Towards an inquiry into corporate governance research

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TOWARDS AN INQUIRY INTO CORPORATE GOVERNANCE RESEARCH

PROFESSOR JAYASHREE SADRIAND

DR SORAB SADRI

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BASIS

This presentation is based on the research conducted by Dr Sorab Sadri (2000-2005), Dr Sunita Sharma (2003-2006) and Dr Sharukh Tara (2005-2008), which has been later used by several other doctoral scholars like Prof. J Oke.

It may be used as a guide to further scholarship.

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Objective of the research: To understand the policies and practices of Corporate

Governance and classify the literature to provide an overview of the principal findings of prior research.

To suggest a corporate governance “medley” among the actors and institutions that affect corporate governance interactions that encompasses a broader view of governance than has been considered in prior research.

To design and develop an instrument to assess Corporate Governance in selected industries in the Indian Financial Sector.

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Objective of the research: (Contd.)

To establish the relationship between Corporate Governance and Business Sustainability upon studying shareholder ownership, transparency and disclosure, and management performance.

To test for reliability and validity of the House of Corporate Governance model in selected industries in the Indian Financial Sector.

To identify important gaps in the research that represent promising avenues for future study.

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GLOBAL INITIATIVES TO IMPOSE CORPORATE GOVERNANCE

SIR ADRIAN CADBURY COMMITTEE – to address the issues related to corporate governance in the U.K.

CORPORATE GOVERNANCE REPORT OF SINGAPORE GOVERNMENT

SARBANES-OXLEY ACT, 2002 BY THE AMERICAN CONGRESS which came into effect in July 2002 – to address all the issues associated with corporate failures to achieve quality governance and to restore investors’ confidence…

Background of the proposed research:

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Background of the research:

Williams (1996) identified four models of corporate control:

1. The Simple Finance Model; 2. The Stewardship Model; 3. The Stakeholder Model; and 4. The Political Model.

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Alternative Patterns of Separation of Ownership & Management

Anglo-Saxon: Founder/

entrepreneur Professional

manager Exit: sell-out

European: Founder/entrepreneur Heirs + professional

management Retain ownership

Asian/EM: Heirs Maintain ownership

Background of the research:

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1. Shareholder rights

2. Equitable treatment of shareholders

3. Role of shareholders

4. Disclosure and transparency

5. Responsibilities of the board

Research Background

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1. CII Report

2. Kumarmangalam Birla Committee Report

3. Clause 49 Requirements

4. Naresh Chandra Committee

5. Narayan Murthy Report

Current state of Corporate Governance in India:

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IMPLEMENTATION OF CORPORATE GOVERNANCE IN INDIA

KUMAR MANGALAM COMMITTEE – constituted in May 1999 to promote and raise the standard of corporate governance in India

MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE:

Applies to listed companies with paid-up capital Rs.3 crores or more.

Composition of Board of Directors – optimum combination of executive & non-executive directors

Audit Committee – with 3 independent directors with one having financial and accounting knowledge.

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MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE

Remuneration Committee

Board Procedures – At least 4 meetings of the board in a year with maximum gap of 4 months between 2 meetings. to review operational plans, capital budgets, quarterly results, minutes of committee’s meeting.

Director shall not be a member of more than 10 committee and shall not act as chairman of more than 5 committees across all companies.

Management discussion and analysis report covering industry structure, opportunities, threats, risks, outlook, internal control system

Information sharing with shareholders

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ROLE OF CHAIRMAN

REMUNERATION COMMITTEE OF BOARD

SHAREHOLDERS’ RIGHT FOR RECEIVING HALF YEARLY FINANCIAL PERFORMANCE

POSTAL BALLOT COVERING CRITICAL MATTERS LIKE ALTERATION IN MEMORANDUM ETC

SALE OF WHOLE OR SUBSTANTIAL PART OF THE UNDERTAKING

CORPORATE RESTRUCTURING

FURTHER ISSUE OF CAPITAL

VENTURING INTO NEW BUSINESSES

NON-MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE

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IMPLEMENTATION OF RECOMMENDATIONS OF THE BIRLA COMMITTEE

By introduction of Clause 49 in the listing agreement with stock exchanges the following Provisions were introduced.

