1 Recap…. 2 Recent cases of Misconducts Lucent Technologies Adjusted fiscal 2000 revenues by $679 million. Several more names, respected world-over.

1

Recap…

2

Recent cases of Misconducts Recent cases of Misconducts

Lucent Technologies

Adjusted fiscal 2000 revenues by $679 million.

Several more names, respected world-over

AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone Systems, Microstrategy, Mirant, Network Associates, PNC Financial, Qwest, Reliant Resources, Rite Aid, Vivendi Universal, Xcel Energy, Xerox

SATYAM

How can we forget our own Satyam ?

Billions of dollars lost in market capitalisation wiping out life savings of common man on the road

WHY ???

3

Drivers of Unethical Strategies & Drivers of Unethical Strategies & Business Behaviour Business Behaviour

Overzealous pursuit of personal gain, wealth, and other selfish interests. Obsession with wealth accumulation, greed, power and status

Heavy pressures on company managersto meet or beat earnings targets - to do whatever it takes to deliver good financial performance

A company culture that places profits andgood performance ahead of ethical behavior

4

Interdependence - a Corp. and SocietyInterdependence - a Corp. and Society

Successful corporations need a healthy society

Education ,healthcare, safe working conditions, good govt. strong regulators

Successful Corporations cannot survive in a failing Society

A healthy Society needs successful companies

Creates jobs, wealth that pays taxes, innovation to improve standard of living and social conditions

5

Corporate GovernanceCorporate Governance

Maximizing shareholder value-legally, ethically and on a sustainable basis

& ensuring fairness to all stakeholders i.e.

Customers Employees

Investors Vendor- partners

Community

6

WHAT IS CORPORATE GOVERNANCE?WHAT IS CORPORATE GOVERNANCE?

Defined as: “system by which a corporation is directed and controlled, in the interest of shareholders and other stakeholders, to sustain and enhance value”.

Corporate governance involves a set of relationships between key

stakeholders

7

NationalNational The initiative was initially driven by the Confederation of Indian

Industry (CII)

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-Corporate Governance- A historical perspective A historical perspective

8

Good governance makes good business sense ….

Good governance leads to good performance It creates an open and transparent system It improves communication and breaks down systematic barriers to

flow of information Well established business processes imply order and stability to

employees Preferred supplier status among customers Good governance helps in creating a brand and creates comfort for

all stakeholders and society Good governance allows decision making based on data. It reduces

risk

9

Key Principles of Corporate Governance

An effective relationship (trust) between the providers of capital and company managers.

Transparency: Directors must make clear to the providers of capital and other key stakeholders why every material decision has been made.

Accountability: Directors should be held accountable for their decisions and account to key shareholders submitting themselves to appropriate scrutiny.

Fairness: All shareholders should receive equal consideration by the directors and management with a sense of justice and avoidance of bias or vested interests.

Responsibility: Directors should carry out their duties with honesty, probity and integrity.

10

The board is the

most significant instrument of

corporate governance

12

A basic design of CG systemsA basic design of CG systems

Corporate

Board ofDirectors

Management

Shareholders Stakeholders Creditors

Supervisory &enforcementauthorities

Executivedirectors

Ownerdirectors

IndependentDirectors

13

Board’s key functionsBoard’s key functions Strategy formulation, budgets, business plans, etc.

Monitoring the effectiveness of the company’s governance practices;.

Selecting, compensating, monitoring key executives and overseeing succession planning.

Executive and board remuneration;

Ensuring a formal and transparent board nomination and election process.

Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, ensuring control systems for risk management, financial and operational control, and compliance.

Overseeing the process of disclosure and communications.

14

Directors of the BoardDirectors of the Board The role and responsibility of an individual director, of course, would

depend upon the nature of his directorship.

Broadly, there are three types of directors.

1. Full time, executive director who is normally a paid employee of a company having some functional responsibility.

2. Non executive but non independent director who is normally a promoter of the company or having high stakes in the company.

3. And finally independent directors who are not full time directors. There is another class of directors known as nominee directors representing some interests like lending institutions etc.

An executive director, by very nature has much more responsibilities than non executive directors. In law it is their responsibility to ensure compliance with provisions of law failing with they could be held liable as officers in default. As far as independent directors are concerned, the position of law is nebulous.

15

Who are Independent DirectorsWho are Independent Directors

As per Clause 49 of the Listing Agreements an ‘independent director’ shall mean non-executive director of the company who

a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;

b. is not related to promoters or management at the board level or at one level below the board;

c. has not been an executive of the company in the immediately preceding three financial years;

16

Independent DirectorIndependent Director

is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity.

is not a supplier, service provider or customer of the company.

This should include lessor-lessee type relationships also;

is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.

17

Selection of Independent DirectorSelection of Independent Director The selection and appointment of independent directors should be

transparent and on certain valued basis.

Therefore, the companies should have an entirely independent nomination committee which should determine the qualifications for Board membership and should identify and evaluate candidates for nomination to the Board.

It would be more appropriate that the code of Corporate Governance of a company should specifically include the qualifications and attributes that the company seeks of an independent director.

A critical element of a director being independent is his independence to the management both in fact and perception by the public.

The independent directors must not only be independent according to the legislative and stock exchange listing standards but also independent in thought and action i.e. qualitatively independent.

Such qualitative independence will ensure that directors think and act independently without regard to management's influence.

3 Key attributes: Competence, Commitment and Courage

18

Role of Independent DirectorsRole of Independent Directors Independent directors broadly fit into the overall structure of

corporate governance, and are necessary to ensure effective, balanced boards. They should :

* Contribute to and constructively challenge development of company strategy.

