Corporate Governance An overview By Ranganath Khanolkar

May 2008

Corporate Governance - Introduction

Corporate Governance is a process or set of systems and processes to ensure that the company is managed to suit the interest of all concerned. Its essence lies in promoting and maintaining integrity, transparency and accountability in the higher echelons of management, with an increasingly greater focus on investor protection and public interest. Compliance vs. Governance.

May 2008

Corporate Governance Some more definitions

Corporate Governance is the acceptance by the management of the inalienable rights of shareholders as the true owners of the corporation & their own role as trustees on behalf of the shareholders. - N R Narayan Murthy Corporate Governance is about promoting corporate fairness, transparency and accountability. - John Wolfensen Fmr. President World Bank

May 2008

Corporate Governance - Objectives

The core objectives of Corporate Governance philosophy are:

Equitable Treatment Disclosure and Transparency Accountability Stakeholder benefit

May 2008

Corporate Governance Scope

Board procedures & Committees.

Code of Ethics.

Reporting & Controls

Scope of Corporate Governance

Accountability & Audit. Remuneration policy

Disclosures & Approvals

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Corporate Governance Participants

Management

Board of Directors

Shareholders
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Regulators ROC, SEBI, RBI, SEs, etc.

Other Stakeholders Creditors, FIs, Customers, society

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Corporate Governance Pre-reform era

Was there no corporate Governance?
- Companies Act, 1956.

Section 56 : Matters to be stated in the prospectus. Section 297, 299, 301- Related party disclosures. Section 166: Annual General Meeting. Section 193: Maintenance of minutes Books. Section 198, 269, 309: Managerial Remuneration. Section 314 : Office or place of profit. Section 210 & Schedule VI; Balance Sheet. Section 212: Subsidiary Companies. Section 217 Directors Report. Section 252, 255, 256: Composition of Directors. Section 397, 398: Prevention of Oppression and Mismanagement.

- Securities Contract Regulation Act, 1957, FERA, 1973, MRTP 1969, etc.

May 2008

Corporate Governance Why this hype now??

Economic liberalization and deregulation of industry and business. Demand for greater accountability of companies to their shareholders and customers. The 1997 economic and financial crisis in Asian countries. Enron debacle of 2001, Worldcom and other economic scandals. Enron Alleged into off-the-book partnership and innovative financial structures to hide debt and improperly inflate earnings Corporate frauds and allegations of document shredding Market cap down from $80 billion to $268 million WorldCom Overstated EBIDTA by over $3.8 billion and booked $7 billion in expenses as capital expenditures SEC is examining whether it used questionable methods to book sales, classify assets and account debts Market cap down from $115 billion in 2000 to < $1 billion
May 2008

Corporate Governance Evolution

Efforts to formulate standards for corporate governance initiated in countries in US & UK. Some of them were: Sir Adrian Cadbury Committee in Financial Aspects of Corporate Governance. (1992) OECD principles of Corporate Governance (1999). Blue ribbon Committee on improving the effectiveness of corporate Audit Committees.(1999) Euro shareholders Corporate Governance Guidelines. Enactment of Sarbanes-Oxley Law.(2002)

May 2008

Corporate Governance Developments in India

1996 CII sets up a National Task force under Chairmanship of Rahul Bajaj. 1997 - CII Task Force announced draft code. 1998 CII code came into existence. 2000 - SEBI accepts the recommendation of Kumarmangalam Birla committee. 2002- Nareshchandra committee was formed 2003 - SEBI constituted a committee under Chairmanship of Narayan Murthy. 2004 SEBI accepts revised recommendation of Narayan Murthy Committee

May 2008

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Corporate Governance Clause 49

Clause 49 is the 49th Clause in the Listing Agreement, recommended by SEBI & which every listed company has to enter with the Stock Exchanges. Clause 49 mandates 4 major compliance areas. Board and Audit committee

Code of conduct & Disclosures

Certifications

Risk Management
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Corporate Governance Clause 49

Board of Directors Composition NEDs Compensation & Disclosure No. of Board meetings No. of Committee Positions Audit Committee Composition No of meetings Quorum Powers & Roles Review Subsidiary Company At least 1 independent director of Listed Holding Co. Review of financial statements Minutes be placed before Listed Holding Co.
May 2008

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Corporate Governance Clause 49

Disclosures Basis of related party transactions Accounting Treatment Proceeds from public, rights issues, etc. Remuneration Management Shareholders Code of conduct

May 2008

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Corporate Governance Clause 49

CEO / CFO Certifications - Financial statements and cash Flow do not contain any materially untrue statement or omits any material fact or contains misleading statements. Financial statements present a true and fair view and are in compliance with AS. No fraudulent, illegal and violative transactions have been entered into. Accept responsibility for establishing internal controls Appropriate disclosures have been made to Audit Committee. Compliance Certificate from PCS / PCA.

May 2008

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Corporate Governance Risk Management

The company to lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Periodic legal compliance review.

May 2008

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Corporate Governance A Myth ???

Regular Board meeting and Attendance Fortunes 2001 list of most admired companies reveals no difference in attendance records of Board members of most and least admired companies. Equity involvement of Directors Board members of Enron held impressive amounts of equity. Financial literacy of Audit Committee members Enron has most well-known financial competencies and experience on Board. Presence of independent non-executive Directors: Enron, U.S. Airways had fairly large majority of independent Directors.

May 2008

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Corporate Governance A Myth ???

Rules, procedures, composition of committees are supposed to produce effective boards Good and Bad companies both have these things. Size of the Board- Companies having small Boards have done equally well as against those with big Boards. Redundancy of disclosures Shareholders hardly read the entire Annual Report. Loose drafting in Clause 49. Wide gap between prescription and practice. Family-owned structures, shareholders, directors, management are the same group.

May 2008

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Open House

May 2008

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