18. developments in corporate governance mr. n.k.jain

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ByCS N.K. JAIN

SECRETARY & CEO

22, Institutional Area, Lodi Road, New Delhi – 110 003, INDIA

DEVELOPMENTS IN CORPORATE GOVERNANCE

Knowledge Partner

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GLOBAL DEVELOPMENTS IN CG Revised UK CG Code, 2010

UK Stewardship Code, 2010

HKSE -Revised CG Code and

Associated Listing Rules.

New CG Code Singapore

KING III REPORT South Africa

CG Developments in India

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• Recognised the value of diversity inboardrooms.

• Evaluations of the board of FTSE 350companies be externally facilitated every threeyears.

• All directors of FTSE 350 companies be subjectto annual election by shareholders.

• Levels of remuneration for NEDs should reflectthe time commitment and responsibilities.

REVISED UK CORPORATE GOVERNANCE CODE, 2010

The UK Stewardship Code (2010) provides that InstitutionalInvestors should-

• Publicly disclose their policy on how they will discharge their stewardship responsibilities.

• Have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed.

• Monitor their investee companies.

• Be willing to act collectively with other investors.

• Have a clear policy on voting and disclosure of voting activity.

UK Stewardship Code, 2010

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The findings of impact analysis of the UK CG andStewardship Codes by Financial Reporting Council inDecember 2011:

• 80% of FTSE 350 companies put all theirdirectors up for re‐election in 2011

• More companies are bringing in external advisers to assist with evaluation of the board’s effectiveness;

• As of December 2011 the Stewardship Code hasattracted 234 signatories. This is an indicationthat the market is willing to take the concept ofstewardship seriously.

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HKSE -Revised CG Code and Associated Listing Rules

• Directors should ensure that they arefully aware of their duties under thelaw/rules

• Take an active interest in the issuer’saffairs

• Obtain a general understanding ofCompany’s business.

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• Majority of a company’s board be made up ofindependent directors, when thechairman and CEO is the same person orchairman is not independent

• A director cannot be considered independentafter serving on a board for more than9 years

• The board must be responsible for riskmanagement and internal controls.

New Corporate Governance Code Singapore

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• The board should be led by anindependent non-executive chairman whoshould not be the CEO of the company.

• Training and development of directorsshould be conducted through formalprocesses.

EMERGING GOVERNANCE PRINCIPLES INCORPORATED IN THE KING III REPORT

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• The performance of the board, itscommittees and the individual directorsshould be evaluated annually.

• The board should report on theeffectiveness of risk Management.

• Sustainability Reporting and disclosureshould be formalised as part of thecompany’s reporting processes.

EMERGING GOVERNANCE PRINCIPLES INCORPORATED IN THE KING III REPORT

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CORPORATE GOVERNANCE DEVELOPMENTS IN INDIAMCA Corporate Governance Voluntary Guidelines,2009 mainly focus on-

• Separation of Offices of Chairman & CEO

• Constitution of Remuneration and Nomination

Committees

• Training of Directors

• Board Evaluation

• Rotation of Auditors

• Secretarial Audit

• Institution of mechanism for Whistle Blowing

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Corporate Governance developments in India…….New Companies Bill, 2011

•Separation of Role of Chairman & CEO in theprescribed class of companies.

•Concept of independent directors introduced inCompany Law.

•Constitution of Nomination and RemunerationCommittees made mandatory for listed /prescribedcompanies.

•Secretarial Audit by a practicing Company Secretarymade mandatory for listed / prescribed companies.

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Corporate Governance developments in India…….

New Companies Bill, 2011

• At least one woman director mandatory in theprescribed companies.

• CSR Committee to be constituted.

• Board should make every endeavour to spendat least 2% of the average net profits of thecompany made during the three immediatelypreceding financial years, in pursuance of itsCorporate Social Responsibility Policy.

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• SEBI vide its Circular dated 15 March, 2011mandated that the Institutional Investors (i.e.AMCs) shall disclose their general policiesand procedures for exercising the votingrights on their website and in the Annual Reportfrom the financial year 2010-11.

