses need not only good internal governance, but also must operate

in a sound institutional environment. Therefore, elements such as secure private property rights,

functioning judiciary, and free press are necessary to translate corporate governance laws and

regulations into on-the-ground practice.

Good corporate governance ensures that the business environment is fair and transparent and that

companies can be held accountable for their actions. Conversely, weak corporate governance

leads to waste, mismanagement, and corruption. It is also important to remember that although

corporate governance has emerged as a way to manage modern joint stock corporations it is

equally significant in state-owned enterprises, cooperatives, and family businesses. Regardless of

the type of venture, only good governance can deliver sustainable good business performance.

Principles of Corporate Governance
http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Stakeholder_(corporate)http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)


7/89

Contemporary discussions of corporate governance tend to refer to principles raised in three

documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate

Governance (OECD, 1998 and 2004), theSarbanes-Oxley Actof 2002 (US, 2002). The Cadbury and

OECD reports present general principles around which businesses are expected to operate to assure

proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by

the federal government in the United States to legislate several of the principles recommended in the

Cadbury and OECD reports.

Rights and equitable treatment of shareholders:[15][16][17]Organizations should respect the rights

of shareholders and help shareholders to exercise those rights. They can help shareholders exercise

their rights by openly and effectively communicating information and by encouraging shareholders to

participate in general meetings.

Interests of other stakeholders:[18]Organizations should recognize that they have legal,

contractual, social, and market driven obligations to non-shareholder stakeholders, including

employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board:[19][20] The board needs sufficient relevant skills and

understanding to review and challenge management performance. It also needs adequate size andappropriate levels of independence and commitment

Integrity and ethical behavior:[21][22] Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations should develop a code of conduct for their

directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:[23][24] Organizations should clarify and make publicly known the

roles and responsibilities of board and management to provide stakeholders with a level of

accountability. They should also implement procedures to independently verify and safeguard the

integrity of the company's financial reporting. Disclosure of material matters concerning the organization

should be timely and balanced to ensure that all investors have access to clear, factual information.

The Scope and Objectives of Corporate Governance.

Much of the contemporary interest in corporate governance is concerned with mitigation of the

conflicts of interests between stakeholders. [5] Ways of mitigating or preventing these conflicts of

interests include the processes, customs, policies, laws, and institutions which have an impact on

the way a company is controlled. An important theme of governance is the nature and extent of

corporateaccountability.

A related but separate thread of discussions focuses on the impact of a corporate governance

system oneconomic efficiency, with a strong emphasis on shareholders' welfare. In large firms

where there is a separation of ownership and management and no controlling shareholder,the principalagent issue arises between upper-management (the "agent") which may have very

different interests, and by definition considerably more information, than shareholders (the

"principals"). The danger arises that rather than overseeing management on behalf of

shareholders, the board of directors may become insulated from shareholders and beholden to

management.[10] This aspect is particularly present in contemporary public debates and

developments in regulatory policy.
http://en.wikipedia.org/wiki/Cadbury_Reporthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Corporate_governance#cite_note-15http://en.wikipedia.org/wiki/Corporate_governance#cite_note-15http://en.wikipedia.org/wiki/Corporate_governance#cite_note-16http://en.wikipedia.org/wiki/Corporate_governance#cite_note-17http://en.wikipedia.org/wiki/Corporate_governance#cite_note-17http://en.wikipedia.org/wiki/Corporate_governance#cite_note-18http://en.wikipedia.org/wiki/Corporate_governance#cite_note-18http://en.wikipedia.org/wiki/Corporate_governance#cite_note-19http://en.wikipedia.org/wiki/Corporate_governance#cite_note-19http://en.wikipedia.org/wiki/Corporate_governance#cite_note-20http://en.wikipedia.org/wiki/Corporate_governance#cite_note-21http://en.wikipedia.org/wiki/Corporate_governance#cite_note-22http://en.wikipedia.org/wiki/Corporate_governance#cite_note-23http://en.wikipedia.org/wiki/Corporate_governance#cite_note-24http://en.wikipedia.org/wiki/Corporate_governance#cite_note-5http://en.wikipedia.org/wiki/Accountabilityhttp://en.wikipedia.org/wiki/Accountabilityhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Corporate_governance#cite_note-10http://en.wikipedia.org/wiki/Cadbury_Reporthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Corporate_governance#cite_note-15http://en.wikipedia.org/wiki/Corporate_governance#cite_note-16http://en.wikipedia.org/wiki/Corporate_governance#cite_note-17http://en.wikipedia.org/wiki/Corporate_governance#cite_note-18http://en.wikipedia.org/wiki/Corporate_governance#cite_note-19http://en.wikipedia.org/wiki/Corporate_governance#cite_note-20http://en.wikipedia.org/wiki/Corporate_governance#cite_note-21http://en.wikipedia.org/wiki/Corporate_governance#cite_note-22http://en.wikipedia.org/wiki/Corporate_governance#cite_note-23http://en.wikipedia.org/wiki/Corporate_governance#cite_note-24http://en.wikipedia.org/wiki/Corporate_governance#cite_note-5http://en.wikipedia.org/wiki/Accountabilityhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Principal%E2%80%93agent_problemhttp://en.wikipedia.org/wiki/Corporate_governance#cite_note-10


8/89

Corporate governance refers to the rules, procedures, and administration of the firms

contracts with itsshareholders, creditors, employees, suppliers, customers, and sovereign

governments. Governance is legally vested in a board of directors who have a fiduciary duty to

serve the interests of thecorporationrather than their own interests or those of the firms

management.

With this simple definition, we assume that directors and managers are motivated to serve theinterests of the corporation by incentive pay, by their own shareholdings and reputational concerns,

and by the threat of takeover.

The operation of the board and the remuneration of the Executive Directors are vital in maintaining

and protecting the interests of the different stakeholder groups. If we accept that the shareholders

collectively own the business and they have invested in it to maximise their wealth, then their main

aim is to grow the overall value of their share capital and maximise returns in the form of dividends.

However, there are potential conflicts of interest between this ambition and the

managers/employees of the group who are looking to maximise their own wealth. Managers are

appointed as agents on behalf of the shareholders of the company who have delegated this

responsibility to them.

In the UK and the US, corporate governance mechanisms emphasise the relationship between

shareholder and management. In countries such as France, Germany and the Netherland, the

corporate governance mechanisms take a stakeholders approach to governance, aiming to

balance the interests of owners, managers, major creditors and employees.

The main mechanisms for understanding corporate governance are the following:

1. The market for corporate control (i.e. ahostile takeovermarket and the market for partial

control).

2. Large shareholder and creditor monitoring.

3. Internal control mechanisms, i.e. the board of directors, non-executivecommittees and the

design ofexecutive compensationcontracts.4. External mechanisms, i.e. product-market competition, external auditors and the regulatory

framework of thecorporate-lawregime and stock exchan

How governance affects firm performance? Do firms perform better when shareholders interests

are likely to be dominant? Answering these questions, will lead us to evaluate the folowing points:

Corporate control

Changes in control due to takeover or insolvency bring dramatic changes in firm personnel and

strategy. CEO and board member turnover increases radically in the event the firm goes into

financial distress. Managers will avoid being taking over by either increasing the firms cash flows

or by some less productive avenue.

