Project 2
Project 2
Project 2
THAPA
ROLL NO: 09
DIVISION: A
TOPIC COVERED
CORPORATE GOVERNANCE
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SR.NO
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CONTENTS
PAGE NO.
1.
Introduction
2.
Definition
3.
4.
5.
6.
7.
8.
9.
Executive Pay
10.
11.
12.
13.
Self-Regulatory Codes
14.
15.
16.
Other Guidelines
17.
18.
19.
20.
Audit committee
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21.
Nomination Committee
22.
Remuneration Committee
23.
Models
24.
Regulations
25.
26.
27.
28.
Chairman
29.
Managing Director
30.
31.
32.
33.
34.
35.
36.
37.
38.
Conclusion
39.
Bibliography
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INTRODUCTION
Corporate Governance is the set of processes, customs, policies, laws & institutions affecting the way
a corporation is directed, administered or controlled. Corporate Governance also includes the
relationships among the many stakeholders involved & the goals for which the corporation is governed.
The principle stakeholders are the shareholders, the Board of Directors, Employees, Customers,
Creditors, Suppliers & the community at large.
Corporate Governance is a multi-faceted subject. It aims at ensuring the accountability of certain
individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent
problem.
Interest in the corporate governance practices of modern corporations, particularly in relation to
accountability, increased following the high-profile collapses of a number of large corporations during
20012002, most of which involved accounting fraud; and then again after the recent financial crisis in
2008. Corporate scandals of various forms have maintained public and political interest in the
regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly
WorldCom).
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CORPORATE
GOVERNANCE
The focus on the need for Corporate Governance probably arose in the aftermath of Watergate scandal
in the United States. Investigations revealed the existence of widespread evil of making of political
contributions & bribing of Government officials by several major corporations.
As a result, the Fraud & corrupt Practices Act, 1977 was passed to check & review the internal control
systems of the corporations a spate of scandal & corporate collapses in the late 1980s &1990s in the
United States & United Kingdom led shareholders & banks to express concern about the safety of their
investments. The companies like Polly Peck, British & Commonwealth, Bank of Credit & Common
International (BCCI), Robert Maxwells Mirror Group News International were all victims of both
boom to bust decade of the 1980s. With a view to prevent the recurrence of such failures Cadbury
Committee under Sir Adrian Cadbury was set up by London Stock Exchange in May 1991 to draft a
code of best Practices for the UK Corporations. The Cadbury Committee report was the milestone in the
history of the concept of Corporate Governance.
In the early 2000s, the massive bankruptcies of Enron and World com, as well as lesser corporate
scandals led to increased political interest in Corporate Governance, This is reflected in the passage of
the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the Corporate Governance of
organizations included the financial crisis of 2008/9 and the level of CEO pay.
East Asia
In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South
Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed.
The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the
institutions in their economies.
Iran
The Tehran Stock Exchange introduced a corporate governance code in 2007 that reformed "board
compensation polices, improved internal and external audits, ownership concentration and risk
management. However, the code limits the directors independence and provides no guidance on
external control, shareholder rights protection, and the role of stakeholder rights.
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The fundamental objective of Corporate Governance is to enhance shareholders value & protect the
interests of other stakeholders by improving the corporate performance & accountability. Further, its
objective is to generate an environment of trust & confidence amongst those having competing &
conflicting interests.
It is integral to the very existence of a company & strengthens investors confidence by ensuring
companys commitment to higher growth & profits. Broadly, it seeks to achieve the following
objectives:
A properly structured board capable of taking independent & objective decisions is in place at
the helm of affairs.
The board is balance as regards the representation of adequate number of non-executive &
independent directors who will take care of their interests & well-being of all the stakeholders.
The board adopts transparent procedure and practices & arrives at decision on the strength of
adequate information.
The board has an effective machinery to sub serve the concerns of shareholders.
The board keeps the shareholders informed of relevant developments impacting the company.
1. Accountability
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Individuals or groups in a company, who make decisions and take actions on specific issues, need to be
accountable for their decisions & actions. Mechanisms must exist and be effective to allow for
accountability. These provide investors with the means to query and assess the actions of the board and
its committees.
Identifiable groups within the organizations such as governance boards who take actions or make
decisions are authorized & accountable for their actions.
2. Responsibility
With regard to management, responsibility pertains to behavior that allows for corrective action and for
penalizing mismanagement. Responsible management would, when necessary, put in place what it
would take to set the company on the right path. While the board is accountable to the company, it must
act responsively to and with responsibility towards all stakeholders of the company.
Each contracted party is required to act responsibly to the organization and its stakeholders.
3. Fairness
The systems that exist within the company must be balanced in taking into account all those that have
an interest in the company and its future. The rights of various groups have to be acknowledged &
respected. For example, minority share owner interests must receive equal consideration to those of the
dominant share owners.
All decisions taken, processes used, and their implementation will not be allowed to create unfair
advantage to any one particular party.
4. Social Responsibility
A well-managed company will be aware of, and respond to, social issues, placing a high priority on
ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, nonexploitative, and responsible with regard to environmental and human rights issues. A company is likely
to experience indirect economic benefits such as improved productivity and corporate reputation by
taking those factors into consideration.
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Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise
their rights by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
Disclosure and transparency: Organizations should clarify and make publicly known the roles
and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.
