Understanding Corporate Governance: Importance and Impact
Corporate governance plays a crucial role in preventing failures like mismanagement, lack of controls, and poor governance standards. Examples from global and Indian scenarios highlight the significance of effective governance practices in ensuring business success and societal trust. Various committees and guidelines have been formed to address corporate governance issues. The evolution of corporate governance in India through key developments and initiatives underscores the ongoing efforts to enhance governance practices.
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Corporate Governance - Companies Act Prospective. N K Jain B.Sc., LLB.,DCL,FCS,FCPS Corporate Advisor Partner, Global FinServe LLP Member , ASSOCHAM National Council for Corporate Affairs & CSR Former Council Member and Secretary & CEO, ICSI Cell: 09818348811 Landline: 0120 - 4263965 E-mail: nkjain1953@gmail.com 5thJanuary, 2016
Why Corporate Governance ? Illustrious business enterprises which witnessed spectacular growth in boom time became disastrous failures later due to:- Mismanagement; Lack of effective internal controls and financial reporting; Poor governance standards. 2 nkjain1953@gmail.com 9818348811
Americas Hall of Shame WorldCom Enron Anderson Waste Management 3 nkjain1953@gmail.com 9818348811
England Catches Up Polly Peck Bank of Credit and Commerce International British & Commonwealth Robert Maxwell s Mirror Group International 4 nkjain1953@gmail.com 9818348811
Series of Indian Scams Harshad Mehta s securities scam Preferential Allotment scam Vanishing Companies scam Plantation companies scam Non-banking finance companies scam Mutual fund scam Global Trust Bank scam Satyam scam 5 nkjain1953@gmail.com 9818348811
Why Corporate Governance ? The society, shareholders, MFs and large institutional investors insisted that corporates adopt better governance practices. It led to formation of several committees to study the issue and make recommendations, codes, guidelines on CG. The society s response to these frauds was reflected in the legislative & regulatory changes made by governments. 6 nkjain1953@gmail.com 9818348811
CG Developments in India CII s Desirable CG Code, 1998 Kumar Mangalam Birla Committee, 2000 Task Force on Corporate Excellence, 2000 Naresh Chandra Committee, 2002 Narayan Murthy Committee, 2003 Dr. J J Irani Expert Committee, 2005 CG Voluntary Guidelines, 2009 7 nkjain1953@gmail.com 9818348811
CG Developments in India Guidelines issued by the Department of Public Enterprises for Central Public Sector Undertakings, 2010 Adi Godrej Committee Report, 2012 The Companies Act, 2013 Revised Clause 49 of the Listing Agreement by SEBI, 2014 SEBI Listing Regulations, 2015 8 nkjain1953@gmail.com 9818348811
Corporate Governance Issues Separation of Ownership from Management: Promoters/Shareholders should exercise their ownership rights in the general meetings of the company and ought not to throw their weight in the Board meetings. Boards should be allowed to function and decide with complete freedom what is good for the company and its various stakeholders. 9 nkjain1953@gmail.com 9818348811
Corporate Governance Issues Distinguishing the roles of board and management: The business of a company is to be managed by or under the direction of the board. The responsibility of managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executives. Thus, the board occupies a key position between shareholders (owners) and company s management. 10 nkjain1953@gmail.com 9818348811
Role of the Board Establish Vision and Mission. Strategic direction, policy and advice. Overseeing implementation of its policies. Appointment & evaluating performance of CEO and senior management staff. Ensuring stakeholder relationships. Risk mitigation. Procuring resources. 11 nkjain1953@gmail.com 9818348811
Strategic Board for better CG Optimum size: The optimum board size will result in greater involvement of directors which will lead to more cohesive functioning and faster decisions. Independence: Strategic board should have less insiders and more outsiders to maintain independence /objectivity in decision making. Information: Timely, accurate and intelligent information to board enhances its efficiency and effectiveness. nkjain1953@gmail.com 9818348811 12
Strategic Board for better CG Diversity: The board should be composed of directors with varied expertise, experience & diverse professional qualifications and also of people with different ethnic and cultural backgrounds in tune with rapid globalisation of businesses. Vision: The board should have a longer vision and broader responsibility than those of CEO and top management. 13 nkjain1953@gmail.com 9818348811