Board, Remuneration Committee, Pay and incentives

A research has found that the appointment of non-executives directors is associated to a company

stock price increases. An Executive that wants to take the company in a direction that might be

more in its personal interests could be sacked. Another research has found a positive relationship

between the percentage of shares owned by managers and board members and firms market-to-

book values.
http://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Non-executive_directorhttp://en.wikipedia.org/wiki/Executive_compensationhttp://en.wikipedia.org/wiki/Executive_compensationhttp://en.wikipedia.org/wiki/Corporate_lawhttp://en.wikipedia.org/wiki/Corporate_lawhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Shareholderhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Non-executive_directorhttp://en.wikipedia.org/wiki/Executive_compensationhttp://en.wikipedia.org/wiki/Corporate_law


9/89

The remuneration committee is made up of non-execs, so this creates a natural control to stop the

executive directors awarding themselves unjustifiable salaries and benefits. The remuneration of

the Directors should be in line with other similar companies, to remain competitive and retain its top

executives.

The remuneration packages are intended to align the interests of Director and Shareholders by

linking cash and share incentives to performance.

However, some argue that the increase in share price was also associated with a decline in the

value of the firms outstanding debt. And corporate performance cannot be reliably increased

simply by adding outsiders to the board of directors or by increasing the CEOs stockholdings.

Recent Corporate Scandals

Corporate governance failures can lead to disastrous consequences beyond anyone expectations.

Parmalat- a world leader in the dairy food business, entered bankruptcy protection in 2003 when

investors least expected it. How the Italian group so much praised siphoned away billions of euros

without its shareholders, nor its top managers suspecting it?

One of the problem at Parmalat was due to its ownership and control structures-There was alimited presence of shareholders and mainly linked by family ties. Parmala was a holding company

with all the other companies within the group controlled by the Tanzani family. The family had the

majority if not all of the voting rights. As this happens, other shareholders had limited control over

the activities of the group-hence limited power to block any decisions. Managers had also limited

power to influence decisions taken by the family shareholders.

In that case, the family managed to siphoned away almost millions of euros to other

companies owned by the family.

In summary, the demise of Parmalat was a failure to fully implement the corporate governance

mechanisms listed above.

Statutory auditors

Some thought that the Parmalat case was country-specific, however, Enron the

giant American Energy failed victim to corporate governance problems with the help ofArthur

Andersen-the US accounting firm.

Drivers of Good Corporate Governance.

The key underlying driver of corporate governance is the need for external

funding. An organisation has to attract and retain shareholders and obtainloan finance to meet funding peaks. To be attractive to investors it has todemonstrate that funds will not be wasted, but will be used responsibly toproduce consistent returns for investors. Corporate governance is thesubstance behind such a demonstration of effectiveness and it needs tocreate and harness power to achieve that end.Business is driven by the exercise of power; corporate governance is drivenby the need to moderate and channel that power. Power, like its analogue
http://www.andersen.com/http://www.andersen.com/http://www.andersen.com/http://www.andersen.com/http://www.andersen.com/


10/89

electricity, is both useful and dangerous. Wikipedia defines power as ameasure of a persons ability to control the environment around them,including the behaviour of other persons the exercise of power seemsendemic to humans as social beings. J K Galbraith classified power ascondign (based on force), compensatory (through the use of variousresources) and conditioned (the result of persuasion), and the source of

power as personality (individuals), property (material resources) andorganisational (hierarchical). Michel Foucault, the French philosopher, linkspower with knowledge, hence the power of doctors and priests. More recentthinking on power, e.g. Steven Lukes, focuses on the enabling nature ofpower, leading to empowerment. This is the key means of moderating andchannelling power, and avoiding the concentration of power which makeseffective corporate governance impossible, and unleashes the excesses ofdomineering leaders like Jean-Marie Messier, former CEO of Vivendi. As LordActon warned: All power tends to corrupt; absolute power corruptsabsolutely. If domineering leaders can destroy shareholder value for theirinvestors, as in the case of Marconi, are entrepreneurs, who often risk theirown resources, a better model for the exercise of power? Entrepreneurs are

often motivated by the need to succeed, rather than by the fruits of success,as in the case of Sir Chris Evans, who has established 20 successful science-based companies, four quoted on the London Stock Exchange including Celsisand Enzymatix. Each has moved from innovation, through nurture tomaturity; each needs effective corporate governance to consolidate itssuccess. Some entrepreneurs dislike the responsibility of corporategovernance; Sir Kenneth Morrison of Morrison plc fought against it but camein line to fund his acquisition of Safeways. Others, likeSir Richard Branson, operate mainly through private companies and havelimited external accountability. This is a key driver of the move to privateequity structures. Few individuals can be totally self-sufficient; most will needexternal support even if they are self-funding, like Boris Berezovsky and otherRussian oligarchs. Sovereign wealth funds (SWF) are accountable only totheir owner governments, most of which have created SWFs to invest windfallprofits from natural resources. SWFs now total $2.2 trillion (est.), and mostare located in GCC countries, China, Singapore, Russia and Norway. Manybanks have been partially recapitalised by SWFs since the sub-prime crisisand companies, such as Siemens, are seeking them as investors. Some SWFshave rigorous governance, e.g. Norway, but most are closed and do notpublish details of their activities or of the motives behind their investments.Recently a code for SWFs has been developed by the IMF and many arepromising to observe it. Is it real or just a smokescreen?We can see that power is not always exercised openly and that some holdersof power do not wish, or need, to be accountable other than to themselves ortheir closed circle. This situation is disquieting for other parties the EUCommission is concerned about the risk of SWF takeover of strategiccompanies, and the USA is monitoring the situation closely. Trust in SWFs islow among OECD country governments and their emerging role as alender/investor of last resort is increasingly disquieting. The need for greatertransparency is being pressed on SWFs, particularly when major banks andinvestment operations are subject to increasing scrutiny to block flows ofdirty money. In his book Power and Influence (2007), Robert Dilenschneider


11/89

gives copious advice on how to obtain and exercise power. His mostrevealing thought is search for power but never forget to share it. In acomplex world of inter-dependencies, absolute power is unsustainable.Organization Resistance to corporate governance is founded on a repudiationof agency theory.Where employees control the operations of the organisation, which is

normally the case, they fail to recognise that they are the servants of theorganisation and are tempted to behave like masters. This self-servingattitude encourages hidden agendas and biases decisions in their favour. Theinflation in rewards, and their divorce from business results, is an extremesymptom of this malady.Where this malady becomes too apparent, as inscandals like Enron, Parmalat, etc., there is a grave danger of overreaction.Sarbanes-Oxley is such an overreaction which has made governance over-prescriptive and created a massive bureaucracy to police it. As we saw inChapter 1, self-regulation is the best approach to governance in that itengenders responsibility and allows a flexible response to situations as theydevelop. Selfregulation, linked to a framework of laws, is a British tradition,dating back at least as far as the medieval guilds. These set standards,

controlled recruitment and apprenticeship and policed behaviour. In themodern world controlled entry is less acceptable, but much of the spirit of theguilds sustains self-regulation in a more complex world. External regulationcreates conflict and expense at its extreme it could be a return to thesystem of the Soviet Union.A key driver of corporate governance is the concept of fairness. The FSArefuses to define the term but expatiates at length on the subject. The OECDdefines fairness as protecting shareholder rights and ensuring contractswith resource providers are enforceable. This implies that all shareholdershave clear rights and that supply contracts are clear and even-handed.Fairness operates more widely in corporate governance, not least instakeholder situations, and it has both legal and behavioural roots. Conceptsof fairness emerged strongly in eighteenth-century philosophy, e.g. Hume,Kant and in particular Rousseaus Social Contract. The legal roots of fairnesslie in the courts of equity and have shaped jurisprudence ever since. JohnRawls book