Transparency: It involves explaining of companys policies & actions to those to whom it owes
responsibilities. It should lead to the making of appropriate disclosures without jeopardizing
companys strategic interests. Internally, transparency means openness in a companys
relationship with its employees as well as the conduct of its business in a manner that will bear
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Ethical Issues
Efficiency Issues
Accountability issues
Ethical Issues:
They are concerned with the problem of fraud, which is becoming wide spread in capitalist
economies. Corporations often employ fraudulent means to achieve goals. They perform cartels
to exert tremendous pressure on the government to formulate public policy, which may
sometimes go against the interests of individuals & society at large. At times corporations may
resort to unethical means like bribes, giving gifts to potential customers & lobbying under the
cover of public relations in order to achieve their goal of maximizing long run owner value.
Efficiency Issues:
They are concerned with the performance of the management. Management is responsible for
ensuring reasonable returns on investment made by the shareholders. In developed countries,
individuals usually invest their money through mutual, retirement & tax funds. In India,
however, small shareholders are still important source of capital for corporations. The potential
return on the investments of the shareholders is dependent upon the efficient & effective use of
the funds by the management of the company.
Accountability Issues:
This issue concentrates on the stakeholders need for transparency of management in the conduct
of the business. Since the activities of the management influence the workers, customers & the
society at large, some of the accountability issues are concerned with the social responsibility
that a corporation must shoulder.
8. Executive pay
Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of
2013) has been brought to executive pay levels since the financial crisis of 20072008. Research on the
relationship between firm performance and executive compensation does not identify consistent and
significant relationships between executives' remuneration and firm performance. Not all firms
experience the same levels of agency conflict, and external and internal monitoring devices may be
more effective for some than for others. Some researchers have found that the largest CEO performance
incentives came from ownership of the firm's shares, while other researchers found that the relationship
between share ownership and firm performance was dependent on the level of ownership. The results
suggest that increases in ownership above 20% cause management to become more entrenched, and less
interested in the welfare of their shareholders.
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Some argue that firm performance is positively associated with share option plans and that these plans
direct managers' energies and extend their decision horizons toward the long-term, rather than the shortterm, performance of the company. However, that point of view came under substantial criticism circa
in the wake of various security scandals including mutual fund timing episodes and, in particular, the
backdating of option grants as documented by University of Iowa academic Erik Lie and reported by
James Blander and Charles Forelle of the Wall Street Journal.
Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of
options faced various criticisms. A particularly forceful and long running argument concerned the
interaction of executive options with corporate stock repurchase programs. Numerous authorities
(including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in
concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in
part, corporate stock buybacks for U.S. Standard &Poors 500 companies surged to a $500 billion annual
rate in late 2006 because of the impact of options. A compendium of academic works on the
option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006.
A combination of accounting changes and governance issues led options to become a less popular
means of remuneration as 2006 progressed, and various alternative implementations of buybacks
surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of
implementing a share repurchase plan.
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Advocates argue that empirical studies do not indicate that separation of the roles improves stock
market performance and that it should be up to shareholders to determine what corporate governance
model is appropriate for the firm.
In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S.
companies with combined roles have appointed a "Lead Director" to improve independence of the
board from management. German and UK companies have generally split the roles in nearly 100% of
listed companies. Empirical evidence does not indicate one model is superior to the other in terms of
performance. However, one study indicated that poorly performing firms tend to remove separate CEO's
more frequently than when the CEO/Chair roles are combined.
Ensure equitable treatment of all shareholders including minority and foreign shareholders.
Recognize the rights of stakeholders as established by law and encourage active co-operation
between corporations and stakeholders in creating wealth, jobs and sustainability of financially
sound enterprises.
Ensure timely and accurate disclosure of all material matters regarding the corporations
including the financial situation, performance, ownership and governance of the company.
Ensure strategic guidance of the company, effective monitoring of management by the board and
the boards accountability to the company and the shareholders.
Corporate governance principles and codes have been developed in different countries and issued from
stock exchanges, corporations, institutional investors, or associations (institutes) of directors and
managers with the support of governments and international organizations. As a rule, compliance with
these governance recommendations is not mandated by law, although the codes linked to stock
exchange listing requirements may have a coercive effect.
12.Self-Regulatory Codes
Codes are generally self-regulatory rules for guiding conduct or behavior. They do not direct or control
behavior by some official authority. International Capital Markets Group (1992) listed the following
benefits of self-regulation:
In self-regulation it is possible to impose ethical standards, which go beyond those, which can
be imposed by statutory legislation.
Self-regulators are directly accountable to the members of their group. Self-regulatory systems
have built in motivation to regulate for effectiveness and least interference.
Self-regulators, being part of the group understand the issues facing the group more intimately
and are therefore more sensitive to the needs of the entire group.
The regulated have an opportunity to participate at all levels of the self-regulatory process.
This makes it easier for them to appreciate and accept new regulations.
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Self-regulation has a built-in system of checks and balances as the regulated see it as their duty
to expose non-compliance.
Self-regulators can identify complex regulatory problems at an early stage and develop suitable
solutions before these problems reach a stage where they can disrupt group operations.
Self-regulations are more comprehensive than, official regulations and are easier to operate and
implement.
