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Adrian Cadbury Committee Report (1992)

Genesis of corporate governance lies in business scams and failures in the late 1980s and the early 1990s Thus Cadbury committee was set up in the UK in May 1991 Committee chaired by Sir Adrian Cadbury was formed by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession to address the financial aspects of Corporate Governance
Final Report was published on 1st December, 1992.

Contents segregated into 3 parts:

1. Reviewing the structure and responsibilities of boards of Directors and recommending a Code of Best Practice 2. Considering the roles of auditors and addressing a number of recommendations to the accountancy profession: and, 3. Dealing with the rights and responsibilities of shareholders

Further the code of best practice is divided into 4 sections:


1. Concerning the role of BOD, duties of a board and its composition 2. Dealing with the role of outside non-executive directors 3. Concerning executive directors and their remuneration 4. Addressing questions of financial reporting and controls

Major recommendations defining a code of best practice for companies:


1. All listed companies should comply with the code. The stock exchange should require the Annual Report of all listed companies to include a statement about the extent of compliance. In case of non compliance board to provide reasons. 2. Favored separation of the offices of chairman and chief executive to prevent excessive concentration of power in boardrooms.

3. Promoted the power and influence of non-executive directors who should be independent and of high calibre. 4. 3.Non-executive directors should be in a majority on the nomination committee which is responsible for making recommendations for board membership to ensure that candidates are judged on their merits and not according to their standing with the chief executive. 5. Companies should set up audit committees whose membership should be confined to non-executive directors. 6. Remuneration committees- mainly non-executive directors- recommend remuneration of executive directors in all its forms. 7. Total emoluments of the chairman and highest paid directors should be disclosed in the companys annual report, including break-up between salary and performance related pay. 8. True & fair financial reporting-responsibility of the board 9. The committee recognized that there exists a conflict of interests between auditors appointed by managers and their responsibility for the interests of shareholders. Thus it calls for a professional and objective relationship between the BOD and the auditors, and also provide the auditors direct access to the non-executive directors of the board 10. It called for a professional and objective relationship between the boards and auditors 11. Encouraged institutional investors to make greater use of their voting rights and take active interest in the board functioning.

Kumar Manglam Birla Committee Report (2000)


Set up by SEBI Most recommendations were accepted Included by SEBI in its new clause 49 of the Listing Agreement in 2000. Main Recommendations 1. Optimum combination of exec and non-exec Directors

2. Non-executive chairman : one-third of board should be independent directors 3. Executive chairman : Half of the board independent 4. Independent directors are those 5. Independent directors are those who apart from Directors remuneration, do not have any material relationship or transaction with the company 6. A director should not be a member in more than 10 committees or act as chairman of more than 5 committees across all cos. Of which he is a director.

Annual Report- Section on CG-Disclosures 1. All elements of remuneration package of all directors, i.e. salary, benefits, bonus, stock options, pension, etc. 2. Details of fixed component & performance linked incentives along with performance criteria 3. Service contracts, notice period, severance fees 4. Stock option details if any, and whether issued at a discount as well as the period over which accrued and exercisable Appointment of new Director, shareholders must have: 1. Brief resume of the director 2. Nature of experience functional area 3. Names of companies where he holds directorship and membership of committees of the board 4. Board meetings should be held at least 4 times a year, with a maximum gap of 4 months between any two meetings Audit Committee The audit committee should meet at least thrice a year. Quorum:2 or one third

Minimum 2 independent directors Powers of Audit committee 1. Investigate any activity within its terms of reference 2. Seek information from employees 3. Obtain outside legal/professional advice 4. Secure attendance of outsiders with relevant expertise Remuneration Committee Committee on redressal of shareholder complaints- transfer of shares, non-receipt of balance sheet, declared dividends, etc. All shareholders of a company should be given right to vote on critical matters through a postal ballot system

Critical matters could include:

1. Alterations, if any in the memorandum of association such as changes in name, objects, address of registered office, etc. 2. Sale of whole or part of undertaking 3. Sale of investments in the cos., where the shareholding or voting rights exceeds 25% 4. Further issue of shares through preferential allotment or private placement basis 5. 5 Corporate restructuring 6. Entering a new business area A management discussion and analysis report should include following matters: 1. Industry structure and developments 2. Opportunities and threats 3. Segment or product wise performance

4. Risks and concerns 5. Internal control systems 6. Financial performance vs. operational performance 7. Developments on HR/ IR front including no. of people employed. Half-Yearly declaration of financial performance including summary of the significant events in last 6 months should be sent to each household of shareholders. Co. should arrange to obtain a certificate from the auditors regarding compliance of mandatory recommendations. This should be sent to the stock exchanges along with annual reports filed by the co. Should be a separate section on CG in the annual reports of cos., with a detailed compliance report on CG Non compliance of any mandatory recommendation with reasons Extent to which non mandatory recommendations have been adopted should be specifically highlighted.