• The AMCs are also required to disclose thedetails of voting in AGMs/EGMs of theinvestee companies.

ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNANCE

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CG SCORECARD OF INDIA INC.

ICSI Research Studies of TOP 50 participating companies inCG Award reveal the following CG developments in IndianCorporate Sector and the challenges ahead-

• Rotation of Independent Director by Companies in theyear 2010-11

- 20% of Cos rotated IDs in 6 years.

- 32% of Cos rotated IDs between 6-9 years.

- 52% of the Companies disclosed on rotation of

IDs in the year 2010-11.• More than 50% of Companies have a policy for induction

of IDs.

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CG SCORECARD OF INDIA INC…

Remuneration Committee in the year 2010-11

• 92% companies constituted RemunerationCommittee as compared to 88% in the year2009-10 and 72% in the year 2008-09.

• 25% of the companies have constitutedRemuneration Committee with 100%independent directors.

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CG SCORECARD OF INDIA INC…

Separate Meetings of Independent Directors

• 58% of Companies organiseseparate meetings of IDs.

CHALLENGES

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Challenge IGender Diversity

• The issue of gender diversity on boards has receivedincreasing attention globally.

• While some countries like Norway, Spain and Iceland haveintroduced mandatory quotas (i.e. 40%), other countries areseriously discussing intervention to tackle this issue.

• In India, women comprise only 5.3% per cent of BSE 100company boards.

• This percentage compares unfavourably with Norway(40.1%), US (16.1%), UK (12.5%), Canada (10.3%), HongKong (8.9%) and Australia (8.4%).

• Companies Bill-2011- At least one woman director mandatoryin the prescribed companies. 18

Challenge IISeparation of roles of Chairman & CEO

• UK Corporate Governance Code, 2010– The roles of chairman and chief executive should not be

exercised by the same individual.

• South Africa– The Board should be led by an independent non-executive

Chairman who should not be the CEO of the Company.

• Australia– The Roles of Chair and CEO should not be exercised by the

same individual.

• Companies Bill, 2011– unless the articles of the company provide otherwise, an

individual shall not be the chairperson of the company as wellas the managing director or Chief Executive Officer of thecompany at the same time. 19

Challenge IIIDevelopment of Board Members

– ICSI Research study shows thatcompanies have started to focus on thetraining/development needs of the Boardof Directors specially the new directorsinducted on the Board.

– On an average 56% Companies haveprovided training to its Board Membersduring the years 2009-2011 as comparedto 40% in 2008-09. 20

Challenge IVLead Independent Director

– Good governance norms recommend appointment ofLead Independent Director on the Board, especially ifthe position of Chairman and CEO are held by thesame person.

– Less than 5% of the top companies have appointedlead Independent Director (LID).

– Companies like Infosys, Wipro, Vedanta ResourcesPlc have appointed Lead Independent Director.

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Challenge V Performance Evaluation

ICSI Research Study shows that this is anarea where Indian companies need tofocus as only 15% companies provide themechanism for Board Evaluation.

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Performance EvaluationCompanies Bill 2011-Schedule IV (Code for Independent

Directors)

(1) The performance evaluation of independent directors shallbe done by the entire Board of Directors, excluding thedirector being evaluated.

(2) On the basis of the report of performance evaluation, itshall be determined whether to extend or continue the termof appointment of the independent director.

Report of Panel of Experts on Reforms in CPSEsrecommended that CPSE Boards evolve a system ofannual self evaluations. This could first begin withMaharatna/Navratna companies. These evaluationsshould be done internally, commenting on the Board’sview on the effectiveness of its own functioning.

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"When it comes to the future, there are three kinds of people: those who

let it happen, those who make it happen, and those who wonder what

happened.”

-John M. Richardson, Jr.

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“The framework for Governance has continually to evolve …….

not simply to develop in parallel with the developments of

business, but to keep one step ahead.”

- Sir Adrian Cadbury

Thank You

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