There should be a formal and transparent procedure for the appointment of new directors to the
board.
Principle 6: Re-election
All directors should be required to submit themselves for re-election at regular intervals and atleast
every three years.
B. DIRECTORS REMUNERATION
Principle 1: The Level & Make-up of Remuneration
Levels of remuneration should be sufficient to attract and retain the directors needed to run the
company successfully, but companies should avoid paying more than is necessary for this purpose.
A proportion of executive directors remuneration should be structured so as to link rewards to
corporate and individual performance.
Principle 2: Procedure
Companies should establish a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors. No director should
be involved in deciding his or her remuneration.
Principle 3: Disclosure
The companys annual report should contain a statement of remuneration policy and details of the
remuneration of each director.
C. RELATIONS WITH SHAREHOLDERS
Principle 1: Dialogue with Institutional Shareholders
Companies should be ready, where practicable, to enter into a dialogue with Institutional
shareholders based on the mutual understandings of objectives.
Principle 2: Constructive use of AGM
Boards should use the AGM to communicate with private investors and encourage their
participation.
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Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to
meet certain governance standards. For example, the NYSE Listed Company Manual requires, among
many other elements:
Independent directors: "Listed companies must have a majority of independent directors. Effective
boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a
majority of independent directors will increase the quality of board oversight and lessen the possibility
of damaging conflicts of interest." (Section 303A.01) An independent director is not part of
management and has no "material financial relationship" with the company.
Board meetings that exclude management: "To empower non-management directors to serve as a more
effective check on management, the non-management directors of each listed company must meet at
regularly scheduled executive sessions without management." (Section 303A.03)
Boards organize their members into committees with specific responsibilities per defined charters.
"Listed companies must have a nominating/corporate governance committee composed entirely of
independent directors." This committee is responsible for nominating new members for the board of
directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of
listing standards as well as outside regulations. (Section 303A.04 and others)
Organization for Economic Co-operation and Development Principles
One of the most influential guidelines has been the Organization for Economic Co-operation and
Development (OECD) Principles of Corporate Governancepublished in 1999 and revised in 2004.
[2]
The OECD guidelines are often referenced by countries developing local codes or guidelines.
Building on the work of the OECD, other international organizations, private sector associations and
more than 20 national corporate governance codes formed the United Nations Intergovernmental
Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce
their Guidance on Good Practices in Corporate Governance Disclosure. This internationally
agreedbenchmark consists of more than fifty distinct disclosure items across five broad categories:
Auditing
Board and management structure and process
Corporate responsibility and compliance in organization
Other Guidelines
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The investor-led organization International Corporate Governance Network (ICGN) was set up by
individuals centered around the ten largest pension funds in the world 1995. The aim is to promote
global corporate governance standards. The network is led by investors that manage 18 trillion dollars
and members are located in fifty different countries. ICGN has developed a suite of global guidelines
ranging from shareholder rights to business ethics.
The World Business Council for Sustainable Development (WBCSD) has done work on corporate
governance, particularly on Accounting and Reporting, and in 2004 released Issue Management Tool:
Strategic challenges for business in the use of corporate responsibility codes, standards, and
frameworks. This document offers general information and a perspective from a business
association/think-tank on a few key codes, standards and frameworks relevant to the sustainability
agenda.
In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate
Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the
environmental, social and governance responsibilities of a company to its financial performance and
long-term sustainability.
Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision is the
degree to which companies manage their governance responsibilities; in other words, do they merely try
to supersede the legal threshold, or should they create governance guidelines that ascend to the level of
best practice. For example, the guidelines issued by associations of directors, corporate managers and
individual companies tend to be wholly voluntary but such documents may have a wider effect by
prompting other companies to adopt similar practices.
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The Corporate Governance framework should recognize the rights of stakeholders and encourage
active co-operation between corporations and stakeholders in creating wealth, jobs, and financially
sound enterprises. This Principle states that the Corporate Governance framework should recognize
the legal rights of stakeholders. A Corporate Governance structure has to be concerned with finding
ways to encourage the various stakeholders in the firm to make the much needed investment in
human and physical capital. It is ultimately in the long term self-interest of firms to recognize that
their employees and other stakeholders constitute a valuable resource for building competitive and
profitable companies, whether or not those employees or other stakeholders have legal place in
Corporate Governance structure.
3. Disclosure & Transparency
The Corporate Governance framework should ensure that timely and accurate disclosure is made on
all material matters regarding the corporation, including the financial situation, performance,
ownership, and governance of the company.
Transparency is widely recognized as a central and indispensable element of an effective Corporate
Governance system. The Principles require the timely and accurate disclosure of information on all
material matters regarding the financial situation, performance, accordance with high quality
standards. The Principles also requires for an annual independent audit so as to impose an external,
objective control on the preparation and presentation of financial statements.
The Corporate Governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the boards accountability to the company and
the shareholders.
The board is the main mechanism for monitoring management and providing strategic guidance to the
company. The OECD has a number of different boards. Some board emphasizes the monitoring of the
management conduct while other boards are more concerned with providing a strategic vision for the
corporations. The accountability of the board to the company and its shareholders is a basic tenet of
sound Corporate Governance everywhere. The Principles make it clear that it is the duty of the board to
act fairly with respect to all group of shareholders, to deal fairly with stakeholders and to assure
compliance with applicable laws. The responsibilities of the board includes: reviewing corporate
strategy and planning; overseeing management; managing potential conflicts of interest; and assuring
the integrity of accounting, reporting and communication systems. The Principles also stress the need
for objective judgment on corporate affairs by board members, independent of the opinion of
management.
