Corporate Governance

At its broadest, corporate governance encompasses the framework of rules, relationships, systems and processes within and by which fiduciary authority is exercised and controlled in corporations. Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board (when such entity exists), regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority, performance measures, assurance mechanisms, reporting requirements and accountabilities. In this way, the corporate governance structure spells out the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. Issues of fiduciary duty and accountability are often discussed within the framework of corporate governance.

KUMAR MANGALAM BIRLA COMMITTEE The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. The number of independent directors (independence being as defined in the foregoing paragraph) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of board should comprise of independent directors and in case a company has an executive chairman, at least half of board should be independent. Independent directors are directors who apart from receiving directors remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement. Further, all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report.

 Executive Compensation How top executives of business corporations are paid. Salary is taxable to an individual at a high individual rate. If part of that income can be converted to capital gain, for example by granting stock options to executives, a more advantageous tax treatment may be obtained. In a typical modern US corporation, the CEO and other top executives are paid with a mixture of cash and shares of the company which are almost always subject to vesting restrictions. The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Vesting can be based on time, performance or both. For example a highly paid CEO would get 1 million in cash, and 1 million in company shares (and share buy options used).

 Other components of an executive compensation package may include: i) Salary ii) Bonus iii) Perquisites (or "perks") and other personal benefits iv) Stock v) Stock options vi) Perks such as generous retirement plans, a dental plan, a chauffeured limousine, an executive jet interest free loans for the purchase of Housing etc.

 Executive Pay: It Paid to Cheat - Maya Roney, 05.09.05

Some companies that used heavy doses of performance-based pay to compensate their chief executives have also been involved in accounting scandals. Here are three egregious examples. a) Computer Associates: Chief Executive Charles B. Wang was the number one earner on FORBES' list in 2000 for pulling in a total of $650 million--of which all but $1 million was performance-based pay. The software company had seemingly performed well; its stock price doubled in the preceding four years. But accounting problems related to deferred revenue began to surface, and Wang was booted from the chief's post in 2000. In 2004 the company announced it would restate revenue $2.2 billion lower for 2000 and 2001. b) Qwest Communications Intl: Chief Executive Joseph P. Nacchio had the telecom industry's second-fattest pay in fiscal year 2001, totaling $101.9 million--including a long-term incentive plan payment of

$24.4 million based on an increase in the value of Qwest. But in June 2002 Nacchio was forced to resign as the SEC investigated the firm for accounting irregularities that would soon lead to a charge of financial fraud. The company later restated revenue $2.49 billion lower for 2000 and 2001 and has lost money the past three years. c) Tyco International: Chief Executive Dennis Kozlowski used acquisitions to turn Tyco, once a sleepy conglomerate, into a growth company. Earnings and stock price soared. Kozlowski was well rewarded, getting $77 million in restricted stock from 1999 through 2001, based in part on the growth in pretax earnings and operating cash flow he delivered. Except that those earnings were manipulated in the company's treatment of acquisitions, and Tyco's earnings and stock price collapsed in an accounting scandal during 2001. The company subsequently restated prior 2001 earnings lower by $507 million. (We said that Computer Associates restated revenue $2.2 billion lower. The restatement shifted revenues from year to year but did not lower them overall. -The Editors)

Insider Trading is buying or selling of a security by someone who has access to material, nonpublic information about the security. An "insider" is any person who possesses at least one of the following: A) access to valuable non-public information about a corporation (this makes a company's directors and high-level executives insiders) B) ownership of stock that equals more than 10% of a firm's equity C) common misconception is that all insider trading is illegal, but there are actually two methods by which insider trading can occur. One is legal, and the other is illegal.

Legal Insider Trading: An insider is legally permitted to buy and sell shares of the firm - and any subsidiaries - that employ him or her. However, these transactions must be properly registered with the Securities and Exchange Commission (SEC) and are done with advance filings.

 Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors.

Illegal Insider Trading: The more infamous form of insider trading is the illegal use of undisclosed material, information for profit. This can be done by anyone, including company executives, their friends and relatives, or just a regular person on the street, as long as the information is not publicly known. For example, suppose the CEO of a publicly-traded firm inadvertently discloses his/her company's quarterly earnings while getting a haircut. If the hairdresser takes this information and trades on it, that is considered illegal insider trading, and the SEC may take action. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as brokers and even family members can be guilty.