Corporate Governance

ASSIGNMENT 1
Question1: What is a code of good Corporate Governance? Do you consider it can
serve any useful purpose in improving governance? Support you answer with exampl
es?
Answer 1 In A Board Culture of Corporate Governance, business author Gabrielle
O'Donovan defines corporate governance as 'an internal system encompassing polic
ies, processes and people, which serves the needs of shareholders and other stak
eholders, by directing and controlling management activities with good business
savvy, objectivity, accountability and integrity. Sound corporate governance is
reliant on external marketplace commitment and legislation, plus a healthy board
culture which safeguards policies and processes. O'Donovan goes on to say that
'the perceived quality of a company's corporate governance can influence its sha
re price as well as the cost of raising capital. Quality is determined by the fi
nancial markets, legislation and other external market forces plus how policies
and processes are implemented and how people are led. External forces are, to a
large extent, outside the circle of control of any board. The internal environme
nt is quite a different matter, and offers companies the opportunity to differen
tiate from competitors through their board culture. To date, too much of corpora
te governance debate has centred on legislative policy, to deter fraudulent acti
vities and transparency policy which misleads executives to treat the symptoms a
nd not the cause.' It is a system of structuring, operating and controlling a co
mpany with a view to achieve long term strategic goals to satisfy shareholders,
creditors, employees, customers and suppliers, and complying with the legal and
regulatory requirements, apart from meeting environmental and local community ne
eds. Report of SEBI committee (India) on Corporate Governance defines corporate
governance as the acceptance by management of the inalienable rights of sharehol
ders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical busi
ness conduct and about making a distinction between personal & corporate funds i
n the management of a company. The definition is drawn from the Gandhian principl
e of trusteeship and the Directive Principles of the Indian Constitution. Corpor
ate Governance is viewed as business ethics and a moral duty. See also Corporate
Social Entrepreneurship regarding employees who are driven by their sense of in
tegrity (moral conscience) and duty to society. This notion stems from tradition
al philosophical ideas of virtue (or self governance)
and represents a "bottom-up" approach to corporate governance (agency) which sup
ports the more obvious "top-down" (systems and processes, i.e. structural) persp
ective.
Q2. Chairman of the BOD has a pivotal role in the performance of BOD, Do you agr
ee? Support your answer with reasons and example.?
Ans 2.While each company will have its own needs and criteria for the selection
of a Chairman, it is generally viewed that it is proper to separate the role of
the Chairman from the CEO in the interest of providing checks and balances. Whil
e the board will be finally responsible for setting up strategy the initiator wi
ll normally be the CEO. The Chairman however, is the leader of the board and the
refore, must set the. Standards required from the board colleagues. The Chairman
is also the link between the board and the Shareholders, he or she needs to be
satisfied with the corporate reporting to them. This will include the interim an
d annual results, the annual report, the AGM and the periodic reports on special
occasions such as during takeovers. Reporting of results to analysts and instit
utions is also an important event where the Chairman's presence an involvement i
s expected. Chairman is the most vital appointment in the Corporate Governance.
It is difficult to identify any common practice for evaluation of his performanc
e. It is common knowledge that Boards in India, in general, function rather pass
ively. However, the importance of the role of the Boards has begun to be appreci
ated. A great responsibility lies on the chairman of the BOD's to galvanize the
members for a significant contribution.