Duties of Directors Sec.166 ..act in accordance with articles of company; ..act in good faith to promote company s objects in interest of company, employees, shareholders, community & environment; ..exercise his duties with due and reasonable care, skill and diligence ; .not to involve in conflict of interest with comp .not to achieve any undue gain or advantage; ..not to assign his office.. nkjain1953@gmail.com 9818348811 14
In re Caremark International, Inc. The company provides health care services and products to patients referred to them by a physician. Since the business is based on referrals, companies such as Caremark compensate physicians. A federal law, the Anti-Referral Payments Law ( ARPL ) prevents such a system. In 1994, Caremark was indicted for violating the ARPL. 15 nkjain1953@gmail.com 9818348811
In re Caremark International, Inc. The court held that a board s sustained and systematic failure to monitor its corporation s compliance with governing law would be evidence of an absence of good faith. It was held that a lack of good faith could be demonstrated by a board s failure to undertake a pre-existing duty the statutory duty to monitor. 16 nkjain1953@gmail.com 9818348811
Union Carbide India Ltd.- Bhopal Gas Case Leak of poisonous gas from the plant on the night of December 2 3, 1984 made its way in and around the shantytowns located near plant at Bhopal and destroyed & damaged thousands of lives, vegetation, etc. The prosecution charged the company and its directors with not heeding the feedback on inadequate safety norms and other maintenance lapses. 17 nkjain1953@gmail.com 9818348811
Union Carbide India Ltd.- Bhopal Gas Case The court has held Keshub Mahindra guilty & sentenced him to 2 years of imprisonment along with seven other accused. He attended only a few meetings in a year and took only macro view of the company s developments. A non-vigilant act of non-executive chairman, accounted for death of thousands. Ignorance of the system by directors of the company is unacceptable. Role of directors in this case is questionable. 18 nkjain1953@gmail.com 9818348811
The Volkswagen emissions scandal Olaf Lies, a Volkswagen board director who represents the state of Lower Saxony, which has a controlling stake in the carmaker, has said some staff acted criminally in cheating emissions tests. CEO has quit after the firm admitted diesel cars were designed to cheat in tests. 19 nkjain1953@gmail.com 9818348811
The Volkswagen emissions scandal Lies told BBC We only found out about the problems in the last board meeting... So we need to find out why the board wasn t informed earlier.. when they were known about over a year ago in the United States. Fines in the US alone could be about $12bn. Huge damage has been done as millions of people have lost their faith in VW, said Lies. 20 nkjain1953@gmail.com 9818348811
The Volkswagen emissions scandal VW has admitted that 11m diesel cars worldwide have been fitted with a defeat device. VW has put aside 6.5bn ( 4.8bn) to meet the costs of recalling the cars but also faces the threat of fines and legal action from shareholders and customers. 21 nkjain1953@gmail.com 9818348811
Separation of the roles of Chairperson & CEO Chairperson leads the board. CEO leads the senior management team The board evaluates the performance of senior executives including the CEO. Combining the role of both the CEO and the Chairman removes an important check on senior management s activities. The Chairman should be an ID to provide the appropriate counterbalance and to check the power of the CEO. nkjain1953@gmail.com 9818348811 22
Separation of the roles of Chairperson & CEO Sec.203 provides that an individual shall not be appointed or re-appointed as Chairperson as well MD or CEO of the company at the same time after the date of commencement of the Act unless the:- a. article of the company provide otherwise; or b. company does not carry multiple businesses Prescribed classes of companies engaged in multiple businesses with CEO for each such business may be exempted by Govt. 23 nkjain1953@gmail.com 9818348811
Composition of Board Sec. 149 Minimum Number of Directors: a. Public Company : 3 directors b. Private Company : 2 directors One Person Company : 1 director c. Maximum number of directors restricted to 15 Maximum directorships: 20 companies including 10 directorships in public companies Listed public company to have at least 1/3rd of total directors as IDs. nkjain1953@gmail.com 9818348811 24
Number of IDs in other Companies: Rule 4 Following companies shall have at least two directors as IDs:- Public companies having: i. paid up share capital of 10 cr. +; or ii. turnover of 100 cr. +; or iii. in aggregate, outstanding loans, debentures and deposits exceeding 50 cr. iv. Where a company ceases to fulfil any of three conditions for 3 consecutive years, it shall not be required to comply with this requirement nkjain1953@gmail.com 9818348811 25
