Corporate Governance and Business Ethics in Listed Companies: Regulations and Perspectives
Corporate governance and business ethics are integral to the success of listed companies, with a focus on internalized values, self-governance, and adherence to moral principles. Key areas include code of conduct, compliance, dealings with related parties, and vigil mechanisms. The Companies Act, 2013, and Listing Regulations highlight the importance of a robust system, independent directors' role in risk management, and annual compliance certifications.
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Corporate Governance - Business Ethics and Culture Changes Companies Act, 2013 and Listing Regulations Perspective for Listed Companies CS B. Murli Nestl India Limited 15 April 2016 1
Corporate Governance & Business Ethics Core of Corporate Governance is Internalised value of an organization and that top management follows Effectiveness determined by level of Self Governance Business Ethics: Moral principles and Standards and Code of Conduct business expected to follow while dealing with all Stakeholders Purity of purpose to be upheld by carefully designed actual practices of an enterprise Business ethics and corporate governance go hand in hand Relevance of Culture Change 2
Business Ethics Some Key Areas : Code of Conduct Compliance Dealings with Related Party Societal Activities Making it work : Vigil Mechanism Performance Evaluation of the Directors 3
Code of Conduct Companies Act 2013 Code of Independent Directors : Directors to report concerns about violation of code of conduct or ethics policy SEBI Listing Regulations 2015 lay down a code of conduct for all Board members and Senior Management personnel annual compliance certificate by CEO and CFO that no transactions entered during the year which are violative of the code of conduct annual affirmation by the members of the board and senior management personnel on the compliance of the code of conduct Dissemination of code of conduct of board of directors and senior management personnel on the website Supplier Code of Conduct 4
Code of Conduct Board of Directors and Senior Management Company Values Dealing with conflict of interests Compliance of laws Maintaining confidentiality Standards of business conduct for stakeholders Prohibition from taking corporate opportunities 5
Compliance Companies Act, 2013 and Listing Regulations Board Responsibility to ensure proper systems, its adequacy and effectiveness Independent Directors to ensure there is a Risk Management System which is robust and defensible External Audits including Secretarial and Internal Audit Company Secretary to report to the Board about compliance with the provisions of laws applicable to the Company Periodic review compliance report of all laws applicable to the company and respective corrective action plans, if any CEO/CFO Certification 6
Related Party Transactions Companies Act, 2013 Wider definition of related party Arms Length Transaction and Ordinary Course of Business Approval Process : Audit Committee : Approval/ Modification of transaction Shareholders (non-related) : Not at Arms length or ordinary course Disclosures in the Board s Report and Financial Statements Directors interested not to be present / participate 7
Related Party Transactions Listing Agreement Policy on dealing with related party transactions disclose on company website Annual omnibus approval for repetitive transactions specify nature, base price/ formula etc, quarterly review by audit committee. Shareholder approval for material related party transactions, related party to abstain. Quarterly reporting to stock exchange of material related party transactions 8
Societal Activities Companies Act, 2013 Constitution of CSR Committee. Annual CSR spends of least 2% of its average net profits CSR Policy, Monitoring of projects. Spends not in the course of business. Annual Report of CSR Activities Listing Regulations Business Responsibility Reporting Societal Activities of mutual interest. CSR is not Philanthropy 9
Business Responsibility Reporting (BRR) Initiatives from an environmental, social and governance perspective Principles and core elements of responsible business practices 1) business to govern with ethics, transparency and accountability 2) sustainable business model 3) wellbeing of all employees 4) responsibility towards all stakeholders specially marginalized ones 5) respect human rights 6) environment sustainability 7) follow public policy in a responsible manner 8) support inclusive growth 9) value to customers and consumers in a responsible manner Includes disclosures on policy on ethics/ stakeholder complaints, sustaining sourcing, employee safety and skill upgradation, environment, information on product label more than law. 10