CORPORATE EXCELLENCE

Good Corporate Governance

Bad Governance is being recognized as root cause of corrupt practices Corporations are expected to provide good governance to benefit all stakeholders Directors and management, urged by stakeholders and inspired by societal values, have an important role to play Obligation to Investors Towards shareholders Informed shareholder participation

Transparency Financial Reporting and Records Good Corporate Governance Obligation to Employees Fair employment Practices Equal Opportunities Employer Encouraging Whistle Blowing Humane Treatment Empowerment Equitable treatment and Inclusiveness Participative and Collaborative Environment Good Corporate Governance Obligation to Customers Quality of Products & Services Products at Affordable Prices Commitment to Customer Satisfaction Good Corporate Governance Managerial Obligation Protecting Company Assets Behavior towards Government Agencies Control Consensus Oriented Gifts and Donations Good Corporate Governance

Distinction between Direction and Management Managing Directors and Whole-Time Directors Corporate Excellence According to a survey on Corporate Excellence carried out by Credit Lyonnais, three Indian cos.- Infosys, HLL and Wipro are amongst Asias top 10 corporations in terms of good governance practices. Also, ICICI, Cummins India, HDFC, Ranbaxy, Dr. Reddys Lab,Orchid chemicals and many Tata group cos. Share this honour. Initiatives of the Deptt. Of Company Affairs In May 2000, a group of leading industrialists, professionals and academics were invited to study and recommend measures to enhance corporate excellence in India. Examined the subject of Corporate Excellence through sound Corporate Governance Recommendations of the Task Force Greater role and Influence for non-executive, independent Directors Stringent punishment for EDs for failing to comply with listing and other requirements Limitation on the nature of and no. of directorship of managing and whole time directors Proper disclosure to the shareholders and investing community Interested shareholders to abstain from voting on specified matters More meaningful and transparent accounting and reporting Tougher listing and compliance regimen through a centralized National Listing authority Code of public behavior for PSUs Corporate Excellence

The Award for excellence in Corporate Governance, instituted in 1999, by the Ministry of Finance under the DCA is sponsored by DLF (formerly by Unit Trust of India). ICSI National Award for Excellence in Corporate Governance2010 Presented to Dr. Reddys Laboratories Limited and Larsen & Toubro Limited

Corporate Governance-Conceptual Issues


Five Key Issues Structures and Processes for Corporate Governance CG issues in M&A

Ethics in Governance practices in corporates CSR and Corporate Governance Environmental Issues and Corporate Governance

Structures and Processes Worldwide, it has been recognized that along with the board of directors, the other participants viz. shareholders including institutional investors or large shareholders, other stakeholders, banks and auditors, etc. do have significant roles in the governance structures and their commitments in the processes of corporate governance.

Directors-Board of Directors (BOD) Main responsibility of governing a company Directors are appointed by shareholders

Board appoints one or more of them as MD/ whole time directors/ executive directors to be approved by the shareholders.

Directors-Board of Directors (BOD)

Roles of board and shareholders is interactive Quality of governance depends upon the interface Directors required to achieve balance between competing interests of shareholders, customers, lenders, promoters and directors.

Principal issues involved in respect of Board composition

Proportion of directors-internal vs. external Size, structure and style of the board, and Age of the Board members Board of Directors The Board does not operate as a hierarchy. The members must work together as equals. Each member bears the same duties and responsibilities in law irrespective of their positions as executive, non-executive, independent or nominee. Board of Directors

Four types of structures prevail: All-executive board Majority executive board Majority outside board Two-tier supervisory board

Four types of structures prevail : 1. All-executive board:

There is really no separation between ownership and management as the management is dominated by the owners or promoters of the business. Before Corporate Governance came into prominence, most boards in UK and India were all-executive boards.