Composition of Board - In case of full time chairman, 50% non-executive directors and 50% executive directors

Constitution of audit committee – With 3 independent directors with chairman having sound financial background. finance director and internal audit head to be special invitees and minimum 3 meetings to be convened. It should be responsible for review of financial performance 0n half yearly/annually basis; appointment/ removal/remuneration of auditors; review of internal control systems and its adequacy.

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Remuneration of Directors – Remuneration of non-

executive directors to be decided by the board.

details of remuneration package, stock options,

performance incentives of directors to be

disclosed

Board Procedures – At least 4 meetings in a year.

director not to be member of more than 10

committees and chairman of more than 5

committees across all companies

: CLAUSE 49 REQUIREMENTS

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In addition, under Clause 49

Management discussion & Analysis

report – should include: (a) industry

structure & developments (b)

opportunities & threats (c) segment

wise or product wise performance

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RECENT DEVELOPMENTS

COMMITTEE HEADED BY SHRI NARESH CHANDRA CONSTITUTED IN AUGUST 2002 TO EXAMINE CORPORATE AUDIT, ROLE OF AUDITORS, RELATIONSHIP OF COMPANY & AUDITOR

RECOMMENDATION OF NARESH CHANDRA COMMITTEE: RECOMMENDED A LIST OF DISQUALIFICATIONS FOR

AUDIT ASSIGNMENTS LIKE DIRECT RELATIONSHIP WITH COMPANY, ANY BUSINESS RELATIONSHIP WITH CLIENT, PERSONAL RELATIONSHIP WITH DIRECTOR

AUDIT FIRMS NOT TO PROVIDE SERVICES SUCH AS ACCOUNTING, INTERNAL AUDIT ASSIGNMENTS ETC. TO AUDIT CLIENTS

AUDITOR TO DISCLOSE CONTINGENT LIABILITIES & HIGHLIGHT SIGNIFICANT ACCOUNTING POLICIES

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RECENT DEVELOPMENTS

RECOMMENDATION OF NARESH CHANDRA COMMITTEE: AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FOR

APPOINTMENT OF AUDITORS\

CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS, CORRECTNESS OF ANNUAL AUDITED ACCOUNTS

REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOT HAVE ANY MATERIAL, PECUNIARY RELATIONSHIP OR TRANSACTION WITH THE COMPANY

COMPOSITION OF BOARD OF DIRECTORS

STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVE DIRECTORS TO BE REVIEWED

RECOMMENDATIONS HAVE FORMED PART OF COMPANIES (AMENDMENT) BILL, 2003

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SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R.

NARAYANA MURTHY TO REVIEW EXISTING CODE OF CORPORATE

GOVERNANCE

RECOMMENDATIONS:

STRENGHTENING THE RESPONSIBILITIES OF AUDIT COMMITTEE

IMPROVING QUALITY OF FINANCIAL DISCLOSURES

UTILISATION OF PROCEEDS FROM IPO

TO ASSESS & DISCLOSE BUSINESS RISKS

FORMAL CODE OF CONDUCT FOR BOARD

WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANY

PROVIDING FREEDOM TO APPROACH THE AUDIT COMMITTEE

SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OF HOLDING COMPANY

RECENT DEVELOPMENTS

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CORPORATE GOVERNANCE - ULTIMATE OBJECTIVE

TO ATTAIN HIGHEST STANDARD OF PROCEDURES AND PRACTICES FOLLOWED BY THE CORPORATE WORLD SO AS TO HAVE TRANSPARENCY IN ITS FUNCTIONING WITH AN ULTIMATE AIM TO MAXIMISE THE VALUE OF VARIOUS STAKEHOLDERS.

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Redefining Corporate Governance

Processes and Structure by which business and affairs of corporate sector is directed and managed…

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Criteria for Good Governance

Ownership Rights of Shareholder (C1) Transparency & Disclosure (C2) Performance of the Management (C3) Effectiveness of Board of Directors (C4) Equitable Treatment of Stake Holders (C5) Leadership, Ethics and Culture (C6)

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HENCE

Any meaningful research into corporate governance must follow the above route.

This involves: (administering questionnaires, conducting, conducting focused interviews and remembering all the time that data is important)

Never forget that correlation does not imply causation