* Scrutinize management performance.

* Satisfy them that financial information is accurate and ensure that robust risk management is in place.

* Be prepared to attend AGMs and discuss issues relating to their roles (especially chairmen of committees).

* Have a greater exposure to major shareholders (particularly the senior independent director).

19

Responsibilities of Independent DirectorsResponsibilities of Independent Directors

Independent Director shall periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. In the event of any proceedings against an independent director in connection with the affairs of the company, defence shall not be permitted on the ground that the independent director was unaware of this responsibility.

To function to properly according to the spirit of corporate governance as a director on the board and as Member/Chairman across various committees viz. the Audit Committee, the Shareholders’ Grievance Committee and the Remuneration Committee of the company.

20

Responsibilities of Independent DirectorsResponsibilities of Independent Directors

A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

At least one independent director on the Board of

Directors of the holding company shall be a director on the Board of Directors of the subsidiary company.

21

Board CompositionBoard Composition

Not less than 50% of the board to be non-executive directors

Independent Directors:

• If the chairman executive: At least half of the board should comprise of independent directors

• If Chairman non-executive:At least one- third of the board should comprise of independent directors

Non-executive directors’ remuneration to be approved by shareholders

Board meetings – to meet at least 4 times, with gap not exceeding 3 months.

Minimum information for board meetings laid down

22

Board of Directors: information that must be supplied Annual, quarter, half year operating plans, budgets and updates

Quarterly results of company and its business segments

Minutes of the audit committee and other board committees

Recruitment and remuneration of senior officers

Materially important legal notices and claims, as well as any accidents, hazards, pollution issues and labor problems

Any actual or expected default in financial obligations

Details of joint ventures and collaborations

Transactions involving payment towards goodwill, brand equity and intellectual property

Any materially significant sale of business and investments

Foreign currency and other risks and risk management

Any regulatory non-compliance

Mandatory guidelines and disclosuresMandatory guidelines and disclosures

23

How to be a good independent directorHow to be a good independent director

Non-executive directors need to be sound in judgement and to have an inquiring mind.

They should question intelligently, debate constructively, challenge rigorously and decide dispassionately.

They should listen sensitively to the views of others, inside and outside the board.

24

Companies Act and Independent DirectorsCompanies Act and Independent Directors

The Companies Act looks at all directors alike:

Throws some extra compliances in case of whole time directors

Requires some disclosures by interested directors

Defines “officer in default” giving a degree of immunity to directors other than the whole time directors

Does not exempt independent directors from any of the duties, liabilities, responsibilities of the Board

Independent directors as much as part of the corporate governance team as any other director

Independent directors have the same power that other directors have

25

Liabilities under other lawsLiabilities under other laws

The basic directorial liability apart, being a corporate director may invite liabilities under myriad Central, State and Local laws:

Most often, notices, summons, etc are addressed to all directors

Sometimes, IT searches are also unable to distinguish between working directors and independent directors

26

Way out…Way out…

Clearly, it would be difficult to get right individuals if we make the life of an independent director hell

Hence, the two tier board is an alternative

Executive board and supervisory board distinction

Since, independent directors do not have an executive role or censuring of executing actions, they do not have liabilities of executive management

Dual board system allows for easy functioning of the company as executive decisions do not come to the supervisory board

27

Board of Directors: frequency of meetings and composition The frequency of board meetings and board committee meetings,

with their dates, must be fully disclosed to shareholders in the annual report of the company

The attendance record of all directors in board meetings and board committee meetings must be fully disclosed to shareholders in the annual report of the company

Full and detailed remuneration of each director (salary, sitting fees, commissions, stock options and perquisites) must be fully disclosed to shareholders in the annual report of the company

Loans given to executive directors are capped (no loans permitted to non-executives), and must be fully disclosed to shareholders in the annual report of the company

Some more Mandatory guidelines …Some more Mandatory guidelines …

28

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

Board composition (executive, non-exec, independent) Qualifications and experience of directors Number of outside directorships held by each director (capped at director not

being a member of more than 10 board-level committees, and Chairman of not more than 5)

Attendance record of directors Remuneration of directors Relationship (familial or pecuniary) with other directors Warning against insider trading, with procedures to prevent such acts Details of grievances of shareholders, and how quickly these were addressed Date, time and venue of annual general meeting of shareholders

Still more Mandatory guidelines …Still more Mandatory guidelines …

29

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

Dates of book closure and dividend payment Details of shareholding pattern Name, address and contact details of registrars and/or share transfer

agents Details about the share transfer system Stock price data over the reporting year, and how the company’s

stock measured up to the index Financial effects of stock options Financial effects of any share buyback Financial effects of any warrants that are to be exercised Chapter reporting corporate governance practices

Few more Mandatory guidelines …Few more Mandatory guidelines …

30

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

Detailed chapter on Management Discussion and Analysis focusing on markets, operations, finances, accounts, risks, opportunities and threats, internal control systems

Consolidated financial statement, incorporating accounts of all subsidiaries (over 50% shares held by reporting company)

Details of all significant related party transactions Detailed segment reporting (revenues, costs, operating profits and

capital employed) Deferred tax liabilities and assets and debit/credit in the P&L for the

reporting year

Few more Mandatory guidelines …Few more Mandatory guidelines …

31

“The Foundation of any structure of Corporate

Governance is disclosure. Openness is the

basis of public confidence in the corporate

system, and funds will flow to the centres of

economic activity that inspire trust.”

- Sir Adrian Cadbury