As per research conducted by Department of Trade and Industry & Kings College, London, there are

18 drivers of good corporate governance:

1. Board Independence

2. Diversity, human and social capital within the board

3. High engagement in board processes

4. Presence of large block shareholders

5. Shareholder activism

6. Breadth and depth of public information disclosure


12/89

7. Breadth and depth of private information sharing

8. Independence of the external auditors

9. Competence of the audit committee

10. Presence of internal control systems and support of whistle blowing.

11. Long term performance-related incentives

12. Transparent and independent control of the remuneration committee

13. An active markets for corporate control

14. Transparency and protection for shareholders and stakeholders during mergers and acquisitions

15. Board power in takeover bids, subject to shareholder veto

16. Shareholder involvement within corporate governance

17. Voice mechanisms for debt holders

18. Employee participation in financial outcomes and collective voice in decision making.

The efficiency of corporate governance in a particular organization depends upon a combination of

drivers. These drivers may substitute or complement each other in terms of their efforts on

organizational outcomes including business strategy and performance.

As per my views, most important drivers of Good and Effective Corporate Governance system are :

1. Board Independence

2. Presence of large block shareholders i.e Institutional Investors

3.Shareholder Activism

As far as Board Independence in the company is concerned, in practice it can be rarely noticed.

Directors are mostly serving as Independent Directors on the Board of the Company from last 15-20

years and are just regarded as the expensive furniture of the company. There should be certain fixed

term for independent directors otherwise, they would lose their independence.

There are more committees of Board and less commitment. The question arises: Do promoters whoare leading corporates really understand the value of Corporate Governance Standards? , What is

situation of Promoters Interests vs. Shareholders Interests and how it can be tackled? The conduct of

Board Meetings is more important than the composition ofBoard of Directors. Board functioning is

important rather than names of high profile candidates on Board.

Rise of Shareholders Activism is still a baby step in India. The shareholders are becoming more

focused now. Some of the global examples of Share holders Activism are :
http://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Activist_shareholderhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Activist_shareholderhttp://en.wikipedia.org/wiki/Board_of_directors


13/89

1. Apple agreed to investor demands requiring a majority share vote in order for any candidate to be

elected to it s board of directors not just a simple majority.

2. Los Angeles CountyEmployee retirement association or Lacera made it mandatory for all board of

directors to elected annually.

3.Shareholder rejected CITI CEO Vikram Pandits $15 million compensation in non binding vote.

4.Merger of Sea Goa and Sterlite Industries

5.Coal India Vs. The Children Investment Fund

6.Veritas, Canadian Research Firm raised Corporate Governance and Accounting Practices issues at

Reliance Industries, Reliance Communications, Kingfisher and most recently DLF.

7.SEBI mandated AMCs to disclose their general policies and procedures for exercising the voting

rights in respect of shares held by them

More Institutional Investors should be involved. Proxy Voting Advisory firms is also emerging in India

for eg. Institutional Investors Advisory Services, In govern Research Services.

In nutshell, Corporates and Board of Directors should have fear of law. There should be strong

enforcement of laws and regulations to prevent corporate frauds. Fraud cases should be resolved

swiftly by fast track redressal forums.

- Board members should be informed and act ethically and in good faith, with due diligence

and care, in the best interest of the company and the shareholders.

- Review and guide corporate strategy, objective setting, major plans of action, risk policy,

capital plans, and annual budgets.

- Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key

executives and oversee succession planning

- .Align key executive and board remuneration (pay) with the longer-term interests of the

company and its shareholders.

- Ensure a formal and transparent board member nomination and election process.

- Ensure the integrity of the corporations accounting and financial reporting systems,

including their independent audit.

- Ensure appropriate systems of internal control are established. Oversee the process ofdisclosure and communications.
http://maps.google.com/maps?ll=34.05,-118.25&spn=0.1,0.1&q=34.05,-118.25%20(Los%20Angeles%20County%2C%20California)&t=hhttp://maps.google.com/maps?ll=34.05,-118.25&spn=0.1,0.1&q=34.05,-118.25%20(Los%20Angeles%20County%2C%20California)&t=h


14/89

Framework- Separation of Management from Ownership- Significant development in Worlds- Development for Listed Companies.- New Frontiers for Corporate Governance.

Separation of Management from Ownership, and Ownershipstructure of Companies.

Some people argue that shareholders do not completely control the corporation. They argue that

shareholder ownership is too diffuse (spread out) and fragmented for effective control of

management. A striking feature of the modern large corporation is the diffusion of ownership

among thousands of investors.

One of the most important advantages of the corporate form of business organization is that it

allows ownership of shares to he transferred. The resulting diffuse ownership, however, brings with

it the separation of ownership and control of the large corporation. The possible separation of

ownership and control raises an important question: Who controls the firm?

Managerial goals may be different from those of shareholders. What will managers maximize if they

are left to pursue their own goals rather than shareholders goals?

Some financial economists propose the notion of expense preference. They argue that managers

obtain value from certain kinds of expenses. In particular, company cars, office furniture, office

location, and funds for discretionary investment have value to managers beyond that which comes

from their productivity.

Economists conducted a series of interviews with the chief executives of several large companies.

From these interview they concluded that managers are influenced by two basic underlying

motivations:

1. Survival. Organizational survival means that management will always try to command

sufficient resources to avoid the firms going out of business.

2. Independence and self-sufficiency. This is the freedom to make decisions without

encountering external parties or depending on outside financial markets. The above-mentioned

interviews suggested that managers do not like to issue new shares of stock. Instead, they like to

be able to rely on internally generated cash flow.

These motivations lead to what is thought to be the basic financial objective of managers: the

maximization of corporate wealth. Corporate wealth is defined as that wealth over which

management has effective control; it is closely associated with corporate growth and corporate

size. Corporate wealth is not necessarily shareholder wealth. Corporate wealth tends to lead to

increased growth by providing funds for growth and limiting the extent to which new equity is

raised. Increased growth and size are not necessarily the same thing as increased shareholder

wealth.


15/89

Ownership Structure

When you start a business, you must decide whether it will be a sole proprietorship, partnership,

corporation or limited liability company (LLC). (If you need a brief explanation of the main businesstypes, see: Types of Ownership Structures.)

Which of these forms is right for your business depends on the type of business you run, how many

owners it has and its financial situation. No one choice suits every business: Business owners have

to pick the structure that best meets their needs. This article introduces several of the most

important factors to consider, including:

the potential risks and liabilities of your business

the formalities and expenses involved in establishing and maintaining the various business

structures

your income tax situation, and

your investment needs.

Risks And Liabilities

In large part, the best ownership structure for your business depends on the type of services or

products it will provide. If your business will engage in risky activitiesfor example, trading stocks or

repairing roofsyoull almost surely want to form a business entity that provides personal liability

protection (limited liability), which shields your personal assets from business debts and claims. A

corporation or a limited liability company (LLC) is probably the best choice for you.

To learn more about the advantages and disadvantages of each type of business structure,

see Ways to Organize Your Business, a chart that compares the pros and cons of each.

Formalities And Expenses

Sole proprietorships and partnerships are easy to set upyou dont have to file any special forms or

pay any fees to start your business. Plus, you dont have to follow any special operating rules.

LLCs and corporations, on the other hand, are almost always more expensive to create and more

difficult to maintain. To form an LLC or corporation, you must file a document with the state and pay

a fee, which ranges from about $40 to $800, depending on the state where you form your business.