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2. Clause 40 A: It requires compliance with SEBI Regulations, 1977 by the acquires and the
company where any person acquires or agrees to acquire any securities beyond 5% of voting
capital or exceeding 10% of the voting rights of the company under clause 40B, compliance
with the aforesaid Act is mandatory where takeover offer is made or a change in control of
management of company is involved.
3. Clause 43 A: It casts an obligation on the company to disclose the fact of delisting together with
reason / jurisdiction and suspension of trading in securities at the stock exchange at which these
are listed.
4. Clause 45: It provides that there shall be five public shareholders for every rupees one lakh of
net capital offer made to public and ten incase of offer for sale.
5. Clause 46: It requires the company to appoint company secretary who shall act as compliance
officer and directly lease with authorities like SEBI, stock exchanges, Registrar & investors.
6. Clause 47: It requires that permission for delisting of securities from other than regional stock
exchange shall be subject to company passing a special resolution of shareholders in the general
meeting and publishing a notice in the newspapers offering justification for proposed delisting.
CLAUSE 49
The company agrees to comply with the following provisions:
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I.
Board of Directors
A. Composition of Boards
i) The Board of Directors of the company shall have an optimum combination of executive and nonexecutives directors with not less than fifty percent of the board of directors comprising of nonexecutive director. The number of independent directors would depend on whether the Chairman is
executive or non-executive. In case of non-executive chairman, at least one third of board should
comprise of independent directors and in case of an executive chairman, at least half of board
should comprise of independent directors.
B. Composition of Boards
i) All compensation paid to non-executive directors shall be fixed by the Board of Directors and shall be
approved by shareholders in general meeting. Limits shall be set for the maximum number of stock
options that can be granted to non-executive directors in any financial year and in aggregate. The
stock options granted to the non-executive directors shall vest after a period of at least one year
from the date such non-executive directors have retired from the Board of the Company.
ii) The considerations as regards compensation paid to an independent director should be the same as those
applied to a non-executive director.
iii)The company shall publish its compensation philosophy and statement of entitled compensation in
respect of non-executive directors in its annual report. Alternatively, this may put up on the
companys website and reference drawn thereto in the annual report. Company shall disclose on an
annual basis, details of shares held by non-executive directors, including on an if-converted basis.
iv) Non-executive directors shall be required to disclose their stock holding in the listed company in which
they are proposed to be appointed as directors, prior to their appointment. These details should
accompany their notice of appointment
C. Independent Director
Independent Director shall however 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, defense shall not be
permitted on the ground that the independent director was unaware of this responsibility.
i)
The considerations as regards remuneration paid to an independent director shall be the same as those
applied to a non-executive director.
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D. Board Procedure
The board meeting shall be held at least four times a year, with a maximum time gap of four months
between any two meetings. The minimum information to be made available to the board is given in
Annexure-IA.
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.
E. Code of Conduct
i)
It shall be obligatory for the Board of the company to lay down the code of conduct
for all board members and senior management of a company. This code of conduct
ii)
Audit Committee
A. Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up and shall comply with the
following:
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i)
The audit committee shall have minimum three members. All the members of audit
committee shall be non-executive directors, with the majority of them being
ii)
independent.
All members of audit committee shall be financially literate and at least one member
iii)
iv)
v)
The audit committee should invite such of the executives, as it considers appropriate
to be present at the meetings of the committee, but on occasions it may also meet
without the presence of any executives of the company. The finance director, head of
internal audit and when required, a representative of the external auditor shall be
vi)
fee and also approval for payment for any other services.
Reviewing with management the annual financial statements before submission to
the board.
Reviewing with management, external and internal auditors, the adequacy of internal
control systems.
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Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
scope of audit as well as post audit discussion to ascertain any area of concern.
Reviewing the companys financial and risk management policies.
To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders and creditors.
information.
Management discussion and analysis of financial condition and results of operations.
Reports relating to compliance with laws and to risk management.
Management letters / letters of internal control weaknesses issued by statutory /
v)
vi)
internal auditors.
Records of related party transactions.
The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the audit committee
III.
IV.
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ii)
Companies shall take measures to ensure that this right of access is communicated to
all employees through means of internal circulars, etc. The employment and other
personnel policies of the company shall contain provisions protecting whistle
blowers from unfair termination and other unfair or prejudicial employment
iii)
practices.
Company shall annually affirm that it has not denied any personnel access to the
audit committee of the company and that it has provided protection to whistle
blowers from unfair termination and other unfair or prejudicial employment
V.
iv)
practices.
Such affirmation shall form a part of the Board report on Corporate Governance that
v)
iii)
iv)
v)
VI.
VII.
Disclosures
A. Basis of Related Party Transactions
i)
A statement of all transactions with related parties including their basis shall be
placed before the Audit Committee for formal approval / ratification. If any
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defined framework.