2. Majority executive board : Non-executive members are appointed in small numbers, say two or three in the board. There is a danger of domination of board affairs by executive members but they may find it difficult to exercise genuine independence of opinion, when their boss, the CEO, is also a Board member. E.g. Boards in the UK and India.

3. Majority outside board : Where non-executive directors form the majority, particularly the independent majority Can emphasize checks and balances Close supervision of management performance E.g. USA and Australia

The reliance on independent outside directors in the unitary board to provide a separation of function and check on management has been reflected much in the corporate world in the growing use of audit committee, nomination committee and remuneration committee of the main board. 4. Two-tier supervisory board Ultimate separation of executive management from non-executive direction. Most of Continental European countries, especially Germany are examples. In Germany, the Supervisory Board (Aufsichsrat) has no common membership with the Executive Board (Vorstand)

4. Two-tier supervisory board

Role of supervisory board is to oversee the plans and performance of the management board. Primary power lies in the ability to hire and fire the chief executive. Members of Supervisory board represent Labor and Capital in equal numbers, with the employees appointing labor members and shareholders their representatives. Japanese Boards

Made up of almost entirely internal, all executive directors. Essentially hierarchical Culture-Consensus Lengthy discussions involving roots of the organization Negotiation, rethinking and influencing

Board Size 1. Varies: 2-3 upto 20 2. Explained by Company size (sales volume) 3. Locally regulated 4. Need to access different markets 5. Board size of large Indian companies in Automobile, Banking, Petroleum & Natural Gas, cement, textile, Iron& steel, Telecom, and diversified cos is generally broad-based (11-16) 6. Boards of almost all IT and Pharmaceutical companies is small (4-9) Board Style Board style varies, depending upon Board expectations and Leadership Result of Power base and role of the board Also function of the companys history, culture, value and belief system Norms in the industry

Depends on the boards commitment to effective decision making and the concern for interpersonal relations. Board style may be categorized as :

(a) Rubber stamp board (b) Representative Board (c) Country club (d) Professional Corporate Governance Key Issues Duality Issue 1. Whether the post of Chairman should be combined with the CEO 2. Vested in one person or both the positions should be separated in the interest of the organization 3. In India, 54% of Listed companies have Chairman/CMDs at the helm of affairs as Executive Chairman/CMD 4. The remaining 46% companies do have non-executive chairmen in their boards and are run by the MD/ CEO. 5. It also shows that position of Chairman and CEO/MD has been segregated in majority of private sector companies 6. In PSUs, due to Government Policy the Chairman-CEO duality remains 7. Non-Duality is not a good indicator of independence, because the boards can still be effectively controlled by the management or minority owners even without the existence of duality Board Committees Corporate failures in the past, have led to emphasize the need for increasing the effectiveness of the board through the use of the Board Committees Audit Committee

1. 2. 3. 4. 5. 6.

Formally set up by the Board Consists of Independent Board members Report to the Board Acts as a link between the Board and outside auditors Members discuss the scope of the Audit Explore matters raised by auditors regarding management systems and controls. 7. Involved in resolving any disagreements that might occur on the form and content of published financial accounts. 8. Also recommendations need to be made on audit fees and/or reappointment or change of auditors. 9. Existence of a strong, independent audit committee avoids any possibility of domination by top executive management of the boards links with auditors. Remuneration Committee Good governance largely exercised through the remuneration committee, which needs to be and seen to be independent and professional. Independent members trends in other industries and companies Important role have an appropriate reward policy to attract, retain and motivate directors to achieve long term goals Members need to be sensitive to wider community concerns. Essential that : Committee is seen to be, independent with access to its own external advice Clear policy on remuneration well understood, has support of the shareholders Performance packages are aligned with long-term shareholder interests and have challenging targets; and Reporting is clear, concise and gives the reader of the annual report a birds eye view of payment policy and the rationale behind them. Nomination Committee Outside independent directors Usually chaired by the company chairman The vehicle by which new non-executive directors are brought for selection Discuss and agree upon the brief, choose search firms, agree upon the short list and interview final candidates

1.

2. 3. 4. 5. 6. 7. 8.

1. 2. 3. 4.

5. It is a fact that often appointments are made more from within the circle of the chairman to offer him support, especially in difficult times.

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