Towards an inquiry into corporate governance research
1TOWARDS AN INQUIRY INTOCORPORATE GOVERNANCERESEARCHPROFESSOR JAYASHREE SADRIANDDR SORAB SADRI
2BASIS This presentation is based on the researchconducted by Dr Sorab Sadri (2000-2005), DrSunita Sharma (2003-2006) and Dr SharukhTara (2005-2008), which has been later usedby several other doctoral scholars like Prof. JOke. It may be used as a guide to furtherscholarship.
3Objective of the research: To understand the policies and practices ofCorporate Governance and classify theliterature to provide an overview of the principalfindings of prior research. To suggest a corporate governance “medley”among the actors and institutions that affectcorporate governance interactions thatencompasses a broader view of governancethan has been considered in prior research. To design and develop an instrument to assessCorporate Governance in selected industries inthe Indian Financial Sector.
4Objective of the research: (Contd.) To establish the relationship betweenCorporate Governance and BusinessSustainability upon studying shareholderownership, transparency and disclosure, andmanagement performance. To test for reliability and validity of the House ofCorporate Governance model in selectedindustries in the Indian Financial Sector. To identify important gaps in the research thatrepresent promising avenues for future study.
5GLOBAL INITIATIVES TO IMPOSECORPORATE GOVERNANCE SIR ADRIAN CADBURY COMMITTEE – to address theissues related to corporate governance in the U.K. CORPORATE GOVERNANCE REPORT OF SINGAPOREGOVERNMENT SARBANES-OXLEY ACT, 2002 BY THE AMERICANCONGRESS which came into effect in July 2002 – toaddress all the issues associated with corporate failuresto achieve quality governance and to restore investors’confidence…Background of the proposedresearch:
6Background of the research:Williams (1996) identified four models ofcorporate control: 1. The Simple Finance Model; 2. The Stewardship Model; 3. The Stakeholder Model; and 4. The Political Model.
7Alternative Patterns of Separation of Ownership &Management Anglo-Saxon: Founder/entrepreneur Professionalmanager Exit: sell-out European: Founder/entrepreneur Heirs + professionalmanagement Retain ownership Asian/EM: Heirs Maintain ownershipBackground of the research:
81. Shareholder rights2. Equitable treatment of shareholders3. Role of shareholders4. Disclosure and transparency5. Responsibilities of the boardResearch Background
91. CII Report2. Kumarmangalam Birla Committee Report3. Clause 49 Requirements4. Naresh Chandra Committee5. Narayan Murthy ReportCurrent state of Corporate Governance inIndia:
10IMPLEMENTATION OF CORPORATEGOVERNANCE IN INDIA KUMAR MANGALAM COMMITTEE – constituted in May1999 to promote and raise the standard of corporategovernance in IndiaMANDATORY RECOMMENDATIONS OF BIRLACOMMITTEE: Applies to listed companies with paid-up capital Rs.3crores or more. Composition of Board of Directors – optimumcombination of executive & non-executive directors Audit Committee – with 3 independent directors withone having financial and accounting knowledge.
11MANDATORY RECOMMENDATIONSOF BIRLA COMMITTEE Remuneration Committee Board Procedures – At least 4 meetings of the board in a yearwith maximum gap of 4 months between 2 meetings. toreview operational plans, capital budgets, quarterly results,minutes of committee’s meeting. Director shall not be a member of more than 10 committeeand shall not act as chairman of more than 5 committeesacross all companies. Management discussion and analysis report coveringindustry structure, opportunities, threats, risks, outlook,internal control system Information sharing with shareholders
12 ROLE OF CHAIRMAN REMUNERATION COMMITTEE OF BOARD SHAREHOLDERS’ RIGHT FOR RECEIVING HALF YEARLYFINANCIAL PERFORMANCE POSTAL BALLOT COVERING CRITICAL MATTERS LIKEALTERATION IN MEMORANDUM ETC SALE OF WHOLE OR SUBSTANTIAL PART OF THEUNDERTAKING CORPORATE RESTRUCTURING FURTHER ISSUE OF CAPITAL VENTURING INTO NEW BUSINESSESNON-MANDATORYRECOMMENDATIONSOF BIRLA COMMITTEE
13IMPLEMENTATION OFRECOMMENDATIONS OF THEBIRLA COMMITTEE By introduction of Clause 49 in the listing agreement withstock exchanges the following Provisions were introduced. Composition of Board - In case of full time chairman, 50%non-executive directors and 50% executive directors Constitution of audit committee – With 3 independentdirectors with chairman having sound financialbackground. finance director and internal audit head to bespecial invitees and minimum 3 meetings to be convened.It should be responsible for review of financial performance0n half yearly/annually basis; appointment/removal/remuneration of auditors; review of internalcontrol systems and its adequacy.