Management shall place a report certified by the compliance officer of the company,
before the entire Board of Directors every quarter documenting the business risks
faced by the company, measures to address and minimize such risks, and any
limitations to the risk taking capacity of the corporations. This document shall be
formally approved by the Board.
iii)
iv)
v)
performance criteria.
Service contracts, notice period, severance fees.
Stock option details, if any and whether issued at discount as well as the period
over which accrued and over which exercisable
E. Management
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As part of the directors report or as an addition there to, a Management Discussion and
Analysis report should form part of the annual report to the shareholders. This Management
Discussions and Analysis should include discussion on the following matters within the
limits set by the companys competitive position:
Outlook.
VIII.
CEO/CFO Certification
CEO and the CFO of the company shall certify that, to the best of their knowledge and belief:
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i)
They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as cash flow statements and the Directors
IX.
ii)
Report.
These statements do not contain any materially untrue statement or omit any
iii)
iv)
v)
vi)
performance criteria.
Service contracts, notice period, severance fees.
Stock option details, if any and whether issued at a discount as well as the period
specifically highlighted.
The companies shall submit a quarterly compliance report to the stock exchanges within
15 days from the close of quarter. The report shall be submitted either by the Compliance
Officer or the Chief Executive Officer of the company after obtaining due approvals.
But in todays environment, audit committees are also concerned with the retention and performances of
external auditors, the effectiveness of internal controls, compliance with code of ethics and the anatomy
of whistle blowing procedures for accounting related issues.
Composition of Audit Committee
1) The audit committees should have minimum three members all being independent and with
atleast one director having financial and accounting knowledge.
2) The chairman of the committee should be an independent director.
3) The chairman should be present at annual general meeting to answer shareholder quarries.
4) The audit committees should invite such of the executives, as it considers appropriate to be
present at the meetings of the committee but an occasions if may a ISO meet without the
presence of any executives of the company. Finance director and head of the internal audit and
when required a representative of external, a representative of the external auditor should be
present as invites for the meeting of the audit committee.
5) The company secretary should act as the secretary to the committee.
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6) To review with the management external and internal auditor, the adequacy of internal control
system.
7) To discuss with internal auditors of any significant findings and follow up thereon.
8) To discuss with the external auditors before audit commences, of the nature and scope of audit.
Also post audit discussion to ascertain any area of concern.
9) To review companys financial and risk management policies.
10) To look into the reasons for substantial defaults in the payments to the depositors, debentures
holders, shareholders and creditors.
11) To make recommendations regarding the audit fee, selection and replacement of auditors.
12) To review the adequacy of internal audit function, including the structure of the internal audit
department, starting and seniority of the official heading the department, reporting structure,
coverage and frequency of internal audit.
One size does not fit for all when delegating oversight responsibility to the audit committee,
recognize that the needs and dynamics of each company, board and audit committee are unique.
The board must ensure the audit committee must comprises the right individuals to provide
independent, objective and effective oversight.
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The board and audit committee must continually assess whether and insist about integrity and
accuracy in financial reporting.
The audit committees oversight process should facilitate its understanding and monitoring of
key roles responsibilities and risks within the financial reporting environment.
The audit committee must continually reinforce its direct responsibility for the external
auditor, as required under Sarbanes Oxlay.
Nomination Committees
Introduction
Committees are usually set up to select the new non-executive directors. Usually, it is headed by the
chairman and its shortlists and interviews the final candidates.
Role of Nomination Committee
1) Oversee board organization, including committee assignments.
2) Determine qualifications for board membership.
3) Identity and evaluate candidates for nominations to the board.
4) Propose a slate of nominees for selection by the shareholders at the annual meeting of the
shareholders.
5) Act as the contact point for shareholder input to the nomination process.
6) Oversee director orientation and training.
7) Oversee the annual assessment of the board and its committees.
8) Oversee the development of and recommend corporate govern and principles for adoption of the
full board.
9) Oversee CEO succession planning for other senior management positions.
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Whether its board has a dedicated nominating committee, and if not the reasons why it did not
torn such a committee and a description of the process adopted to determine director nominees.
Whether a company pays any third parties a fee to assist in the process of identifying and
evaluating candidates and what functions these search firms perform.
The minimum qualifications and standards a company seeks for director nominees.
Whether candidates put toward by shareholders are considered for director nominees are the
processes for identifying and evaluating such candidates.
Whether a company has rejected any candidates nominated by large long term shareholders or
group of shareholders.
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Remuneration Committee
Shareholders are becoming concerned about the lack of transparency regarding the remuneration of
directors and top level managers. The board sets up the remuneration committee to objectively review
the remuneration packages of the executive directors and other top level managers.
This committee, which is made up of independent directors chalks out the remuneration policy. Such
policy checks the reasonable increase of executive remuneration.
The remuneration committee designs a transparent remuneration policy that can attract and retain
directors and top management and motivate them to achieve the long term goals of the organization.
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MODELS
Different models of corporate governance differ according to the variety of capitalism in which they are
embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The
coordinated or Multi stakeholder Model associated with Continental Europe and Japan also recognizes
the interests of workers, managers, suppliers, customers, and the community. A related distinction is
between market-orientated and network-orientated models of corporate governance.