Maximum tenure of Independent Directors For a term up to 5 consecutive years & shall be eligible for reappointment for another term of up to 5 consecutive years on passing of a special resolution by the company. Any tenure of an ID on the date of commencement of the Act not to be counted. nkjain1953@gmail.com 9818348811 26
Cooling period for appointment of an ID An independent director, who completes his term shall be eligible for appointment as independent director in the company only after the expiration of 3 years of ceasing to be an independent director in the company. 27 nkjain1953@gmail.com 9818348811
ID- Rewards IDs shall be entitled to receive:- sitting fee for attending meetings of the Board or Committees thereof or for any other purpose as may be decided by the Board; reimbursement of expenses for participation in such meetings; and profit related commission as may be approved by the members. IDs are not entitled to stock option. 28 nkjain1953@gmail.com 9818348811
Separate Meetings of the Independent Directors IDs shall hold at least one meeting in a year, without non-IDs and management. IDs, in the meeting shall, review/assess: performance of non-IDs & Board as a whole; performance of the Chairperson, taking into account the views of EDs and non-EDs; quality, quantity and timeliness of flow of information between management & Board that is necessary for the Board effectiveness. nkjain1953@gmail.com 9818348811 29
Familiarisation Programme for Independent Directors Familiarise IDs with the company, their roles, rights, responsibilities, nature of industry, business model of the company etc. Details of such familiarisation programmes shall be disclosed on the company's website and a web link shall also be given in the Annual Report. 30 nkjain1953@gmail.com 9818348811
Woman Director Sec.149(1) The following companies shall appoint at least one WD :- every listed company; every other public company having: - paid-up share capital of 100 crs or more; or turnover of 300 crs or more. i. ii. 31 nkjain1953@gmail.com 9818348811
Woman Director Women are responsible for more than 75 percent of all buying decisions. A diverse board leads to a smarter company. Savvy women on board help to find business solutions encompassing new perspectives from the female population. Gender diversity at the top accounts for 36% better stock price growth and 46% better return on equity. 32 nkjain1953@gmail.com 9818348811
Vacation of Office of Director Sec. 167(1),(3) The office of a director shall become vacant in case he absents himself from all the board meetings held during a period of 12 months with or without seeking leave of absence of the Board.
Key Managerial Personnel Sec. 203 & Rule 8 Board of every listed company and every other public company having a paid-up share capital of 10 crs or more shall appoint the following whole time KMPs :- Managing Director or Chief Executive Officer or Manager and in their absence a Whole Time Director; a Company Secretary; and a Chief Financial Officer. 34 nkjain1953@gmail.com 9818348811
National Financial Reporting Authority ( NFRA) - Sec. 132 The CG may constitute a NFRA to provide for matters relating to accounting/auditing standards which shall:- a) make recommendations to CG on the formulation of accounting and auditing policies and standards for adoption by companies and their auditors; b) monitor and enforce compliance with accounting and auditing standards; c) oversee the quality of service of professionals; d) perform such others functions as may be prescribed. [This section not yet notified] 35 nkjain1953@gmail.com 9818348811
National Financial Reporting Authority ( NFRA) - Sec. 132 NFRA shall have power to investigate into matters of professional or other misconduct committed by any member or firm of CAs. Where professional or other misconduct is proved, NFRA shall have the power to make order for imposing penalty of not less than 10 lac but which may extend to 10 times of the fees received in case of firms. [This section not yet notified] 36 nkjain1953@gmail.com 9818348811
Rotation of Auditors Sec. 139 & Rule 6 No listed company or prescribed classes of companies, excluding small and one person companies, shall appoint/ re-appoint:- an individual as an auditor for more than 1 term of 5 consecutive years; and an audit firm as an auditor for more than 2 terms of 5 consecutive years. Period for which individual/firm has been auditor prior to commencement of the Act shall be taken into account for calculating period of 5/10 years. i. ii. 37 nkjain1953@gmail.com 9818348811
