What is corporate governance? The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies -- customers, employees, investors, vendors and the society-at-large. The raison dêtre of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year. - N R Narayana Murthy
Investor: This organisation seems to be beneficial… OrganizationNo CG Management: It’s in my control… (hehehehe)
Investor: This organisation seems to be beneficial… OrganizationCG: Audits Stakeand checks holders: I’m happy with company’s transparecy..
Fundamental Objective of CorporateGovernance Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse Also, unlike most OECD countries, the initiative in India was initially driven by an industry association, the Confederation of Indian Industry ◦ In December 1995, CII set up a task force to design a voluntary code of corporate governance ◦ The final draft of this code was widely circulated in 1997 ◦ In April 1998, the code was released. It was called Desirable Corporate Governance: A Code ◦ Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others
Corporate Governance in practice in India The Ministry of Company Affairs, set up National Foundation for Corporate Governance (NFCG) in partnership with CII, ICSI and ICAI The NFCG has the following Vision and Mission VISION: Be a catalyst in making India the best in Corporate Governance practices MISSION:• To foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders• To make significant difference to Indian corporate sector by raising the standard of Corporate Governance towards achieving stability and growth The NFCG focuses on the following areas• Creating awareness on the importance of implementing good CG practices both at the level of individual corporations and for the economy as a whole. The foundation would provide a platform for quality discussions and debates among academicians, policy makers, professionals and corporate leaders through workshops, conferences, meetings and seminars• Encouraging research capability in area of CG in the country and providing key inputs in developing laws and regulations, which meet the twin objectives of maximizing wealth creation and fair distribution of this wealth.
Corporate Governance in practice in India(Contd)• Working with regulatory authorities at multiple levels to improve implementation and enforcement of various laws related to CG• In close co-ordination with the private sector, work to instill a commitment to CG reforms to facilitate the development of a CG culture• Setting up ‘National Centers for Corporate Governance’ across the country, which would provide quality training to Directors as well as produce quality research and aim to receive global recognition.
CII Code recommendations (1997) For A listed company with turnover exceeding Rs 100 crores, if the chairman is also the MD, at least half of the board should be independent directors, else at least 30%. No single person should hold directorships in more than 10 listed companies. Directors should be paid a commission not exceeding 1% (3%) of net profits for a company with (out) an MD over and above sitting fees. Stock options may be considered too. Attendance record of directors should be made explicit at the time of re-appointment. Those with less than 50% attendance shouldn’t be re-appointed. Audit Committee: Listed companies with turnover over Rs. 100 crores or paid-up capital of Rs. 20 crores should have an audit committee of at least three members, all non-executive, competent and willing to work more than other non-executive directors, with clear terms of reference and access to all financial information in the company and should periodically interact with statutory auditors and internal auditors and assist the board in corporate accounting and reporting. Reduction in number of nominee directors. FIs should withdraw nominee directors from companies with individual FI shareholding below 5% or total FI holding below 10%.
Birla Committee (SEBI) recommendations (2000) At least 50% non-executive members. For a company with an executive Chairman, at least half of the board should be independent directors, else at least one-third. Non-executive Chairman should have an office and be paid for job related expenses. Maximum of 10 directorships and 5 chairmanships per person. Audit Committee: A board must have a qualified and independent audit committee, of minimum 3 members, all non-executive, majority and chair independent with at least one having financial and accounting knowledge. Its chairman should attend AGM to answer shareholder queries. The committee should confer with key executives as necessary and the company secretary should be he secretary of the committee. The committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six months with the quorum being the higher of two members or one-third of members with at least two independent directors. It should have access to information from any employee and can investigate any matter within its TOR, can seek outside legal/professional service as well as secure attendance of outside experts in meetings. It should act as the bridge between the board, statutory auditors and internal auditors with arranging powers and responsibilities. Remuneration Committee: The remuneration committee should decide remuneration packages for executive directors. It should have at least 3 directors, all Nonexecutive and be chaired by an independent director. The board should decide on the remuneration of non-executive directors and all remuneration information should be disclosed in annual report. At least 4 board meetings a year with a maximum gap of 4 months between any 2 meetings. Minimum information available to boards stipulated.
Narayana Murthy committee (SEBI) recommendations (2003) Training of board members suggested. There shall be no nominee directors. All directors to be elected by shareholders with same responsibilities and accountabilities. Non-executive director compensation to be fixed by board and ratified by shareholders and reported. Stock options should be vested at least a year after their retirement. Independent directors should be treated the same way as non- executive directors. The board should be informed every quarter of business risk and risk management strategies. Boards of subsidiaries should follow similar composition rules as that of parent and should have at least one independent directors of the parent company. The Board report of a parent company should have access to minutes of board meeting in subsidiaries and should affirm reviewing its affairs. Performance evaluation of non-executive directors by all his fellow Board members should inform a re-appointment decision. While independent and non-executive directors should enjoy some protection from civil and criminal litigation, they may be held responsible of the legal compliance in the company’s affairs. Code of conduct for Board members and senior management and annual affirmation of compliance to it.