Continental Europe
Some continental European countries, including Germany and the Netherlands, require a two-tiered
Board of Directors as a means of improving corporate governance.[28] In the two-tiered board, the
Executive Board, made up of company executives, generally runs day-to-day operations while the
supervisory board, made up entirely of non-executive directors who represent shareholders and
employees, hires and fires the members of the executive board, determines their compensation, and
reviews major business decisions.
India
The Securities and Exchange Board of India Committee on Corporate Governance defines corporate
governance as the "acceptance by management of the inalienable rights of shareholders as the true
owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction between personal
& corporate funds in the management of a company."
United States, United Kingdom
The so-called "Anglo-American model" of corporate governance emphasizes the interests of
shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive
directors elected by shareholders. Because of this, it is also known as "the unitary system". Within this
system, many boards include some executives from the company (who are ex officio members of the
board). Non-executive directors are expected to outnumber executive directors and hold key posts,
including audit and compensation committees. In the United Kingdom, the CEO generally does not also
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serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major
misgivings regarding the impact on corporate governance.
REGULATIONS
Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These
may vary in many respects between countries, but a corporation's legal person status is fundamental to
all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right
without reference to any particular real person. It also results in the perpetual existence that
characterizes the modern corporation. The statutory granting of corporate existence may arise from
general purpose legislation (which is the general case) or from a statute to create a specific corporation,
which was the only method prior to the 19th century.
In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in
some countries, and various laws and regulations affecting business practices. In most jurisdictions,
corporations also have a constitution that provides individual rules that govern the corporation and
authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in
English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and
Articles of Association. The capacity of shareholders to modify the constitution of their corporation can
vary substantially. The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent
modifications. This law made it illegal to bribe government officials and required corporations to
maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the
Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied
on corporations and executives convicted of bribery.
The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private
citizens or make facilitating payments (i.e., payment to a government official to perform their routine
duties more quickly). It also required corporations to establish controls to prevent bribery.
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile corporate scandals.
It established a series of requirements that affect corporate governance in the U.S. and influenced
similar laws in many other countries. The law required, along with many other elements, that:
The Public Company Accounting Oversight Board (PCAOB) is established to regulate the auditing
profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the
financial statements of corporations and issuing an opinion as to their reliability.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements.
Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their
defense.
Board audit committees have members that are independent and disclose whether or not at least one is a
financial expert, or reasons why no such expert is on the audit committee.
External audit firms cannot provide certain types of consulting services and must rotate their lead
partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior
management roles worked for the auditor in the past year. Prior to the law, there was the real or
perceived conflict of interest between providing an independent opinion on the accuracy and reliability
of financial statements when the same firm was also providing lucrative consulting services.
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There is no standardized list of the major functions and responsibilities carried out by position of chief
executive officer. The following list is one perspective and includes the major functions typically
addressed by job descriptions of chief executive officers.
Chairman
The chairman is responsible for leadership of the Board. In particular, he will:
He ensures effective operation of the Board and its committees in conformity with the highest
standards of corporate governance.
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Chairman sets the agenda, style and tone of Board discussions to promote constructive debate
and effective decision-making.
He chairs the Nominations Committee and builds an effective and complementary Board,
initiating change and planning succession on Board and Group Executive appointments.
He ensures that all Board committees are properly established, composed and operated.
Chairman ensures comprehensive induction program for new directors and update for all
directors as and when necessary.
He supports the Chief Executive in the development of strategy and more broadly, to support
and advise the Chief Executive.
He maintains accesses to senior management as is necessary and useful, but not intrude on Chief
Executives responsibilities.
He ensures that the performance of the Board, its main committees and individual directors is
formally evaluated on an annual basis.
Managing Director
The first building block of Corporate Governance to be put in place in a company is the Managing
Director. In start-ups this position is generally filled by the founder.
Whatever the size or nature of the company, the role of the Managing Director is to ensure that the
company achieves its strategic objectives and to provide leadership and direction to staff.
His / Her role depends on the stage of growth of the company. Typically, the scope of the role becomes
more clearly defined as the company develops and the supporting Corporate Governance framework
required is clearer. For example, one such a framework is developed, the Managing Director may
delegate some responsibilities to members of the Management Team.
Role of the Managing Director
Develop and deliver on the companys strategic plan in the most effective and efficient manner
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Accountable for the overall performance of the company and for the day-to-day running and
management of the companys business, under delegated authority from the Board.
Develop and present the strategic and annual business plans to the Board for approval.
Take a leadership role in establishing or developing the companys culture and values.
Ensure that there is a fit between strategy and culture, and the companys processes and
structure.
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Ensure that appropriate internal audit processes and procedures are in place.
Report to the Board on progress against the strategic and annual business plans on a regular
basis. Typically, reporting against the annual plan will be monthly, while reporting against the
strategic plan will be less frequent, although it should be at least two or three times a year.
Board
The role of Board is to:
Establish the mission, goals and policies of the organization, what we should accomplish and
how we should conduct ourselves in the process.
Develop a long-range plan for the organization; define our strategy and a time frame for
achievement of our goals.
Ensure the long term financialstability and strength of the organization, develop and maintain
sources of income to provide for the continuing operation of the organization.
Ensure the long term organizational stability and strength of the organization, bring into the
organization individuals with the necessary abilities to lead and manage the organization in the
future.
Maintain the integrity, independence and ideals of the organization; do not allow individuals or
organizations to compromise these principles.