In addition, owners of corporations and LLCs must elect officers (usually, a president, vice

president and secretary) to run the company. They also have to keep records of important business

decisions and follow other formalities.

If youre starting your business on a shoestring, it might make the sense to form the simplest type

of businessa sole proprietorship (for one-owner businesses) or a partnership (for businesses with

more than one owner). Unless yours will be a particularly risky business, the limited personalliability provided by an LLC or a corporation may not be worth the cost and paperwork required to

create and run one.

Income Taxes

Owners of sole proprietorships, partnerships and LLCs all pay taxes on business profits in the

same way. These three business types are pass-through tax entities, which means that all of the

profits and losses pass through the business to the owners, who report their share of the profits (or
http://www.nolo.com/article.cfm/objectID/6294EA66-70E7-4562-81AC734B34CAD352/111/182/ART/http://www.nolo.com/article.cfm/objectID/B9655EB0-F6FE-4DA4-8B027E925D28F777/111/182/ART/http://www.nolo.com/article.cfm/objectID/6294EA66-70E7-4562-81AC734B34CAD352/111/182/ART/http://www.nolo.com/article.cfm/objectID/B9655EB0-F6FE-4DA4-8B027E925D28F777/111/182/ART/


16/89

deduct their share of the losses) on their personal income tax returns. Therefore, sole proprietors,

partners and LLC owners can count on about the same amount of tax complexity, paperwork and

costs.

Owners of these unincorporated businesses must pay income taxes on allnet profits of the

business, regardless of how much they actually take out of the business each year. Even if all of

the profits are kept in the business checking account to meet upcoming business expenses, theowners must report their share of these profits as income on their tax returns.

In contrast, the owners of a corporation do not report their shares of corporate profits on their

personal tax returns. The owners pay taxes only on profits they actually receive in the form of

salaries, bonuses and dividends.

The corporation itself pays taxes, at special corporate tax rates, on any profits that are left in the

company from year to year (called retained earnings). Corporations also have to pay profits on

dividends paid out to shareholders, but this rarely affects small corporations, which seldom pay

dividends.

This separate level of taxation adds a layer of complexity to filing and paying taxes, but it can be a

benefit to some businesses. Owners of a corporation dont have to pay personal income taxes on

profits they dont receive. And, because corporations enjoy a lower tax rate than most individuals

for the first $50,000 to $75,000 of corporate income, a corporation and its owners may actually

have a lower combined tax bill than the owners of an unincorporated business that earns the same

amount of profit.

Investment Needs

Unlike other business forms, the corporate structure allows a business to sell ownership shares in

the company through its stock offerings. This makes it easier to attract investment capital and to

hire and retain key employees by issuing employee stock options.

But for businesses that dont need to issue stock options and will never go public, forming a

corporation probably isnt worth the added expense. If its limited liability that you want, an LLC

provides the same protection as a corporation, but the simplicity and flexibility of LLCs offer a clear

advantage over corporations. For more help on choosing between a corporation and an LLC, read

the articleCorporations vs. LLCs.

Changing Your Mind

Your initial choice of a business structure isnt set in stone. You can start out as sole proprietorship

or partnership and later, if your business grows or the risk of personal liability increases, you can

convert your business to an LLC or a corporation.

Development for Listed Companies

Companies listed on theNew York Stock Exchange (NYSE) and other stock exchanges are required tomeet certain governance standards. For example, the NYSE Listed Company Manual requires, among

many other elements:

Independent directors: "Listed companies must have a majority of independent directors...Effective

boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a

majority of independent directors will increase the quality of board oversight and lessen the possibility
http://www.nolo.com/article.cfm/objectID/9D0C8698-EC1E-4561-A1FDC7FC4BC232C8/111/182/ART/http://www.nolo.com/article.cfm/objectID/9D0C8698-EC1E-4561-A1FDC7FC4BC232C8/111/182/ART/http://www.nolo.com/article.cfm/objectID/9D0C8698-EC1E-4561-A1FDC7FC4BC232C8/111/182/ART/http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://www.nolo.com/article.cfm/objectID/9D0C8698-EC1E-4561-A1FDC7FC4BC232C8/111/182/ART/http://en.wikipedia.org/wiki/New_York_Stock_Exchange


17/89

of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management

and has no "material financial relationship" with the company.

Board meetings that exclude management: "To empower non-management directors to serve as a

more effective check on management, the non-management directors of each listed company must

meet at regularly scheduled executive sessions without management." (Section 303A.03)

Boards organize their members into committees with specific responsibilities per defined charters.

"Listed companies must have a nominating/corporate governance committee composed entirely of

independent directors." This committee is responsible for nominating new members for the board of

directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of

listing standards as well as outside regulations. (Section 303A.04 and others)[38]

Clause 49 of the Indian Listing Agreement to theIndian stock exchangecomes into effect from 31

December 2005. It has been formulated for the improvement of corporate governance in all listed

companies.

In corporate hierarchy two types of managements are envisaged: i) companies managed by Board of

Directors; and ii) those by a Managing Director, whole-time director or manager subject to the control and

guidance of the Board of Directors.

As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board

should comprise independent directors. In the case of a company with a non-executive Chairman, at

least one-third of the board should be independent directors.

It would be necessary for chief executives and chief financial officers to establish and maintain

internal controls and implement remediation and risk mitigation towards deficiencies in internal controls,

among others.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock

exchangein the prescribed form. The clause also requires that there be a separate section on

corporate governance in the annual report with a detailed compliance report.

A company is also required to obtain a certificate either from auditors or practicing company

secretaries regarding compliance of conditions as stipulated, and annex the same to the director's

report.

The clause mandates composition of an auditcommittee; one of the directors is required to be

"financially literate".

It is mandatory for all listed companies to comply with the clause by 31 December 2005.

In late 2002,SEBI constituted the Narayana Murthy Committee to assess the adequacy of current corporate

governance practices and to suggest improvements. Based on the recommendations of this committee,

SEBI issued a modified Clause 49 on 29 October 2004 (the revised Clause 49) which came into operation

on 1 January 2006.
http://en.wikipedia.org/wiki/Corporate_governance#cite_note-38http://en.wikipedia.org/wiki/Corporate_governance#cite_note-38http://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/N._R._Narayana_Murthyhttp://en.wikipedia.org/wiki/Corporate_governance#cite_note-38http://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Chairmanhttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/SEBIhttp://en.wikipedia.org/wiki/N._R._Narayana_Murthy


18/89

The revised Clause 49 has suitably pushed forward the original intent of protecting the interests of investors

through enhanced governance practices and disclosures. Five broad themes predominate. The

independence criteria for directors have been clarified. The roles and responsibilities of the board have been

enhanced. The quality and quantity of disclosures have improved. The roles and responsibilities of the audit

committee in all matters relating to internal controls and financial reporting have been consolidated, and the

accountability of top managementspecifically the CEO and CFOhas been enhanced. Within each of

these areas, the revised Clause 49 moves further into the realm of global best practices (and sometimes,

even beyond).

By Circular dated 8 April 2008, the Securities and Exchange Board of India amended Clause 49 of the

Listing Agreement to extent the 50% independent directors rule to all Boards of Directors where the Non-

Executive Chairman is a promoter of the Company or related to the promoters of the company.