Vigil Mechanism Whistle Blower Policy Companies Act, 2013 and Listing Regulations Establishment of vigil mechanism for directors and employees Adequate safeguards against victimisation of persons Direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. Disclosure on its website and in the Board s report. Code of Independent Directors Ascertain and ensure that the Company has an adequate and functional vigil mechanism and ensures that the interests of a person who uses such mechanism are not prejudicially affected on account of such use. Option to report on anonymous basis Mechanism for reporting of complaints by non-employees 11
Performance Evaluation of Directors Companies Act, 2013 and Listing Regulations Board s Report to indicate manner of formal annual evaluation by the Board of its own performance and that of its committees and individual directors. Code for Independent Directors - Independent directors shall bring an objective view in the evaluation of the performance of Board and management. Separate meeting of Independent directors shall interalia review the performance of non-independent directors and the Board as a whole and review the performance of the Chairperson Nomination and Remuneration Committee shall interalia carry out evaluation of every director s performance and whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors 12
The Journey Challenge of making employees, live and imbibe the ethical code and value Greater challenge with business partners Commitment by Corporate Management Continued reinforcement of values Right combination of spirit and structure Synergy in vision statement, mission statement, core values, general business principles and code of conduct 13
Thank You 14
Code of Conduct for Board of Directors and Senior Management SEBI Listing Regulations : Regulation 17(5) stipulates that the Board of Directors of every listed company shall lay down a code of conduct for all Board members and Senior Management personnel of the Company. Regulation 17(8) Compliance certificate shall be furnished by chief executive officer and chief financial officer interalia stating that there are, to the best of their knowledge and belief, no transactions entered into by the listed entity during the year which are fraudulent, illegal or violative of the listed entity s code of conduct. Regulation 26(3) All members of the board of directors and senior management personnel shall affirm compliance with the code of conduct of board of directors and senior management on an annual basis. Regulation 46(2)(d) The listed entity shall inter alia disseminate on its website code of conduct of board of directors and senior management personnel; Companies Act, 2013 Schedule IV, Part III (Duties of Independent Directors) : Report concerns about unethical behaviour, actual or suspected fraud or violation of the company s code of conduct or ethics policy; 16
Vigil Mechanism Companies Act, 2013] 1. Every listed company shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed (Section 177(9)] 2. The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases: Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board s report. [Section 177(10)] [Rule 7 of The Companies (Meetings of Board and its Powers) Rules, 2014 further provides that : - the AC shall oversee the vigil mechanism. Members with conflict of interest shall recuse themselves - in case of repeated frivolous complaints being filed, the AC may take suitable action against the concerned including reprimand] Code of Independent Directors - Part III (Duties) of Schedule IV to the Companies Act, 2013 1. IDs shall ascertain and ensure that the Company has an adequate and functional vigil mechanism; and 2. IDs shall ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use. Vigil Mechanism [Corporate Governance Code] 1. Establishment of a vigil mechanism for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the Company s code of conduct or ethics policy. 2. Mechanism provides Adequate safeguards against the victimisation and provides for direct access to the Chairman of the Audit Committee in exceptional cases. 3. Vigil mechanism is disclosed on the website, board s report. 4. Role of the Audit Committee includes reviewing the functioning of the Vigil Mechanism. 17
Related party transactions Companies Act, 2013 and Listing Regulations Wider definition of related party [Section 2(76) of the 2013 Act, to be read together with Rule 3 of the Definition Rules, 2014] Definition of relative [Section 2(77) of the 2013 Act, to be read together with Rule 4 of the Definition Rules, 2014] List of key Management Personnel [Section 2(51) for list of KMP under the 2013 Act and for the purpose of Section 2(76)] Conditions of entering into contract or arrangement with a related party [Rule 15 of the Board Meeting Rules, 2014] Approval or any subsequent modification of transactions with related parties [Section 177(4)(iv)] Nature of related party transactions and operating guidelines in connection therewith [Section 188 of the 2013 Act] Disclosure of related party transactions in the board's report [Section 134(3)(h)] Directors interested in related party transactions not to be present in the meetings Policy on related party transactions Shareholder approval required for material related party transactions 18