Hire and develop an executive director to manage the operations of the organization.
Exercise management oversight of the executive director and the operations; approve annual
budgets, review operating and financial results, audit for compliance with internal policies and
external requirements, review performance against goals.
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Perform the functions and work of the board to the best of ones ability.
Contribute financially to the organization to the best of ones ability and seek financial support
from others outside of the organization.
Recommend others who could serve on the board or be of particular value to the organization in
other capacities.
Avoid any conflicts of interest and situations that would compromise the principles of the
organization or lead to the perception of compromise.
3) Vice President
The vice president is the operations officer of the organization & in this capacity shall:
Perform those functions delegated to the vice president by the president
Perform the duties of the president when the president is unable to perform them.
Serve as the chair of at least one committee that is operational in scope.
4) Secretary
The secretary is the officer responsible for the records and correspondence of the organization &
in this capacity shall:
Perform those functions delegated to the secretary by the president.
Safeguard all the records of the organization.
Record and retain the minutes of all board and executive committee meetings and
5) Treasurer
The treasurer is the financial officer of the organization & in this capacity shall:
Perform those functions delegated to the treasurer by the president.
Safeguard the assets of the organization.
Maintain control over the receipt and disbursement of the organizations fund.
Serve as the chair of the Finance committee.
Oversee the preparation of the annual budget.
6) Executive Director
The executive director is not an elected officer, but an employee of the organization. The
executive officer is the chief staff executive & in this capacity shall:
Perform those functions delegated by the president and the board.
Establish a staff structure and hire and train personnel to fit it.
Implement the plans and policies developed by the board.
Operate the national office.
7) Board Committee & Committee Members
The Board of Directors will form committees to perform specific functions, such as financial
oversight, or perform certain work, such as plan the annual convention. Committees may have
non-board members as members except where specifically prohibited. The responsibility of
committee members in all case shall be to:
Be committed to the purpose of the committee.
Became knowledgeable about the work of the committee.
Do the work to the committee.
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The role of the Budget and Administration committee is to perform the properly delegated functions and
duties of the board related to ensuring the long-term financial stability and strength of the organization.
The chair of the committee is the treasurer. The committee composition should include individuals with
some background in business or finance and may include non-board members. The committees scope
may be expanded by the board to include oversight of the administrative operations of the organization.
Nominating Committee
The role of the nominating committee is to recommend to the board for its consideration a list of
qualified individuals who could become members of the board or any of its committees or contribute
substantially to the organization in other capacities. The members of the nominating committee should
not be candidates for election to the board and should understand well the organization and its needs.
Although elections may occur only annually, the committee will be involved in a continuous process of
seeking, identifying and reviewing prospective candidates.
Governance Committee
The role of the governance committee is to recommend to the board for its consideration a multi-year
plan for the organization that defines its mission, goals, needs, polices, etc., within a defined view of the
future. This committee is also responsible for establishing leadership development process; protecting
the Board integrity and establishing compliance with internal governance policies.
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community to establish, utilize and report, on a large scale, quantifiable outcome measures of patient
health and quality of life.
Medical Advisory Board
The MAB is comprised of renal community professionals who provide advice and counsel to the
organization in technical areas as well as support the organization. This committee is responsible for
analyzing the function of increasing membership.
Program Committee
This committee is responsible for patient educational materials and programs.
Marketing Committee
This committee is responsible for developing methods and processes for surveying
designed populations. It is also responsible for creating awareness ofAmerican
Association of Kidney Patients (AAKP) both in the renal communities and general
public.
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This includes electing directors and proposals for fundamental changes affecting the company such as
mergers or liquidation voting takes place at the companys annual meeting.
Ownership in a Portion of Company Earnings
Shareholders have a right to share the residual of profits. They have a claim on a portion of the assets
owned by the company.
The Rights to Transfer
It means shareholders are allowed to trade their stock on an exchange. They can liquidate their funds i.e.
they can convert their investment into cash. They can move their money into other places almost
instantaneously.
Right to Receive Dividend
Along with a claim on assets, shareholders can receive a claim on any profits a company pays out in the
form of a dividend. To receive the dividend when it is declared by the BOD; is a basic right of
shareholders.
Opportunity to Inspect Corporate Books and Records
This opportunity is provided through a companys filings including its annual report. Shareholders have
a right to inspect books of accounts, register of members, register of debenture holders etc. This makes
them aware with current activities of the organization.
The Right to Sue for Wrongful Acts
Investors or shareholders have a right to take legal action against any wrongful act of the corporates.
They can sue against fraud, cheating, insider trading or other unethical and illegal activities of the
organization.
Introduction
Corporate Governance in a globalize economy has become one of the most important topic for the
business environment and the governments. The proper implementation Corporate Governance
regulations by the companies bring out advantage for companies and countries.
High quality status of Corporate Governance means low capital cost, increase in financial capabilities,
liquidity, ability of overcoming crisis more easily and prevention of execution of soundly managed
companies from capital markets.
For years, the OECD has been working to promote use of Corporate Governance principles. They were
first issued in 1999 and revised in 2004 to support good Corporate Governance policy and practice, both
within OECD countries and beyond.
The International Corporate Governance Network (ICGN) statement on Global Corporate Governance
principles adopted on July 9, 1999 at the Annual Conference in Frankfurt.