Clause 49 - Corporate GovernanceThe company agrees to comply with the following provisions:

I. Board of DirectorsA. Composition of Board

(i) The board of directors of the company shall have an optimumcombination of executive and non-executive directors with not less than fiftypercent of the board of directors comprising of non-executive directors. Thenumber of independent directors would depend on whether the Chairman isexecutive or non-executive. In case of a non-executive chairman, at leastone-third of board should comprise of independent directors and in case of anexecutive chairman, at least half of board should comprise of independentdirectors.

Explanation (i) : For the purpose of this clause, the expressionindependent director shall mean non-executive director of the company who

(a) apart from receiving directors remuneration, does nothave any material pecuniary relationships or transactions with the company,

its promoters, its senior management or its holding company, its subsidiariesand associated companies;

(b) is not related to promoters or management at the boardlevel or at one level below the board;

(c) has not been an executive of the company in theimmediately preceding three financial years;

(d) is not a partner or an executive of the statutory audit firmor the internal audit firm that is associated with the company, and has notbeen a partner or an executive of any such firm for the last three years. Thiswill also apply to legal firm(s) and consulting firm(s) that have a materialassociation with the entity.

(e) is not a supplier, service provider or customer of the

company. This should include lessor-lessee type relationships also; and(f) is not a substantial shareholder of the company, i.e. owning two

percent or more of the block of voting shares.

Explanation (ii): Institutional directors on the boards ofcompanies shall be considered as independent directors whether theinstitution is an investing institution or a lending institution.(B) Non executive directors compensation and disclosures


19/89

(i) All compensation paid to non-executive directors shall be fixedby the Board of Directors and shall be approved by shareholders in generalmeeting. Limits shall be set for the maximum number of stock options thatcan be granted to non-executive directors in any financial year and inaggregate. The stock options granted to the non-executive directors shallvest after a period of at least one year from the date such non-executive

directors have retired from the Board of the Company.(ii) The considerations as regards compensation paid to an

independent director shall be the same as those applied to a non-executivedirector.

(iii) The company shall publish its compensation philosophy andstatement of entitled compensation in respect of non-executive directors inits annual report. Alternatively, this may be put up on the companys websiteand reference drawn thereto in the annual report. Company shall disclose onan annual basis, details of shares held by non-executive directors, includingon an if-converted basis.

(iv) Non-executive directors shall be required to disclose their stockholding (both own or held by / for other persons on a beneficial basis) in the

listed company in which they are proposed to be appointed as directors, priorto their appointment. These details should accompany their notice ofappointment(C) Independent Director

(i) Independent Director shall however periodically review legalcompliance reports prepared by the company as well as steps taken by thecompany to cure any taint. In the event of any proceedings against anindependent director in connection with the affairs of the company, defenceshall not be permitted on the ground that the independent director wasunaware of this responsibility.

(ii) The considerations as regards remuneration paid to an independentdirector shall be the same as those applied to a non executive director

(D) Board Procedure(i) The board meeting shall be held at least four times a year, with

a maximum time gap of four months between any two meetings. Theminimum information to be made available to the board is given inAnnexureIA.

(ii) A director shall not be a member in more than 10 committees or act asChairman of more than five committees across all companies in which he is adirector. Furthermore it should be a mandatory annual requirement for every directorto inform the company about the committee positions he occupies in othercompanies and notify changes as and when they take place.

Explanation: For the purpose of considering the limit of the committeeson which a director can serve, all public limited companies, whether listed or not,shall be included and all other companies (i e private limited companies, foreigncompanies and companies under Section 25 of the Companies Act, etc) shall beexcluded.

(iii) Further only the three committees viz. the Audit Committee, theShareholders Grievance Committee and the Remuneration Committee shall beconsidered for this purpose.

(E) Code of Conduct(i) It shall be obligatory for the Board of a company to lay down the

code of conduct for all Board members and senior management of a


20/89

company. This code of conduct shall be posted on the website of thecompany.

(ii) All Board members and senior management personnel shall affirmcompliance with the code on an annual basis. The annual report of the company shallcontain a declaration to this effect signed by the CEO and COO.

Explanation: For this purpose, the term senior management

shall mean personnel of the company who are members of itsmanagement/operating council (i.e. core management team excluding Boardof Directors). Normally, this would comprise all members of management onelevel below the executive directors(F) Term of Office of Nonexecutive directors

(i) Person shall be eligible for the office of non-executive director solong as the term of office did not exceed nine years in three terms of threeyears each, running continuously.II Audit Committee.A. Qualified and Independent Audit Committee

A qualified and independent audit committee shall be set up and shallcomply with the following:

(i) The audit committee shall have minimum three members. Allthe members of audit committee shall be non-executive directors, with themajority of them being independent.

(ii) All members of audit committee shall be financially literate andat least one member shall have accounting or related financial managementexpertise.

Explanation (i) : The term financially literate means the abilityto read and understand basic financial statements i.e. balance sheet, profitand loss account, and statement of cash flows.

Explanation (ii) : A member will be considered to haveaccounting or related financial management expertise if he or she possessesexperience in finance or accounting, or requisite professional certification in

accounting, or any other comparable experience or background which resultsin the individuals financial sophistication, including being or having been achief executive officer, chief financial officer, or other senior officer withfinancial oversight responsibilities.

(iii) The Chairman of the Committee shall be an independentdirector;

(iv) The Chairman shall be present at Annual General Meeting toanswer shareholder queries;

(v) The audit committee should invite such of the executives, as itconsiders appropriate (and particularly the head of the finance function) to bepresent at the meetings of the committee, but on occasions it may also meet withoutthe presence of any executives of the company. The finance director, head of internal

audit and when required, a representative of the external auditor shall be present asinvitees for the meetings of the audit committee;(vi) The Company Secretary shall act as the secretary to the committee.

(B) Meeting of Audit CommitteeThe audit committee shall meet at least thrice a year. One meeting

shall be held before finalization of annual accounts and one every six months.The quorum shall be either two members or one third of the members of theaudit committee, whichever is higher and minimum of two independentdirectors.


21/89

(C) Powers of Audit CommitteeThe audit committee shall have powers which should include the

following:1. To investigate any activity within its terms of reference.2. To seek information from any employee.3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if itconsiders necessary.(D) Role of Audit Committee

(i) The role of the audit committee shall include the following:1. Oversight of the companys financial reporting process

and the disclosure of its financial information to ensure that the financialstatement is correct, sufficient and credible.

2. Recommending the appointment and removal of externalauditor, fixation of audit fee and also approval for payment for any otherservices.

3. Reviewing with management the annual financial statementsbefore submission to the board, focusing primarily on;

(a) Any changes in accounting policies and practices.(b) Major accounting entries based on exercise ofjudgment by management.

(c) Qualifications in draft audit report.(d) Significant adjustments arising out of audit.(e) The going concern assumption.(f) Compliance with accounting standards.(g) Compliance with stock exchange and legal requirements

concerning financial statements(h) Any related party transactions

4. Reviewing with the management, external and internalauditors, the adequacy of internal control systems.

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

structure of the internal audit department, staffing and seniority of the officialheading the department, reporting structure coverage and frequency of internalaudit.

6. Discussion with internal auditors any significant findings andfollow up there on.

7. Reviewing the findings of any internal investigations by theinternal auditors into matters where there is suspected fraud or irregularity or afailure of internal control systems of a material nature and reporting the matter tothe board.

8. Discussion with external auditors before the audit commencesabout nature and scope of audit as well as post-audit discussion to ascertain any areaof concern.