14 Remuneration of Directors – Remuneration of non-executive directors to be decided by the board.details of remuneration package, stock options,performance incentives of directors to bedisclosed Board Procedures – At least 4 meetings in a year.director not to be member of more than 10committees and chairman of more than 5committees across all companies: CLAUSE 49 REQUIREMENTS
15In addition, under Clause 49Management discussion & Analysisreport – should include: (a) industrystructure & developments (b)opportunities & threats (c) segmentwise or product wise performance
16RECENT DEVELOPMENTS COMMITTEE HEADED BY SHRI NARESH CHANDRACONSTITUTED IN AUGUST 2002 TO EXAMINE CORPORATEAUDIT, ROLE OF AUDITORS, RELATIONSHIP OF COMPANY &AUDITOR RECOMMENDATION OF NARESH CHANDRA COMMITTEE: RECOMMENDED A LIST OF DISQUALIFICATIONS FOR AUDITASSIGNMENTS LIKE DIRECT RELATIONSHIP WITHCOMPANY, ANY BUSINESS RELATIONSHIP WITH CLIENT,PERSONAL RELATIONSHIP WITH DIRECTOR AUDIT FIRMS NOT TO PROVIDE SERVICES SUCH ASACCOUNTING, INTERNAL AUDIT ASSIGNMENTS ETC. TOAUDIT CLIENTS AUDITOR TO DISCLOSE CONTINGENT LIABILITIES &HIGHLIGHT SIGNIFICANT ACCOUNTING POLICIES
17RECENT DEVELOPMENTS RECOMMENDATION OF NARESH CHANDRA COMMITTEE: AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FORAPPOINTMENT OF AUDITORS CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS,CORRECTNESS OF ANNUAL AUDITED ACCOUNTS REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOTHAVE ANY MATERIAL, PECUNIARY RELATIONSHIP ORTRANSACTION WITH THE COMPANY COMPOSITION OF BOARD OF DIRECTORS STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVEDIRECTORS TO BE REVIEWED RECOMMENDATIONS HAVE FORMED PART OF COMPANIES(AMENDMENT) BILL, 2003
18 SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R.NARAYANA MURTHY TO REVIEW EXISTING CODE OF CORPORATEGOVERNANCE RECOMMENDATIONS: STRENGHTENING THE RESPONSIBILITIES OF AUDIT COMMITTEE IMPROVING QUALITY OF FINANCIAL DISCLOSURES UTILISATION OF PROCEEDS FROM IPO TO ASSESS & DISCLOSE BUSINESS RISKS FORMAL CODE OF CONDUCT FOR BOARD WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANYPROVIDING FREEDOM TO APPROACH THE AUDIT COMMITTEE SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OFHOLDING COMPANYRECENT DEVELOPMENTS
19CORPORATE GOVERNANCE - ULTIMATEOBJECTIVETO ATTAIN HIGHEST STANDARD OFPROCEDURES AND PRACTICES FOLLOWEDBY THE CORPORATE WORLD SO AS TOHAVE TRANSPARENCY IN ITSFUNCTIONING WITH AN ULTIMATE AIM TOMAXIMISE THE VALUE OF VARIOUSSTAKEHOLDERS.
20Redefining Corporate Governance Processes and Structure by whichbusiness and affairs of corporatesector is directed and managed…
21Criteria for Good Governance Ownership Rights of Shareholder (C1) Transparency & Disclosure (C2) Performance of the Management (C3) Effectiveness of Board of Directors (C4) Equitable Treatment of Stake Holders (C5) Leadership, Ethics and Culture (C6)
22HENCE Any meaningful research into corporategovernance must follow the above route. This involves: (administering questionnaires,conducting, conducting focused interviewsand remembering all the time that data isimportant) Never forget that correlation does not implycausation