Q3. What are the three major committees of the Board? Discuss their role and use
fulness?
Ans3. Committees of the Board.
I) Audit Committee:-
A committee for providing checks against the executive with the ability to revi
ew objectively the progress made where improvements to control or system have be
en agreed. Functions:- i. Review fully the interim and final accounts. ii. Keep
the board fully informed of the quality of the financial reporting and many area
s of disagreements with the auditors. iii. Settle disputes between the managemen
t and external auditors. iv. Establish that the audit fee is appropriate and tha
t the auditors' work plan is adequate.
2) Remuneration Committee:-
The main role of this committee is to have an appropriate reward polity that can
attract, retain and motive directors to achieve the long term goals of the comp
any. Committee members will need to be sensitive to wider community concerns. Fu
nctions: i. The committee is and is seen to be, independent with access to its o
wn external advice. ii. It has a clear policy on remuneration that is well under
stood and has support of the shareholders. Iii. Performance packages are aligned
with shareholders interests in mind. iv. Reporting is clear, concise and gives
the reader of the annual report a bird's eye view of policy payments and the rat
ionale behind them.
3) Nomination Committee:
This is the third important Committee of the Board of Directors'. It is through
this committee that the new non-executive directors are brought for selection. 1
. This committee is usually chaired by the Chairman himself. 2. They select the
Non-Executive Directors'. 3. Usually they will discuss and agree the brief, choo
se the-search firms, agree the shortlist and interview the final candidates. How
ever, this practice is changing. Financial institutions and more active sharehol
ders are beginning to exert their views rather than just rubber- stamping anew a
ppointment in the next AGM.
Q.No 4 The concept of the Chairman cum Managing Director in Public Sector Undert
akings has been in vogue for quite some time. This defeats the purpose of Chairm
an of Board for Directors exercising checks and balances on the performance of M
anaging Director / Chief Executive.
Ans 4. The chairman is the highest office of an organized group such as a board,
committee, or deliberative assembly. The person holding the office is typically
elected or appointed by the members of the group. The chairman presides over me
etings of the assembled group and conducts its business in an orderly fashion. W
hen the group is not in session, the officer's duties often include acting as it
s head, its representative to the outside world and its spokesperson.

A Chairman is selected by a company's board to lead the board of directors, pre
side over meetings, and lead the board to consensus from the disparate points of
view of its members. The chairman is the presiding director over the other dire
ctors on the board and is expected to be fair, a good listener, and a good commu
nicator. In public companies, the role of the chairman of the board is distinct
from that of the company's CEO or managing director. This point has more recentl
y been brought into focus after corporate governance shortcomings were observed
in companies where the two roles are combined. It is believed that the separatio
n of functions within the board of directors or in the structure of the supervis
ory board and management board would facilitate control over the workings of the
company and increase the accountability of the CEO or chairman of the managemen
t board. In an attempt to inject transparency into the relationship between exec
utive management and the board of directors as well as between management and th
e market or shareholders, the UK Cadbury Report was published in 1992. Its recom
mendations have been adopted to a greater or lesser extent by some countries wit
hin the European Union and the United States, as well as by the World Bank.
Chairman of the Board types:
In the case of companies and similarly-organized bodies, there are generally two
types of chairmen, non-executive and executive.
Non-executive
A non-executive Chairman of the Board is and does the following:
A part-time officeholder who sits on and chairs the main board of a company
Provides support and advice to a CEO
This position usually entails fulfilling a similar function on a number of addit
ional board committees, as well as being a political figurehead of the Company.
Executive:
An executive Chairman of the Board is and does the following:
A full-time officeholder who typically leads the board and also takes a hands-o
n role in the company's day-to-day management.

Helps the CEO to oversee all the operational aspects involved in running the com
pany, which include project planning and development delivery, retail and leasin
g, sales, market research and many other areas within their extensive scope. Has
overall responsibility for the company which involves engineering and controlli
ng the company's current growth in and future expansion into international marke
ts. In addition, oversees all projects' development activities and related busin
esses of the company, with the intention of generating financial returns for the
shareholders and driving sustainable development. The chairman often sets the s
tyle of leadership of the board which in turn filters down through the organizat
ion.
Q No. 5 Write short notes on any three of the following:
a) Legal aspects and liabilities of directors.
b) The Cadbury Code of best practices.
C) Corporate social Responsibility
d) CIIs Recommendation on Corporate governance
e )Sexual Harassment in work place
a) Legal Aspects and Liablites of Directors
Ans) Companies Act 1956 make the directors liable for the following amongst oth
er things
Contravention of the law-:
Failure to refund the subscription money to investors Misrepresentation in offer
documents and annual accounts
Duties of directors-:
Attend all board meetings - devote sufficient time and pay attention for conduct
ing the affairs of the company in the best interest of the stakeholders Ensure a
nd protect the interest of the creditors of the company At all times maintain th
e confidentiality of matter discussed at the board meeting Ensure that the compa
nys assets are not wasted and spent for useful purpose Exercise utmost care and d
iligence in discharging the functions in the capacity of directors
Never be negligent and not to commit or let others commit tort-liable acts Never
misuse the power vested upon the director Not to use/exercise the powers given
for a collateral purpose Never ever make secret profits and make good loss - whe
ther due to breach of duty or of negligence. Act always in the best interest of
the company and as well its shareholders, customers and other stakeholders of th
e company
THE ROLE OF THE CHAIRMAN:
The chairman manages the activities of the board and ensures that the effective
functioning of the board ensuring the adherence of the formulated polices and pl
ans and its actual performance by putting them in practice by the executive mana
gement. The chairman works very closely with the company secretary to ensure the
legal compliance and ensure the regulatory requirements to avoid any noncomplia
nce and bring a good corporate governance practices in the company. The chairman
needs to be a good business man understanding the language of the business, the
market in which the company is, what the product and services are offered by th
e company, its future prospects in the national and international perspective ke
eping the long term view in mind for taking the company to the higher level of p
erformance. The chairman needs to ensure that the internal needs of the board an
d its code is observed and he has to also deal with varied levels in the organiz
ation such as executive, non executive directors, senior management, outside exp
erts, internal and statutory auditors, employees, stakeholders mainly shareholde
rs. The chairman needs to have an excellent working relationship with the CEO of
the company who puts the plan into reality. Very good inter personal relationsh
ip with all levels is required to be maintained by the chairman. An excellent ch
airman would be in a position to take the company to its phenomenal growth and m
ake the company a very successful one.
b) The Cadbury Code of best practices
The Cadbury Code of Best practices had 19 recommendations. The recommendations a
re in the nature of guidelines relating to Board of Directors, Non-executive Dir
ectors, Executive Directors and those on Reporting and Control.