9. Reviewing the companys financial and risk management

policies.10. To look into the reasons for substantial defaults in the payment

to the depositors, debenture holders, shareholders (in case of non payment ofdeclared dividends) and creditors.

Explanation (i): The term related party transactions shall havethe same meaning as contained in the Accounting Standard 18, Related Party

Transactions, issued by The Institute of Chartered Accountants of India.Explanation (ii): If the company has set up an audit committee

pursuant to provision of the Companies Act, the company agrees that the


22/89

said audit committee shall have such additional functions / features as iscontained in the Listing Agreement.(E) Review of information by Audit Committee

(i) The Audit Committee shall mandatorily review the followinginformation:

1. Financial statements and draft audit report, including

quarterly / half-yearly financial information;2. Management discussion and analysis of financial condition and

results of operations;3. Reports relating to compliance with laws and to risk

management;4. Management letters / letters of internal control weaknesses

issued by statutory / internal auditors; and5. Records of related party transactions6. The appointment, removal and terms of remuneration of the

Chief internal auditor shall be subject to review by the Audit Committee

III. Audit Reports and Audit QualificationsA. Disclosure of Accounting Treatment

In case it has followed a treatment different from that prescribed in anAccounting Standards, management shall justify why they believe suchalternative treatment is more representative of the underlined businesstransactions. Management shall also clearly explain the alternativeaccounting treatment in the footnote of financial statements.IV. Whistle Blower Policy(A) Internal Policy on access to Audit Committees:

(i) Personnel who observe an unethical or improper practice (notnecessarily a violation of law) shall be able to approach the audit committeewithout necessarily informing their supervisors.

(ii) Companies shall take measures to ensure that this right of access iscommunicated to all employees through means of internal circulars, etc. Theemployment and other personnel policies of the company shall contain provisions

protecting whistle blowers from unfair termination and other unfair or prejudicialemployment practices.

(iii) Company shall annually affirm that it has not denied any personnelaccess to the audit committee of the company (in respect of matters involvingalleged misconduct) and that it has provided protection to whistle blowers fromunfair termination and other unfair or prejudicial employment practices.

(iv) Such affirmation shall form a part of the Board report on CorporateGovernance that is required to be prepared and submitted together with the annualreport.

(v) The appointment, removal and terms of remuneration of the chiefinternal auditor shall be subject to review by the Audit Committee.

V. Subsidiary Companies(i) The company agrees that provisions relating to the composition

of the Board of Directors of the holding company shall be made applicable tothe composition of the Board of Directors of subsidiary companies.

(ii) At least one independent director on the Board of Directors of theholding company shall be a director on the Board of Directors of the subsidiarycompany.

(iii) The Audit Committee of the holding company shall also review thefinancial statements, in particular the investments made by the subsidiary company.

(iv) The minutes of the Board meetings of the subsidiary companyshall be placed for review at the Board meeting of the holding company.


23/89

(v) The Board report of the holding company should state that theyhave reviewed the affairs of the subsidiary company also.VI. Disclosure of contingent liabilities

(i) The company agrees that management shall provide a cleardescription in plain English of each material contingent liability and its risks,which shall be accompanied by the auditors clearly worded comments on the

managements view. This section shall be highlighted in the significantaccounting policies and notes on accounts, as well as, in the auditors report,where necessary.VII. Disclosures(A) Basis of related party transactions

(i) A statement of all transactions with related parties includingtheir basis shall be placed before the Audit Committee for formalapproval/ratification. If any transaction is not on an arms length basis,management shall provide an explanation to the Audit Committee justifyingthe same.(B) Board Disclosures Risk management

(i) It shall put in place procedures to inform Board members about

the risk assessment and minimization procedures. These procedures shall beperiodically reviewed to ensure that executive management controls riskthrough means of a properly defined framework.

(ii) Management shall place a report certified by the complianceofficer of the company, before the entire Board of Directors every quarterdocumenting the business risks faced by the company, measures to addressand minimize such risks, and any limitations to the risk taking capacity of thecorporation. This document shall be formally approved by the Board.(C) Proceeds from Initial Public Offerings (IPOs)

(i) When money is raised through an Initial Public Offering (IPO) itshall disclose to the Audit Committee, the uses / applications of funds bymajor category (capital expenditure, sales and marketing, working capital,etc), on a quarterly basis as a part of their quarterly declaration of financialresults. Further, on an annual basis, the company shall prepare a statementof funds utilized for purposes other than those stated in the offerdocument/prospectus. This statement shall be certified by the independentauditors of the company. The audit committee shall make appropriaterecommendations to the Board to take up steps in this matter.(D) Remuneration of Directors

(a) All pecuniary relationship or transactions of the non-executivedirectors vis-a-vis the company shall be disclosed in the Annual Report.

(ii) Further the following disclosures on the remuneration ofdirectors shall be made in the section on the corporate governance of theannual report.

(a) All elements of remuneration package of all the directors i.e.salary, benefits, bonuses, stock options, pension etc.

(b) Details of fixed component and performance linked incentives, alongwith the performance criteria.

(c) Service contracts, notice period, severance fees.(d) Stock option details, if any and whether issued at a discount as well

as the period over which accrued and over which exercisable.

(E) Management


24/89

(i) As part of the directors report or as an addition there to, aManagement Discussion and Analysis report should form part of the annualreport to the shareholders. This Management Discussion & Analysis shouldinclude discussion on the following matters within the limits set by thecompanys competitive position:

(a) Industry structure and developments.

(b) Opportunities and Threats.(c) Segmentwise or product-wise performance.(d) Outlook.(e) Risks and concerns.(f) Internal control systems and their adequacy.(g) Discussion on financial performance with respect to operational

performance.(h) Material developments in Human Resources / Industrial Relations front,

including number of people employed.

Management shall make disclosures to the board relating to allmaterial financial and commercial transactions, where they have personalinterest, that may have a potential conflict with the interest of the companyat large (for e.g. dealing in company shares, commercial dealings withbodies, which have shareholding of management and their relatives etc.)(F) Shareholders(i) In case of the appointment of a new director or re-appointment of adirector the shareholders must be provided with the following information:

(a) A brief resume of the director;(b) Nature of his expertise in specific functional areas; and(c) Names of companies in which the person also holds the directorship

and the membership of Committees of the board.(ii) Information like quarterly results, presentation made by companies toanalysts shall be put on companys web-site, or shall be sent in such a form so as toenable the stock exchange on which the company is listed to put it on its own web-site.

(iii) A board committee under the chairmanship of a non-executive director shallbe formed to specifically look into the redressal of shareholder and investorscomplaints like transfer of shares, non-receipt of balance sheet, non-receipt ofdeclared dividends etc. This Committee shall be designated asShareholders/Investors Grievance Committee.(iv) To expedite the process of share transfers the board of the company shalldelegate the power of share transfer to an officer or a committee or to the registrarand share transfer agents. The delegated authority shall attend to share transferformalities at least once in a fortnight.

VIII. CEO/CFO certification(i) CEO (either the Executive Chairman or the Managing Director) and theCFO (whole-time Finance Director or other person discharging this function)of the company shall certify that, to the best of their knowledge and belief:

(a) They have reviewed the balance sheet and profit and lossaccount and all its schedules and notes on accounts, as well as the cash flowstatements and the Directors Report;

(b) These statements do not contain any materially untruestatement or omit any material fact nor do they contain statements thatmight be misleading;

(c) These statements together present a true and fair view of thecompany, and are in compliance with the existing accounting standards and / orapplicable laws / regulations;


25/89

(d) They are responsible for establishing and maintaining internal controlsand have evaluated the effectiveness of internal control systems of the company;and they have also disclosed to the auditors and the Audit Committee, deficiencies inthe design or operation of internal controls, if any, and what they have done orpropose to do to rectify these;

(e) They have also disclosed to the auditors as well as the Audit

Committee, instances of significant fraud, if any, that involves management oremployees having a significant role in the companys internal control systems; and(f) They have indicated to the auditors, the Audit Committee and in the

notes on accounts, whether or not there were significant changes in internal controland / or of accounting policies during the year.

