Corporate

Governance
 What is Corporate
Governance

It is a means to maximize long term

shareholder value in a legal and
ethical manner ensuring fairness,
courtesy and dignity in all
transactions of the Company.
 What is Corporate
Governance
 It refers to the guideline, procedures,
rules for decision making.
 It suggests how to monitor the
performance.
 It has to do with power and
accountability; who exercises power,
on behalf of whom and how the
exercise of power is controlled
 The Need for Corporate
Governance
 Poor Governance can harm national
economic performance.
 Poor disclosures and audit procedures
result in deteriorating financial
conditions of the Corporations.
 Poor governance undermines the
confidence in the markets and hold the
financial system hostage.
 Factors behind the Origin
of Corporate Governance
 In the era of globalization, foreign
investors have become very careful about
investing their money.
 Kumar Mangalam Birla Committee Report
appointed by SEBI has formulated some
guidelines.
 Increasing active rate of investigative
reporting in business journalism.
 Mergers and acquisitions taking place at a
fast pace.
 Important issues of
Corporate Governance
 Social responsibility
 Multiple, divergent expectations of
the shareholders.
 Fair Business deals
 Prevention of corruption
 The CEO as a Corporate
Governor
 Good public governance is about
putting public good over private good
and being a good corporate citizen.
 Corporate governance translates into
fairness, transparency, raising the
trust and confidence in shareholders
and understanding societal
responsibility.
 Corporate Governance in
India

 Private Sector

 Public Sector
 Private Sector- categories
of shareholders
 Promoter director – Called as a functional
director and belongs from the promoter
group.
 Professional director - Category of
directors who are invited by the promoter
group on the basis of competence and
favourable personal equation.
 Institutionally nominated – These positions
are fulfilled by senior activities or person of
good reputation.
 Public Sector – categories
of directors
 Functional directors – Full time
employees of the PSUs.
 Govt. directors – They are the
bureaucrats from different controlling
administrative ministry.
 Outside directors
 Distinction between
management and control
Management Control

-Initiation ( proposals for Ratification ( proposals

managing the resources ofdeveloped in the initiation
the firms are developed) stage are evaluated, if
suitable, approved)

Implementation Monitoring ( Assessment

( execution of approved of executive’s
proposals) performance and
implementation of proper
reward system)
 Active role of Institutional
Investors

 Give a direct voice in governance

 Need to improve their own

governance
 Expand the role of non –
executive directors
CII has recommended the following :
 NED’ s should occupy at least 30% of the
board seats.
 There must be a limit on the number of
Boards on which a person cans serve.
 An audit committee, having at least three
non-executive directors must be set and
given access to all the information.
 All the NED ‘s must be compensated well for
their time and efforts
 Proper and Timely
Information to the Board
 Ensure that the Board is well
equipped with information.

 Information should be available on

long term plans, budgets,
competitive developments, quarterly
results etc.,
 Size of the Board

 Optimum size of the Board (10-12)

 Bigger boards would be less effective

as there will be a problem of
coordination.
 Improve Accounting and
reporting Practices
 Business line reporting
 Group accounting
 EPS reporting
 Factors in Corporate
governance
 Transparency in decision making
 Accountability which follows from
transparency because responsibility
could be fixed easily for actions taken
or not taken
 Accountability is for safeguarding the
interests of the stakeholders and the
investors in the organization
Pre requisites for corporate
governance
 Commitment of the management for
the principle of integrity and
transparency in business operations.
 Legal and administrative framework
created by the government.
 Need for corporate
governance in India