Rotation of Auditors- Class of Companies Rule 5 a. Listed company; b. Unlisted public companies having paid up share capital of 10 crs or more; c. Private limited companies having paid up share capital of 20 crs or more; d. Companies having paid up share capital of below threshold limit mentioned in (b) & (c) above, but having public borrowings from FIs, banks or public deposits of 50 crs or ^ 38 nkjain1953@gmail.com 9818348811
Rotation of Auditors Sec.139 Rule 6 An auditor/ audit firm which has completed its term shall not be eligible for re-appointment as an auditor in same company for 5 years. A period of 3 years from the commencement of the Act has been provided to every company existing on or before such commencement to comply with this provision. 39 nkjain1953@gmail.com 9818348811
Auditor not to render certain services - Sec. 144 An Auditor appointed under the new law shall provide to the company only such services as are approved by the BOD or the Audit Committee but which shall not include any of the following services:- Accounting and book keeping services; Internal audit; Design & implementation of any financial information system; 40 nkjain1953@gmail.com 9818348811
Auditor not to render certain services - Sec. 144 Actuarial services; Investment advisory and banking services; Outsourced financial services; and Management services. 41 nkjain1953@gmail.com 9818348811
Secretarial Audit Sec. 204 & Rule 9 Every listed and every public company having a paid-up share capital of 50 crs or more or turnover of 250 crs or more shall annex with its Board s Report, a Secretarial Audit Report given by a PCS. The BOD in its report shall explain in full any qualification or observation or other remarks made by the PCS in his report. 42 nkjain1953@gmail.com 9818348811
Secretarial Audit Sec. 143(12),(15) & 204 If a PCS conducting SA, has reason to believe that an offence involving fraud is being or has been committed against the company by its officers/employees, he shall immediately report the matter to the Central Government. If a PCS does not comply with the above provision, he shall be punishable with fine of minimum 1 lac and may extend to 25 lac. 43 nkjain1953@gmail.com 9818348811
Internal Audit- Companies to appoint IA-Sec.138 a) Every listed company; b) Every unlisted public company having, during the preceding financial year, :- paid up share capital of 50 crs or more; or turnover of 200 crs or more; or iii. outstanding loan or borrowing from banks or public FIs exceeding 100 crs or more ; or iv. outstanding deposits of 25 crs or more. i. ii. 44 nkjain1953@gmail.com 9818348811
Internal Audit-Class of Companies to appoint IA c) Every private company having:- turnover of 200 crs or more during the preceding financial year; or outstanding loans or borrowing from banks or public FIs exceeding 100 crs or more at any point of time during the preceding FY ; Statutory or Cost Auditor can not be the Internal Auditor i. ii. 45 nkjain1953@gmail.com 9818348811
Audit Committee Sec.177 & Rule 6 Class of companies to constitute AC: Every listed company; All public companies: with a paid up capital of 10 crs or more; having turnover of 100 crs or more; having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crs or more. 46 nkjain1953@gmail.com 9818348811
Audit Committee A qualified & independent AC shall be set up. AC shall have minimum 3 directors as members with at least 2/3rd IDs. All members of AC shall be financially literate At least 1 member shall have accounting or related financial management expertise; Chairman of the AC shall be an ID and shall be present at AGM to answer shareholder queries. nkjain1953@gmail.com 9818348811 47
Terms of Reference Appointment of Auditors Monitor Auditor s independence Effectiveness of Audit process Examination of FSs/audit report Approval of Related Party Transactions Scrutiny of inter-corporate loans Valuation of undertakings/assets of company Monitoring end use of funds raised through public offers 48 nkjain1953@gmail.com 9818348811
Nomination & Remuneration Committee- Sec.178 Composition: at least 3 NEDs out of which not less than shall be IDs. Chairperson of the company may be a member but shall not chair the NRC. The NRC shall formulate and recommend to Board a policy, relating to remuneration for the Directors/KMPs/other employees which shall be disclosed in the Board s Report. The Chairman of NRC shall attend General Meetings of the company. nkjain1953@gmail.com 9818348811 49
Board Evaluation NRC shall carry out evaluation of every director s performance. IDs in their separate meetings shall review the performance of non-IDs, the Chairman of the Board and the Board as a whole. The performance evaluation of IDs shall be done by the entire Board, excluding the director being evaluated. Report of performance evaluation shall determine extension of term of appointment. 50 nkjain1953@gmail.com 9818348811