IX. Report on Corporate Governance(i) There shall be a separate section on Corporate Governance in theannual reports of company, with a detailed compliance report on CorporateGovernance. Non-compliance of any mandatory requirement i.e. which is partof the listing agreement with reasons thereof and the extent to which thenon-mandatory requirements have been adopted should be specificallyhighlighted. The suggested list of items to be included in this report is givenin Annexure-1B and list of non-mandatory requirements is given in Annexure

1C.(ii) The companies shall submit a quarterly compliance report to the stockexchanges within 15 days from the close of quarter as per the format givenbelow. The report shall be submitted either by the Compliance Officer or theChief Executive Officer of the company after obtaining due approvals.

Format of Quarterly Compliance Report on Corporate GovernanceName of the Company:Quarter ending on:

ParticularsClause of Compliance status Remarks

Listing Agreement (Yes/No/N.A.)1

2 34

I. Board of Directors49 I(A) Composition of Board49 (IA)(B) Non-executive Directors compensation

& disclosures

(IB)(C) Independent Director (IC)(D) Board Procedure

9 (ID)(E) Code of Conduct9 (IE)(F) Term of office of non-executive directors 49 (IF)


26/89

II. Audit Committee9 (II)

(A) Qualified & Independent Audit Committee 9 (IIA)(B) Meeting of Audit Committee 9 (IIB)(C) Powers of Audit Committee 9 (IIC)

(D) Role of Audit CommitteeII(D)(E) Review of Information by Audit Committee 49 (IIE)

III. Audit Reports and Audit Qualifications 49 (III)IV. Whistle Blower Policy 49 (IV)

V. Subsidiary Companies

49 (V)VI. Disclosure of contingent liabilities 49 (VI)

VII. Disclosures

49 (VII)

(A) Basis of related party transactions (II A)(B) Board Disclosures(VIIB)(C) Proceeds from Initial Public offerings 49

(VIIC)(D) Remuneration of Directors 49

(VIID)(E) Management(VIIE)(F) Shareholders49 (VIIF)

VIII.CEO/CFO Certification 49(VIII)IX. Report on Corporate Governance 49 (IX)

X. Compliance

49 (X)

Note:(1) The details under each head shall be provided to incorporate all theinformation required as per the provisions of the clause 49 of the ListingAgreement.(2) In the column No.3, compliance or non-compliance may be indicatedby Yes/No/N.A.. For example, if the Board has been composed in accordancewith the clause 49 I of the Listing Agreement, Yes may be indicated.Similarly, in case the company has not come out with an IPO, the words

N.A. may be indicated against 49 (VIIC).(3) In the remarks column, reasons for non-compliance may be indicated,for example, in case of requirement related to circulation of information tothe shareholders, which would be done only in the AGM/EGM, it might beindicated in the Remarks column as will be complied with at the AGM.Similarly, in respect of matters which can be complied with only where thesituation arises, for example, Report on Corporate Governance is to be a


27/89

part of Annual Report only, the words will be complied in the next AnnualReport may be indicated.X. Compliance

The company shall obtain a certificate from either the auditors orpracticing company secretaries regarding compliance of conditions ofcorporate governance as stipulated in this clause and annex the certificate

with the directors report, which is sent annually to all the shareholders of thecompany. The same certificate shall also be sent to the Stock Exchangesalong with the annual returns filed by the company.

Schedule of implementation(1) The provisions of the revised clause 49 shall be implemented as

per the schedule of implementation given below:(i) By all entities seeking listing for the first time, at the time

of listing.(ii) By all companies which were required to comply with the

requirement of the erstwhile clause 49 i.e. all listed entities having a paid upshare capital of Rs 3 crores and above or net worth of Rs 25 crores or more atany time in the history of the entity. These entities shall be required to

comply with the requirement of this clause on or before March 31, 2004.(2) The non-mandatory requirement given in Annexure 1C shall be

implemented as per the discretion of the company. However, the disclosuresof the adoption/non-adoption of the non-mandatory requirements shall bemade in the section on corporate governance of the Annual Report.Annexure 1A

Information to be placed before Board of Directors1. Annual operating plans and budgets and any updates.2. Capital budgets and any updates.3. Quarterly results for the company and its operating divisions or

business segments.4. Minutes of meetings of audit committee and other committees

of the board.5. The information on recruitment and remuneration of senior

officers just below the board level, including appointment or removal of ChiefFinancial Officer and the Company Secretary.

6. Show cause, demand, prosecution notices and penalty noticeswhich are materially important.

7. Fatal or serious accidents, dangerous occurrences, any materialeffluent or pollution problems.

8. Any material default in financial obligations to and by thecompany, or substantial non-payment for goods sold by the company.

9. Any issue, which involves possible public or product liabilityclaims of substantial nature, including any judgement or order which, mayhave passed strictures on the conduct of the company or taken an adverseview regarding another enterprise that can have negative implications on thecompany.

10. Details of any joint venture or collaboration agreement.11. Transactions that involve substantial payment towards goodwill,

brand equity, or intellectual property.12. Significant labour problems and their proposed solutions. Any

significant development in Human Resources/ Industrial Relations front like


28/89

signing of wage agreement, implementation of Voluntary Retirement Schemeetc.

13. Sale of material nature, of investments, subsidiaries, assets,which is not in normal course of business.

14. Quarterly details of foreign exchange exposures and the stepstaken by management to limit the risks of adverse exchange rate movement,

if material.15. Non-compliance of any regulatory, statutory nature or listing

requirements and shareholders service such as non-payment of dividend,delay in share transfer etc.Annexure 1B

Suggested List of Items to Be Included In the Report on CorporateGovernance in the Annual Report of Companies1. A brief statement on companys philosophy on code of governance.2. Board of Directors:

(i) Composition and category of directors, for example, promoter,executive, non- executive, independent non-executive, nominee director,which institution represented as lender or as equity investor.

(ii) Attendance of each director at the BoD meetings and the lastAGM.

(iii) Number of other BoDs or Board Committees in which he/she is amember or Chairperson.

(iv) Number of BoD meetings held, dates on which held.3. Audit Committee.

(i) Brief description of terms of reference(ii) Composition, name of members and Chairperson(iii) Meetings and attendance during the year

4. Remuneration Committee.(i) Brief description of terms of reference(ii) Composition, name of members and Chairperson

(iii) Attendance during the year(iv) Remuneration policy(v) Details of remuneration to all the directors, as per format in

main report.5. Shareholders Committee.

(i) Name of non-executive director heading the committee(ii) Name and designation of compliance officer(iii) Number of shareholders complaints received so far(iv) Number not solved to the satisfaction of shareholders(v) Number of pending complaints

6. General Body meetings.(i) Location and time, where last three AGMs held.(ii) Whether any special resolutions passed in the previous 3 AGMs(iii) Whether any special resolution passed last year through postal

ballot details of voting pattern(iv) Person who conducted the postal ballot exercise(v) Whether any special resolution is proposed to be conducted

through postal ballot(vi) Procedure for postal ballot

7. Disclosures.


29/89

(i) Disclosures on materially significant related party transactionsthat may have potential conflict with the interests of company at large.