 Financial scams
 Legal and administrative framework
in India provides for excellent scope
for current practices.
 Specific steps to improve
corporate governance
 Abolition of the Sick Industries
Companies Act (SICA) and BIFR.
 Banking Secrecy Act – Reveal those who
are wilful defaulters.
 Benami Transactions Prohibition Act and
Prevention of Money Laundering Act
 The Power of Ethical
Management
 Is the decision you are taking legal? If it is
not legal, it is not ethical.
 Is the decision you ar taking fair? It should
be a win-win situation for both the parties
entering into an agreement or if it is a
general policy or a multi – level agreement,
there should be equal risk and reward to all
concerned.
 Eleventh Commandment test – If the
decision you are taking is such that if it is
known in the public through media, will you
feel ashamed? If you are feeling ashamed
then it is not an ethical decision.
 Conclusion
 Corporate governance is the net result of the
individual sense of values, the values held in
society or part of a society like professional
bodies or business associations and finally
the system of public governance. If those who
violate the norms are effectively punished
then there is a fear and there will be
adherence of the principles of corporate
governance.
 Kumaramangalam Birla
Committee recommendations:
Three Constituents
 Shareholders
 the Board of Directors
 the Management
 Applicability of
recommendations
 Mandatory
 Non mandatory
 Mandatory
recommendations
 absolutely essential for the
framework of corporate governance
and virtually form its core
 which can be enforced through the
amendment of the listing agreement
 Applicability
 applicable to the listed companies, their directors, management,
employees and professionals associated with such companies,
 The ultimate responsibility for putting the recommendations into
practice lies directly with the board of directors and the
management of the company.
 recommendations will apply to all the listed private and public sector
companies, in accordance with the schedule of implementation. As
for listed entities, which are not companies, but body corporates (e.g.
private and public sector banks, financial institutions, insurance
companies etc.) incorporated under other statutes, the
recommendations will apply to the extent that they do not violate
their respective statutes, and guidelines or directives issued by the
relevant regulatory authorities.
 Board Of directors
 The Board of a Company provides leadership and
strategic guidance, objective judgement
independent of the management to the Company
and exercises control over the Company.
 The Board must fulfils its legal requirements and
also must be aware and understanding of its
responsibilities.
 An effective corporate governance system is one,
which allows the Board to perform these dual
functions efficiently
 Functions of the Board Of
directors
 Directs the Company by formulating and
reviewing the Company’s policies.
 Controls the Company and its management
by laying down the code of conduct.
 Is accountable to the shareholders for
creating, protecting and enhancing wealth
and resources of the Company.
 Is not involved in day to day management of
the Company.
 Composition of the Board Of
directors
 Executive directors are involved in the day
to day management of the Companies
 Non executive directors bring external and
wider perspective and independence to the
decision making.
 Non executive directors may be
independent or non-independent.
 Independent directors
 Receive director’s remuneration
 Do not have any other material
pecuniary relationship or
transactions with the Company, its
promoters, its management etc.,
 Emphasis on the calibre of the non
executive directors.
 Mandatory
Recommendations
 Optimum combination of executive
and non-executive directors with not
less than 50% of the board
comprising the non executive
directors.
 At least one third of the board should
comprise of independent directors
 Nominee Directors
 Institutions should appoint nominees
on the board of Companies only on a
selective basis where such
appointment is considered necessary
to protect the interest of the
Institution
 Chairman of the Board
 The role of the Chairman is to ensure
that the board meetings are
conducted in an effective manner.
 The Chairman’s role should in
principle be different from that of the
Chief Executive.
 Non mandatory
recommendation
 A non executive Chairman should be
entitled to maintain a Chairman’s
Office at the Company's expense and
also allowed reimbursement of
expenses incurred in the
performance of his duties.
 Audit Committee
 Oversight of the finance function and
monitoring
 Relies on the senior financial
management and the outside
auditors.
 Mandatory
recommendation
 A qualifies and independent audit
committee should be set up by the
board of a Company. This would go a
long way in enhancing the credibility
of the financial disclosures of a
Company and promoting
transparency
 Composition of the Audit
Committee
 Minimum of 3 members ( non executive directors,
majority being independent and with at least one
director having financial and accounting knowledge)
 The chairman of the committee should be an
independent director.
 The Chairman should be present at AGM to answer
shareholder queries.
 The Company Secretary should act as the Secretary
to the Committee
( the above are mandatory recommendations)
Frequency of meetings and
quorum of the Audit
committee
 Meet at least thrice a year
 One meeting before finalization and
one every 6 months
 Quorum should be either 2 members or
1/3rd of the members of the audit
committee whichever is higher and
there should be a minimum of two
independent directors.
( this is a mandatory recommendation
 Powers of the Audit
Committee
 To investigate any activity within its
terms of reference
 To seek information from any employee

 To obtain outside legal or other

professional advice
 To secure services of outsiders with
relevant expertise
( this is a mandatory recommendation)
 Remuneration
 The Board of Directors should decide the
remuneration of the non-executive directors
 The annual report must contain :
- all elements of the remuneration
package of all the directors
- Details of fixed component and
performance linked incentives
- Service contracts, notice period,
severance fees
- Stock option details, if any

( this is a mandatory recommendation)

 Board procedures
 The Board meetings should be held at least 4
times in a year with a maximum time gap of 4
months between any two meetings.
 A director should not be a member in more than
10 committees or act as a Chairman of more than
5 committees across all companies in which he is
a director.
 Every director must inform the Company about the
Committee positions he occupies in other
Companies and notify changes as and when they
take place.
 Management
 Management is responsible for ensuring that
the principles of corporate governance are
adhered to and enforced.
 Disclosures must be made by the
management to the Board relating to all
material financial and commercial
transactions, where they have personal
interest that may have potential conflict with
the interest of the Company at large
( this is a mandatory recommendation)
 Shareholders
 The GBM provide an opportunity to
the shareholders to address their
concerns to the Board of Directors
and comment on and demand any
explanation on the Annual report or
on the overall functioning of the
Company.
 Responsibilities of
Shareholders
 Show a greater degree of interest
and involvement in the appointment
of directors and the auditors.
 Inform themselves about the new
directors.
 Shareholders’ rights
 Right to transfer and registration of shares.
 Obtaining relevant information on the Company on a
timely and regular basis
 Participating and voting in shareholder meetings
 Electing members of the Board
 Right to information on takeovers, sale of assets or
divisions of the Company and changes in the Capital
structure.
 Half yearly declaration of financial performance
including summary of significant events in the last 6
months should be sent to each household of
shareholders.
( these are mandatory recommendations)
 Shareholders rights
 A board committee under the
chairmanship of a non-executive
director should be formed to
specifically look into the redressal of
shareholder complaints like transfer
of shares, non-receipt of balance
sheet, non receipt of declared
dividends etc.,
( this is a mandatory recommendation)
 Institutional
Shareholders
 Have acquired large stakes in the
equity share capital of listed
companies . They have a bigger role
to play in corporate governance as
retail investors look upon them for
positive use of their voting rights.
 Conclusion
 Corporate governance must ensure
commitment of the Boar in managing
the Company in a transparent
manner for maximising long term
shareholder value.