The ICGN founded in 1995 at the instigation of major institutional investors, Investor companies,
financial intermediaries academics and other parties interested in the development of Global Corporate
Governance strategies
Objectives
Its main objective is to facilitate international dialogues on issues concerned. Through this process, the
ICGN holds, companies can compete more effectively and economies can best prosper.
The ICGN welcomes the OECD principles as a remarkable convergence on Corporate Governance
common ground among diverse interests, practices and cultures. The ICGN believes that companies
around the world deserve clear concrete guidance on how the OECD principles can be implemented.
The overriding objective of the corporation should be optimizing over time the return to its
shareowners. Corporate objective should be clearly stated and disclosed. To achieve this
objective, the corporation should endeavor to ensure long tern viability of its business, and to
manage effectively its relationship with stakeholders.
2. Communication & Reporting
Corporation should disclose accurate, adequate and timely information especially on the issues
of acquisition, ownership obligation, and sale of shares.
3. Voting Right
Corporations should act to ensure the owners right to vote. Regulations & laws should
facilitate voting rights and timely disclosure of the level of voting.
4. Strategic Focus
Major strategic modifications to the core business of a corporation should be made without prior
shareholders approval of the proposed modification. Shareholders should be given sufficient
information about any such proposal sufficiently early to allow them to make an important
judgement and exercise their voting rights.
5. Operating Performance
Corporate Governance practices should focus Boards attention on optimizing overtime the
companys operating performance. In particular the company should strive to excel in specific
sector peer group comparison.
6. Shareowner Returns
Corporate Governance practices should also focus Boards attention on optimizing profits to pay
good return to their shareholders.
7. Corporate Citizenship
Corporate should adhere to all applicable laws of the jurisdiction in which they operate. Boards
that strive for achieving co-operation between corporation and stakeholders will be most likely.
accuracy of information provided by management to investors. Stock analysts and debt holders may
also conduct such external monitoring. An ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care
should be taken that incentives are not so strong that some individuals are tempted to cross lines of
ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the
company up.
Internal Corporate Governance Controls
Internal corporate governance controls monitor activities and then take corrective action to accomplish
organizational goals. Examples include:
Balance of power:
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The simplest balance of power is very common; require that the President be a different person
from the Treasurer. This application of separation of power is further developed in companies
where separate divisions check and balance each other's actions. One group may propose
company-wide administrative changes, another group review and can veto the changes, and a
third group check that the interests of people (customers, shareholders, employees) outside the
three groups are being met.
Remuneration:
Performance-based remuneration is designed to relate some proportion of salary to individual
performance. It may be in the form of cash or non-cash payments such as shares and share
options, superannuation or other benefits. Such incentive schemes, however, are reactive in the
sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and
can elicit myopic behavior.
Monitoring by large shareholders and/or monitoring by banks and other large creditors:
Given their large investment in the firm, these stakeholders have the incentives, combined with
the right degree of control and power, to monitor the management.
Competition
Debt covenants
Demand for and assessment of performance information (especially financial statements)
Government regulations
Managerial labor market
Media pressure
Takeovers
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enhance the perceived integrity of financial reports, corporation financial reports must be audited by an
independent external auditor who issues a report that accompanies the financial statements.
One area of concern is whether the auditing firm acts as both the independent auditor and management
consultant to the firm they are auditing. This may result in a conflict of interest which places the
integrity of financial reports in doubt due to client pressure to appease management. The power of the
corporate client to initiate and terminate management consulting services and, more fundamentally, to
select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted
in the United States in the form of the Sarbanes-Oxley Act (following numerous corporate scandals,
culminating with the Enron scandal) prohibit accounting firms from providing both auditing and
management consulting services. Similar provisions are in place under clause 49 of Standard Listing
Agreement in India.
CONCLUSION
Corporate Governance is a mechanism which brings discipline, systematicness and sets proper order in
the overall administration of the corporate, state and the entire globe. It is the same link between past,
present and future. Its relevance in todays competitive worlds is same as it was during ancient period.
Worldwide steps are taken by corporates to introduce, apply and develop the Corporate Governance
framework.Corporate Governance has become the latest buzzword today. Almost every country has
institutionalized a set of Corporate Governance codes, spelt out best practices and has sought to impose
appropriate board structures. Despite the Corporate Governance revolution there exists no universal
benchmark for effective levels of disclosure and transparency. There are several corporate governance
structures available in the developed world but there is no one structure, which can be singled out as
being better than the others. There is no one size fits all structure for corporate governance. Corporate
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governance extends beyond corporate law. Its fundamental objective is not the mere fulfillment of the
requirements of law but in ensuring commitment of the board in managing the company in a transparent
manner for maximizing long term shareholder value. Effectiveness of corporate governance system
cannot merely be legislated by law. As competition increases, technology pronounces the death of
distance and speeds up communication. The environment in which companies operate in India also
changes. In this dynamic environment the systems of corporate governance also need to evolve. The
recommendations made by different expert committees will go a long way in raising the standards of
corporate governance in Indian companies and make them attractive destinations for local and global
capital. These recommendations will also form the base for further evolution of the structure of
corporate governance in consonance with the rapidly changing economic and industrial environment of
the country in the new millennium.
BIBLOGRAPHY
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