(ii) Disclosure of accounting treatment, if different, from thatprescribed in Accounting standards with explanation.

(iii) Details of non-compliance by the company, penalties, stricturesimposed on the company by Stock Exchange or SEBI or any statutory

authority, on any matter related to capital markets, during the last threeyears.

(iv) Whistle Blower policy and affirmation that no personnel hasbeen denied access to the audit committee.8. Means of communication.

(i) Half-yearly report sent to each household of shareholders.(ii) Quarterly results(iii) Newspapers wherein results normally published(iv) Any website, where displayed(v) Whether it also displays official news releases; and(vi) The presentations made to institutional investors or to the

analysts.

(vii) Whether MD&A is a part of annual report or not.9. General Shareholder information

(i) AGM : Date, time and venue(ii) Financial Calendar(iii) Date of Book closure(iv) Dividend Payment Date(v) Listing on Stock Exchanges(vi) Stock Code(vii) Market Price Data : High., Low during each month in last

financial year(viii) Performance in comparison to broad-based indices such as BSE

Sensex, CRISIL index etc.(ix) Registrar and Transfer Agents(x) Share Transfer System(xi) Distribution of shareholding(xii) Dematerialization of shares and liquidity(xiii) Outstanding GDRs/ADRs/Warrants or any Convertible

instruments, conversion date and likely impact on equity(xiv) Plant Locations(xv) Address for correspondence

Annexure 1C

Non-Mandatory Requirements1. Chairman of the Board

A non-executive Chairman should be entitled to maintain a Chairmansoffice at the companys expense and also allowed reimbursement ofexpenses incurred in performance of his duties.2. Remuneration Committee

(i) The board should set up a remuneration committee todetermine on their behalf and on behalf of the shareholders with agreedterms of reference, the companys policy on specific remuneration packagesfor executive directors including pension rights and any compensationpayment.


30/89

(ii) To avoid conflicts of interest, the remuneration committee,which would determine the remuneration packages of the executive directorsshould comprise of at least three directors, all of whom should be non-executive directors, the chairman of committee being an independentdirector.

(iii) All the members of the remuneration committee should be

present at the meeting.(iv) The Chairman of the remuneration committee should be present

at the Annual General Meeting, to answer the shareholder queries. However,it would be up to the Chairman to decide who should answer the queries.3. Shareholder Rights

The half-yearly declaration of financial performance including summaryof the significant events in last six-months, should be sent to each householdof shareholders.4. Postal Ballot

Currently, though there is requirement for holding the general meetingof shareholders, in actual practice only a small fraction of the shareholders ofthat company do or can really participate therein. This virtually makes the

concept of corporate democracy illusory. It is imperative that this situationwhich has lasted too long needs an early correction. In this context, forshareholders who are unable to attend the meetings, there should be arequirement which will enable them to vote by postal ballot for key decisions.Some of the critical matters which should be decided by postal ballot aregiven below:

(i) Matters relating to alteration in the memorandum of associationof the company like changes in name, objects, address of registered officeetc;

(ii) Sale of whole or substantially the whole of the undertaking;(a) Sale of investments in the companies, where the

shareholding or the voting rights of the company exceeds 25%;(b) Making a further issue of shares through preferential allotment

or private placement basis;(c) Corporate restructuring;(d) Entering a new business area not germane to the existing

business of the company;(e) Variation in rights attached to class of securities;(f) Matters relating to change in management.

5. Audit qualificationsCompany may move towards a regime of unqualified financial

statements.6. Training of Board Members

Company shall train its Board members in the business model of the

company as well as the risk profile of the business parameters of thecompany, their responsibilities as directors, and the best ways to dischargethem.7. Mechanism for evaluating non-executive Board Members

The performance evaluation of non-executive directors should be doneby a peer group comprising the entire Board of Directors, excluding thedirector being evaluated; and Peer Group evaluation should be themechanism to determine whether to extend/ continue the terms ofappointment of non-executive directors.


31/89

New Frontiers for Corporate Governance

Although institutional investors play a major role in our public equity markets, far less is knownabout the governance of those investor entities than about investee corporations. These

investors are critical to individuals, equity markets, publicly held companies, the economy and to the troubling (and conceptually difficult) issue of good versus bad short-termism ininvestor and investee behavior. Put simply, the fundamental issue is whether institutionalinvestors are part of the problem or part of the solution within the current state of marketcapitalism. By institutional investors we mean, at a minimum, pension funds, mutual funds,insurance companies, hedge funds and endowments of non-profit entities like universities andfoundations. Recent developments in public policy treat shareholders (primarily institutionalinvestors) as part of the solution. The Dodd-Frank Act in the United States and theStewardship Code in the United Kingdom, for instance, essentially place big bets thatinstitutions can and will police the market with new powers and responsibilities. While this is a

worthy objective, it rests on unexamined and unsophisticated assumptions.

In a new paper,Are Institutional Investors Part of the Problem or Part of the

Solution?, we attempt to outline major descriptive and prescriptive issues relating to theseinstitutional investors (the paper is available from Yales Millstein Center here, and from theCommittee for Economic Development here). We call for much greater intellectual and

institutional effort in addressing these vital but under-analyzed questions. Set out below is theessence of our argument for much more sophisticated analysis of the governance ofinstitutional investors based on development of much more robust data bases about thecritical elements of investor governance and performance.

Over the last twenty years, institutional investors have owned an increasing share of publicequity markets more than 70 percent of the largest 1,000 companies in the United States in2009, for example. Over the past two years, in response to failures of some boards of directorsand business leaders, shareholders, including institutional investors, have been givenincreased powers to participate in or have disclosures about discrete spheres of

governance in publicly held corporations. Moreover, during this same period, and in multiplejurisdictions, there have been increasing calls from both the public and private sectors forinstitutional investors to play a broad stewardship role by engaging with investee compa-

nies to help achieve long-term sustainable value and to help curb the excessive risk takingseen as a factor in the financial crisis.

But with these shifts in market and legal powers have come questions about institutionalinvestors which are similar to those raised in the recent past about the corporations in whichthey invest. These questions relate to goals, strategies, governance, performance andaccountability and, importantly, the separation of ownership and control (i.e. agencyproblems). They boil down to a bedrock query: do investors have the capacity to perform therole now expected of them?
http://millstein.som.yale.edu/sites/millstein.som.yale.edu/files/80235_CED_WEB.pdfhttp://millstein.som.yale.edu/sites/millstein.som.yale.edu/files/80235_CED_WEB.pdfhttp://www.ced.org/images/files/80235_CED_WEB.pdfhttp://millstein.som.yale.edu/sites/millstein.som.yale.edu/files/80235_CED_WEB.pdfhttp://www.ced.org/images/files/80235_CED_WEB.pdf


32/89

Policymakers who championed the transfer of enhanced powers to investors went well beyondavailable knowledge in crafting such a response to the financial crisis. This leap of faith isperhaps understandable in light of the severity of the 2008 market seizures and the politicalpressures that arose in their wake. But there is no mistaking that the approach represents, ineffect, a big bet that investor institutions can and will exercise their new rights responsibly,

and that such behavior will make markets more sustainable, less prone to error, and more insync with the interests of capital providers.

Moves to

Corporate Governance Project 25.09.2013

Documents

Transcript of Corporate Governance Project 25.09.2013