Corporate Governance. Historical perspective The concept of governance is as old as human civilization Manu Dharma Shastra Kautilya’s Arthashastra – 3.

Corporate Governance

Historical perspective

• The concept of governance is as old as human civilization

• Manu Dharma Shastra

• Kautilya’s Arthashastra – 3rd Century BC

• Government of India – Satyameva Jayate

• M K Gandhi – My experiments with truth

The Western World

• West started feeling the need of corporate governance as corporate misdemeanors increased

• Cadbury Committee

• The King Committee

• Hampel Committee

• Sarbarnes Oxley Act

Recent US business failures

INVESTORCONFIDENCE

Collapsed Business Model

Fraud

Fraud: Expense Recognition Failure

Fraud: Revenue Recognition Failure

Revenue Recognition Confusion

Questionable Accelerated Revenue Recognition

Fraud: Shareholder Deception

Collapsed Business Model

Revenue Recognition Issues and Shareholder Deception

Inconsistent Billing Practices and Revenue Recognition Issues

Top Management and Corporate Governance

• Role of the Board of Directors

• Responsibilities of Board of Directors

• Role of the Board

• Board Committees

• Role of a Chairman

• Role of CEO

• Creating an Effective Board

Role of the BoD

• To make calls on shareholders in respect of money unpaid on their shares

• To issue debentures

• To borrow money otherwise than through debentures

• To invest the funds of the company

• To make loans

Renewed ramifications

• The enterprise continues to remain effective on the standpoint of technology parameter

• The enterprise continues to achieve healthy market growth in competitive conditions

• Divestment and diversifications take place on sound lines

Renewed ramifications

• Long term productivity and quality are never sacrificed at the altar of short term profitability

• Judicious earnings retention policy is adopted for financial growth , modernization et al

• Serious and sustained attention is adopted towards building a sound system of human values and exalted corporate culture

Broad Agreement

• Oversee the management of the company’s assets

• Establish or approve the company’s mission , objective , strategy and policies

• Review management actions and financial performance of the company

• Hire and fire the principal executive and operating officers of the company

Board Committees

• Audit Committee : It consists of independent directors who report to the board . The committee acts as a link between the board and external auditors

- Review the interim and final accounts - Solve any problem they come across while

completing the audit- Make recommendations re audit fees ,

selection & replacement of auditors

Board Committees

• Remuneration Committee : This committee reviews the remuneration package of the executive directors and other top level managers

• Nominations Committee : Usually set up to select new non executive directors . The chairman of the board heads this committee

Code and Laws on CG

• Reports of Committees on Corporate Governance

• Government Initiatives

• National Award initiated by the GOI

• Recent Development in other markets

Constitution of Board

• Members of the Board may be classified into two groups – insiders and outsiders

• Both insiders and outsiders have their own advantages and disadvantages

• Insiders are better informed of strategic initiatives but will not counter CEO

• Outsiders will stand up against CEO but will lack complete information

Some recommendations

• Cadbury Committee – majority of directors should be non executive directors

• The term of a director can be extended beyond 3 years after prior approval of stakeholders

• CII Report – At least 30% of the board ( chairman non executive) and 50%(chairman is CEO) of listed companies with turnover>Rs100 Crores should comprise of professionally competent and independent non executive directors

Reports of Committees on Corporate Governance

• Cadbury Committee report

• CII Committee Report

• Kumara Managalam report

• Narayana Murthy Committee report

Some recommendations

• CII Recommendations : No person should hold directorships in more than 10 companies.

• Non executive directors should actively participate in board affairs and not be passive advisors and should be adequately compensated through commissions and stock options

List of broad criteria

Governance Structure

30%

Composition of Board

15%

Committees on the Board

15%

Disclosures in Annual Report

20%

Statutory Disclosure

10%

List of broad criteriaNon Statutory Disclosures

10%

Timeliness and content of information

20%

Compliance with listing Agreement

6.67%

Contents on website

6.67%

Grievance resolution

6.67%

List of broad criteria

Enhancement of Share Value

30%

Share Prices 10%

Return on Net Worth

20%

Total 100%

Governance Structure

• Number of meetings held in a year

• Attendance records per meeting

• Attendance of individual director

• Number of meetings of the committees of the board

• Do Directors receive – Quarterly and annual sales plan, budgets , internal audit reports , any defaults by the company

Disclosure in the Annual report

• Does the Annual report contain a statement of the remuneration policy and details of the remuneration of a director

Enhancement of Share Value

• Growth in Sales

• Growth in Assets

• Solvency Ratio

• Margins

Qualitative Criteria

• Employees – discharge policies , obligatory welfare, HRD succession policy

• Stakeholders – customer grievance handling , vendor grievance handling

• Regulations – FERA / FEMA Violations, excise , custom raids, show cause notice

• Society – concern for environment

• Ethical Code of Conduct

Developments in other markets

• Implementation of the Sarbanes-Oxley Act

• European Union

• Asian & Latin American Markets