SEBI constituted a committee on CG under the chairmanship of N.R. Narayana Murthy whose report was presented on 8th February 2003The issue discussed by the committee (2003) presented are related to Audit committee Audit report Independent directors Related parties Risk management Directorship and director’s compensation Codes of conduct Financial disclosureThis report has also set out the recommendations of Naresh Chandra Committee (2003) on corporate audit and governance set up by Department of Company Affairs. These relate to Contingent liabilities CEO / CFO certification Definition of independent directors Independence of audit committee Exemption of independent directors from civil and criminal liabilities under certain circumstances.
J.J. Irani Report on Company Law, dated 31stMay 2005 Management and Board Governance Board of Directors Minimum and Maximum number of Directors Manner of appointment, removal and resignation of Directors Age limit of Directors Independent Directors > The concept and numbers of independent Directors Definition of independent Directors / Attributes of Independent Directors Mode of Appointment of Independent Directors ‘Material’ Transactions Numbers of Directorships and Alternate Directors Directors Remuneration Sitting fees to Non-Executive Directors Disclosure of Remuneration Remuneration of Non- Executive Directors Board Committees Audit Committee for Accounting and Financial Matters Shareholders ‘ Relationship Committee Remuneration Committee Duties and responsibilities of Directors Disqualification of Directors
J.J. Irani Report on Company Law, dated 31st May 2005 (Contd.) Vacation of offices by Directors Resignation by Directors Liabilities of Independent and Non- Executive Directors Knowledge Test Directors and Officers (D&O) Insurance Rights of Independent / Non- Executive Directors Meetings of Directors – Related Matters Quorum for emergency meetings Matters to be discussed at a Board Meeting Restrictions of Board’s Powers Meetings of Members Demand for Poll Other recommendations– Higher deposit amount for notice regarding nominating / appointing a Director Options of buy-back for shareholders of de-listed companies Corporate Structure Key Managerial Personnel Interested Shareholders General Related Party Transactions Director’s duty to disclose interest Certain transactions, in which directors are interested, subject to approval
Introduction of CG - Clause 49 in the Listing Agreement issued via circulars dated 21st February, 9th March and 12th Sept 2000 and 22nd January, 16th March and 31st December 2001Revision of Clause 49 listing agreement with effect from01.04.20051. Board of Directors a) Composition of Board b) Non- Executive Director’s compensation and disclosure c) Other provision to as to Board and Committees d) Code of conduct2. Audit committee a) Qualified and independent audit committee b) Meeting of audit committee c) Powers of audit committee d) Role of audit committee e) Review of information by audit committee3. Subsidiary companies4. Disclosures a) Basis of related party transactions b) Disclosure of accounting treatment c) Board disclosure – Risk management d) Proceeds form public issues, right issues. Preferential issues etc e) Remunerations of directors f) Management g) Shareholders
Some Cases of Corporate Governance in Indian History
Raja headed the Telecommunications and IT Ministry. CAG holds Raja personally responsible for the sale of 2G spectrum at 2001 rates in 2008. The 2G spectrum financial scandal, amounting to around 200 crore (US$39.9 million) of lost income for the Government of India. In 2011, TIME magazine listed the 2G spectrum scam, in which Raja was allegedly involved, as number two on their “Top 10 Abuses of Power” list.Former Telecom Minister: Andimuthu Raja
The biggest corporate scam in India has come from one of the most respected businessmen. Satyam founder Byrraju Ramalinga Raju resigned as its chairman after admitting to cooking up the account books. His efforts to fill the "fictitious assets with real ones“. Through Maytas acquisition failed, after which he decided to confess the crime. With a fraud involving about Rs 8,000 crore (Rs 80 billion)Satyam founder Byrraju Ramalinga Raju
H e was known as the Big Bull. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. However, his bull run did not last too long. Taking advantages of the loopholes in the banking system, Harshad and his associates triggered a securities scam diverting funds to the tune of Rs 4000 crore (Rs 40 billion) from the banks to stockbrokers between April 1991 to May 1992.HARSHAD MEHTA : THE SCAMSTER
Ketan Parekh followed Harshad Mehtas footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.Ketan Parekh
ICSI National Award for Excellencein Corporate GovernanceBest Governed Companies