Relating to the Board of Directors these are:

The Board should meet regularly retain full and effective control over the compan
y and monitor the executive management There should be a clearly accepted divisio
n of responsibilities at the head of a company, which will ensure balance of pow
er and authority, such that no individual has unfettered powers of decision. In
companies where the Chairman is

also the Chief Executive, it is essential that there should be a strong and inde
pendent element on the Board, with a recognized senior member. The Board should i
nclude non-executive Directors of sufficient caliber and number for their views
to carry significant weight in the Boards decisions. The Board should have a forma
l schedule of matters specifically reserved to it for decisions to ensure that t
he direction and control of the company is firmly in its hands. There should be a
n agreed procedure for Directors in the furtherance of their duties to take inde
pendent professional advice if necessary, at the companys expense. All directors s
hould have access to the advice and services of the Company Secretary, who is re
sponsible to the Board for ensuring that Board procedures are followed and that
applicable rules and regulations are complied with. Any question of the removal
of Company Secretary should be a matter for the Board as a whole.

Relating to the Non-Executive Directors the recommendations are:

Non-executive Directors should bring an independent judgement to bear on issues o
f strategy, performance, resources, including key appointments, and standards of
conduct. The majority should be independent of the management and free from any
business or other relationship, which could materially interfere with the exerci
se of their independent judgement, apart form their fees and shareholding. Their
fees should reflect the time, which they commit to the company. Non-executive Di
rectors should be appointed for specified terms and reappointment should not be
automatic. Non-executive Directors should be selected through a formal process an
d both, this process and their appointment, should be a matter for the Board as
a whole.

For the Executive Directors the recommendations in the Cadbury Code of Best Prac
tices are:

Directors service contracts should not exceed three years without shareholders appr
oval There should be full and clear disclosure of their total emoluments and thos
e of the Chairman and the highest-paid UK Directors, including pension contribut
ions and stock options. Separate figures should be given for salary and performa
nce-related elements and the basis on which performance is measured should be ex
plained. Executive Directors pay should be subject to the recommendations of a Rem
uneration Committee made up wholly or mainly of Non-executive Directors.

And on Reporting and Controls the Cadbury Code of Best Practices stipulate that:


It is the Boards duty to present a balanced and understandable assessment of the c
ompanys position. The Board should ensure that an objective and professional relat
ionship is maintained with the Auditors. The Board should establish an Audit Comm
ittee of at least three Non-executive Directors with written terms of reference,
which deal clearly with its authority and duties. The Directors should explain t
heir responsibility for preparing the accounts next to a statement by the Audito
rs about their reporting responsibilities. The Directors should report on the eff
ectiveness of the companys system of internal control The Directors should report
that the business is a going concern, with supporting assumptions or qualificati
ons as necessary.
C) Sexual Harassment in work place: