VARIOUS COMMITTEES AT INTERNATIONAL LEVEL/INTERNATIONAL
COMMITTEES
The following are the committees constituted at international level to introduce
and review corporate governance. Important committees on corporate governance at
international level are the following:
1. Cadbury committee
The Cadbury Committee was set up in May 1991 with a view to overcome the huge
problems of scams and failures occurring in the corporate sector worldwide in the late
1980s and the early 1990s. It was formed by the Financial Reporting Council of the
London Stock Exchange. The committee was chaired by Sir George Adrian Cadbury. The
committee gave important recommendations on the arrangement of company boards and
accounting systems to mitigate corporate governance risks and failures.
2. Greenbury Committee
The Greenbury Committee was established by the United Kingdom Confederation of
Business and Industry on corporate governance. The committee was headed by Sir
Richard Greenbury. The purpose of the committee was to identify good practice in
determining directors’ remuneration and to prepare a code of practice for UK Public
Limited Companies. The final report of the committee was published on 17 July 1995
and is usually referred to as the Greenbury report.
3. Hampel Committee
The Hampel Committee was established in November 1995 to review the
recommendations on corporate governance by the Cadbury Committee. The committee
was constituted by the London Stock Exchange, the Confederation of British Industry,
the Institute of Directors, the Consultative Committee of Accountancy Bodies, the
National Association of Pension Funds and the Association of British Insurers. The
committee was headed by Sir Ronald Hampel. The Hampel Committee released a
preliminary report in August 1997, followed by a final report in January 1998. The
purpose of the committee was to promote high standards of corporate governance in the
interests of investor protection and to preserve and enhance the standing of companies
listed on the Stock Exchange. The report gave some major recommendations on the role
of directors, directors’ remuneration, the role of shareholders and accountability and
audit.
4.OECD Principles
The Organisation for Economic Co-operation and Development (OECD) is an
international economic organisation of 34 countries founded in 1961 to stimulate
economic progress and world trade. It is a forum of countries committed to providing a
platform to compare policy experiences, seek answers to common problems, identify
good practices and co-ordinate domestic and international policies of its members. The
OECD released the principles of corporate governance in May 1999 and were revised in
2004.
These principles are intended to assist member and non-member governments in their
efforts to evaluate and improve the legal, institutional and regulatory framework for
corporate governance in their countries. They provide guidance and suggestions for stock
exchanges, investors, corporations, and other parties that have a role in the process of
developing good corporate governance. The basic areas addressed by OECD principles
are the rights of shareholders, equitable treatment of shareholders, role of stakeholders in
corporate governance, disclosure, transparency and the responsibilities of the board.
5.Sarbanes Oxley [SOX] Act(2002)
The big corporate accounting frauds like Enron, World Com and many more in queue
had shaken the investors’ confidence in the United States and around the globe. As the
United States has a dominant role in global economy, downfall of the US economy had a
cascading effect on the international financial markets. In order to restore, the confidence
of the investors and for bringing back the goodwill to American corporations, a strong
urge for corporate governance restructuring was felt. In the process of designing better
and efficient corporate governance framework in 2002, a law related to the governance
practices was passed by the US parliament. This law is popularly known as Sarbanes
Oxley Act, named after Paul Sarbanes and Michael Oxley who propounded the law. This
law is also known as ‘SOX', which is implemented and governed by Security and
Exchange Commission (SEC). SEC regulates, monitors and controls corporate boards,
internal control mechanism and the audit committees of the US public companies and
public accounting firms. The law has strict provisions of imposing monetary penalties on
.he board members, executives and auditors for non-compliances. The regulation aims at
setting the higher benchmark for accounting standards, internal control and ensuring the
transparency in disclosure of the financial information concerning the investors’ interest.
The law also fixes the responsibility and accountability of boards and audit partners
evasion of which is subject to criminal penalties.
VARIOUS COMMITTEES ON CORPORATE GOVERNANCE IN INDIA.
There are various committees constituted in India to introduce and review
corporate governance in India since 1990s. The recommendations made by these
committees include both mandatory and non-mandatory norms on corporate governance.
Important committees on corporate governance are;
1. Confederation of Indian Industries (CII) Code of Corporate Governance
committee:
The Confederation of Indian Industries set up a task force headed by Rahul Bajaj,
past President, CII and Chairman and Managing Director, Bajaj Auto Limited in 1995. In
1998, the CII released the code called the “Desirable Corporate Governance”. This was a
non-mandatory code which touched the various aspects of corporate governance.
It took the lead in recommending corporate governance practices for its member
companies. CII also hosts the National Foundation for Corporate Governance, a Public
Private Partnership initiative of the Ministry of Corporate Affairs with the 3 professional
institutes, the Institute of Chartered Accountants of India, Institute of Company
Secretaries of India and the Institute of Cost Accountants of India.
2. Kumar Mangalam Birla Committee
The Securities and Exchange Board of India (SEBI) set up a committee in 1999 under
Mr. Kumar Mangalam Birla, member SEBI to promote and raise the standards of good
corporate governance. The primary objective of the committee was to view corporate
governance from the perspective of the investors and shareholders and to prepare a
‘Code’ to suit the Indian corporate environment. The committee identified the
shareholders, the board of directors and the management as the three key constituents of
corporate governance. The committee clearly defined the roles and responsibilities of
these key constituents and also their rights in the context of good corporate governance.
This committee covered issues relating to protection of investor interest, promotion of
transparency, building international standards in terms of disclosure of information.
The committee divided the recommendations under two heads; mandatory and
non- mandatory. The recommendations which are absolutely essential for corporate
governance and are enforced through the amendments of the listing agreement are
mandatory. The recommendation which are desirable or may require change of laws, are
non-mandatory.
3. Naresh Chandra Committee
Ministry of Corporate Affairs appointed a high level committee headed by Mr. Naresh
Chandra in August 2002 to examine various corporate governance issues. The committee
had been entrusted to analyse and recommend changes if necessary, in areas such as the
statutory auditor-company relationship, the procedure for appointment of auditors and
determination of audit fees, measures required to ensure that the management and
companies actually present true and fair statement of the financial affairs, adequacy of
regulation of chartered accountants and company secretaries, role of independent
directors etc.
4. Narayana Murthy Committee
The Narayana Murthy Committee was constituted by the SEBI in 2002 to study the role
of audit committees, audit reports, independent directors, related parties, risk
management, directorships and director compensation codes of conduct and financial
disclosures.
The
committee
recommendations.
5.J.J.Irani Committee
submitted
both
mandatory
and
non-mandatory
The Government of India constituted an expert committee on company law on 2 December 2004 under
the chairmanship of Dr J.J. Irani to make recommendations on (i) responses received from various
stakeholders on the concept paper; (ii) issues arising from the revision of the Companies Act(iii) bringing
about compactness by reducing the size of the Act and removing redundant provisions; (iv) enabling
easy and unambiguous interpretation by recasting the provisions of the law; (v) providing greater
flexibility in rule making to enable timely response to ever-evolving business models; (vi) protecting the
interests of the stakeholders and investors, including small investors etc.
PRINCIPLES OF CORPORATE GOVERNANCE
There are some commonly accepted key principles or elements of good
governance that are applicable to all organizations. These basic principles of Corporate
Governance are:
1 – Establish clear roles and responsibilities
The responsibilities of the board, should be established by setting strategic directions and
promoting ethical conduct in business dealings. It is recommended that the board should:
2 – Strengthen the Composition of the board
The board should have transparent policies and procedures that will assist in the selection
of board members. The board should comprise members who bring value to board
deliberations. The board should establish formal and transparent remuneration policies
and procedures to attract and retain directors.
3 – Reinforce Independence
The board should have policies and procedures to ensure effectiveness of independent
directors. The positions of chairman and CEO should be held by different individuals,
and the chairman must be a non-executive member of the board.The board must comprise
of a majority of independent directors where the chairman of the board is not an
independent director.
4 – Foster Commitment
Directors should devote sufficient time to carry out their responsibilities, regularly update
their knowledge and enhance their skills.
5– Uphold Integrity in Financial Reporting
The board should ensure financial statements are a reliable source of information. It is
recommended that the Audit Committee should ensure financial statements comply with
applicable financial reporting standards.
6– Recognize and Manage Risks
The board should establish a sound risk management framework and internal controls
system. It is recommended that the board should establish a sound framework to manage
risks and an internal audit function which reports directly to the Audit Committee.
7.– Ensure Timely and High Quality Disclosure
Companies should establish corporate disclosure policies and procedures to ensure
comprehensive, accurate and timely disclosures. It is recommended that the board should
ensure the company has appropriate corporate disclosure policies and procedures.The
board should encourage the company to leverage on information technology for effective
dissemination of information.
8– Strengthen Relationship between Company and Shareholders, by honouring
their rights
The board should facilitate the exercise of ownership rights by shareholders. It is
recommended that the board should take reasonable steps to encourage shareholder
participation at general meetings. The board should encourage voting and should promote
effective communication and proactive engagements with shareholders.
9- Ethical behavior : Organisations should develop a code of conduct for their directors
and executives which promotes ethical and responsible decision making. Certain
behavioural standards must be established in the business to govern its policy formulation
and day to day operations.
10- Openness, Disclosure, Accountability, Integrity and transparency: A company
should clearly disclose to shareholders and other stakeholders all material facts related
with it and ensure that all the parties have access to clear, factual information. Reliable
and timely information give valuable help to different stakeholders in their decision
making process.
Good governance ensures openness and transparency so as to give the stakeholders true
and fair information about the operations of the organization.
Good governance ensures that all members of the organization responsible and
accountable for their decisions and actions.
Good governance ensures straightforward dealing based on honesty and objectivity. It
also includes observing high standards of probity and propriety in the functioning of the
organization
PILLARS OF CORPORATE GOVERNANCE
According to the World Bank, Corporate governance is based on four important
pillars. They are as follows;
1. Accountability: Directors should be made accountable for their decisions and
action to shareholders and key stakeholders through a process of rigorous scrutiny.
2. Fairness: The meaning of fairness is that all shareholders should receive equal,
just, and unbiased consideration by the directors and management.
3. Transparency: Directors should disclose and clarify to shareholders and other
key stakeholders all material information of the company.
4. Responsibility: Directors should carry out their duties with honesty and integrity.
CLAUSE 49 or SECTION 49 OF THE LISTING AGREEMENT
Good corporate governance is the topmost priority of the Security and Exchange
Board of India (SEBI). In its efforts towards this objective, SEBI had constituted a
committee on Corporate Governance under the Chairmanship of Kumar Mangalam Birla
in 1999. On the basis of the recommendations made by the committee, SEBI on February
21, 2000 specified the principles of corporate governance and introduced the clause 49 in
the Listing agreement of the Stock Exchanges.
Clause 49 of the listing agreement entitled ‘Corporate Governance’ lays down the
principles of Corporate Governance that are required to be followed by the listed
company.
In its constant endeavour to improve the standards of corporate governance in
India, SEBI in October 2002 constituted a committee on Corporate Governance under the
Chairmanship of N. R. Narayana Murthy. The Committee in its report observed that the
effectiveness of a system of Corporate Governance cannot be legislated by law, nor can
any system of Corporate Governance be static. In a dynamic environment, system of
Corporate Governance needs to be continually evolved.
On the basis of the recommendations made by the Narayana Murthy committee,
SEBI revised the Clause 49 of the Listing Agreement. The revised Clause 49 of the
Listing Agreement to the Indian stock exchange came into effect from 31December 2005.
It has been implemented for the improvement of corporate governance in all listed
companies.
As per the revised norms of Clause 49, companies should give a separate section
on corporate governance in their annual report with a detailed compliance report. Noncompliance of any mandatory requirement which is part of the listing agreements with
reasons thereof and the extent to which the non-mandatory requirements have been
adopted should be specifically highlighted.
Areas of Corporate Governance in Clause 49
Clause 49 of the Listing Agreement of the SEBI covered the following areas of
corporate governance;
1. Board of Directors and its composition and compensation.
2. Provisions regarding the composition and functioning of Audit Committee which
is an important pillar of the Corporate Governance.
3. Management of subsidiary companies.
4. Disclosures of important issues regarding related party transactions accounting
policies, principle of risk management, accounting for proceeds from public
issues, right issues, preferential issues, etc.
5. Content of management discussion and analysis.
6. Information to shareholders.
7. CEO/ CFO certification.
8. Report of Corporate Governance and compliance certificate.
REQUIREMENTS UNDER THE CLAUSE 49
Clause 49 of the Listing Agreement of Stock Exchanges places certain mandatory
and non-mandatory requirements for listed companies in India. All companies whose
securities are to be listed on a stock exchange have to comply with the requirements laid
down in Clause 49.
The requirements of the Clause 49 aim at the improvement of corporate
governance in all listed companies. The significant requirements under the Clause 49 can
be studied under two heads;
 Mandatory Requirements and
 Non-Mandatory Requirements
MANDATORY REQUIREMENTS
Clause 49 contains a series of mandatory norms that are to be strictly followed by
a listed company. The mandatory requirements are;
I.
Board of Directors
Clause 49 stipulates certain mandatory requirements for the composition and
compensation for the Board of Directors of the company. They are as follows;
Board Composition
The board of directors of the company shall have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board of
directors comprising of non-executive directors. The number of independent directors
would depend on whether the Chairman is executive or non-executive. In case of a nonexecutive 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.
Executive and Non-executive directors
Executive directors are responsible for the day-to-day operations of the company.
Non-executive directors mainly focus on corporate decision making. As an integral part
of the Board of Directors, they participate in the major decisions regarding the
management of the company in an unbiased and independent manner.
Independent director
An Independent Director also known as an outside director is a member of the
board of directors who does not have a material or pecuniary relationship with company
or related persons, except sitting fees. An independent director is a person having many
years of experience can act as a guide for the company. The role they play in a company
broadly includes improving corporate credibility and governance standards. He has to
function as watchdog for the benefit of the shareholders. Independent Director plays an
active role in various committees to be set up by a company to ensure good governance.
II.
Audit Committee
There should be an audit committee in the organisation with minimum of three boards of
directors. Out of local members two third of the members should be an independent
directors. All the members in the of the committee should be financially liberate and one
member should be expertise in accounting and financial management field.
III.
Subsidiary Companies
At least one independent director on the Board of Directors of the holding company shall
be a director on the Board of Directors of the subsidiary company. The Audit Committee
of the holding company shall also review the financial statements, in particular, the
investments made by the subsidiary company. The minutes of the Board meetings of the
subsidiary company shall be placed for review at the Board meeting of the holding
company. The Board report of the holding company should state that they have reviewed
the affairs of the subsidiary company .
IV.
Disclosures
Clause 49 of the Listing Agreement puts a responsibility of disclosure upon the
listed companies. This clause has been introduced to strengthen the corporate governance
and transparency in the present business environment for the sake of investor protection.
The followings are the various requirements;
A. Basis of related party transactions
B. Board Disclosures on Risk management
C. Proceeds from Initial Public Offerings (IPOs)
D. Remuneration of Directors
E. Management Discussion and Analysis report
F. Information provided to Shareholders
V.
CEO/CFO certification
CEO (either the Executive Chairman or the Managing Director) and CFO (wholetime Finance Director or other person discharging this function)of the company shall
certify that, to the best of their knowledge and belief.
a) They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as the cash flow statements and the
Directors’ Report;
b) These statements do not contain any materially untrue statement or omit any
material tad nor do they contain statements that might be misleading;
c) These statements together present a true and fair view of the company, and arc in
compliance with the existing accounting standards and / or applicable laws I
regulations;
d) They are responsible for establishing and maintaining internal controls and have
evaluated the effectiveness of internal control systems of the company; and they
have also disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of internal controls, if any, and what they have done or
propose to do to rectify these;
e) They have also disclosed to the auditors as well as the Audit Committee, instances
of significant fraud, if any, that involves management or employees having a
significant role in the company’s internal control systems; and
f) They have indicated to the auditors, the Audit Committee and in the notes on
accounts, whether or not there were significant changes in internal control and / or
of accounting policies during the year.
VI.
Report on Corporate Governance
There shall be a separate section on Corporate Governance in the annual reports of
company, with a detailed compliance report on Corporate Governance. Non-compliance
of any mandatory requirement i.e. which is part of the listing agreement with reasons
thereof and the extent to which the non-mandatory requirements have been adopted
should be specifically highlighted.
VII.
Compliance
The company shall obtain a certificate from either the auditors or practicing
company secretaries regarding compliance of conditions of corporate governance as
stipulated in the clause 49 and annex the certificate(the annual activity certificate) with
the compliance report on corporate governance.
NON-MANDATORY REQUIREMENTS
The non-mandatory requirement shall be implemented as per the discretion of the
company. The implementation of non-mandatory requirements is a matter of choice.
However, the disclosures of the adoption or non-adoption of the non-mandatory
requirements shall be made in the section on corporate governance of the Annual Report.
The non-mandatory requirements are given in Annexure - 1C of the Clause 49.
1. Chairman of the Board
A non-executive Chairman should be entitled to maintain a Chairman’s office at the
company’s expense and also allowed reimbursement of expenses incurred in performance
of his duties.
2. Remuneration Committee
i. The BoD should set up a remuneration committee to determine on their behalf and
on behalf of the shareholders with agreed terms of reference, the company’s policy
on specific remuneration packages for executive directors including pension rights
and any compensation payment.
ii. To avoid conflicts of interest, the remuneration committee should comprise of at
least three directors, all of whom should be non-executive directors. The chairman
of committee should be an independent director.
iii. All the members of the remuneration committee should be present at the meeting.
iv. The Chairman of the remuneration committee should be present at the Annual
General Meeting to answer the shareholder queries.
3. Shareholder Rights
The half-yearly declaration of financial performance including summary of the
significant events in last six-months, should be sent to each household of shareholders.
4. Postal Ballot
There is requirement for arranging postal ballot for shareholders who are unable to
attend the meetings. Some of the critical matters which should be decided by postal ballot
are given below:
i. Matters relating to alteration in the memorandum of association of the company like
changes in name, objects, address of registered office etc.
ii. Sale of whole or substantially the whole of the undertaking;
a) Sale of investments in the companies, where the shareholding or the voting rights
of the company exceeds 25%;
b) Making a further issue of shares through preferential allotment or private
placement basis;
c) Corporate restructuring;
d) Entering a new business area not germane to the existing business of the company;
e) Variation in rights attached to class of securities;
f) Matters relating to change in management.
5. Audit qualifications
Company may move towards a regime of unqualified financial statements.
Unqualified financial statements contain an independentauditor’s judgment that the
company’s financial records and statements are fairly and appropriately presented, and in
accordance with Generally Accepted Accounting Principles (GAAP). An unqualified
financial statement is issued when the independent auditor believes that the company’s
financial statements are sound and are free from material misstatements.
6. Training of Board Members
Company shall train its Board members in the business model of the company, the
risk profile of the company, their responsibilities as directors and the best ways to
discharge them.
7. Mechanism for evaluating non-executive Board Members
The performance evaluation of non-executive directors should be done by a peer
group comprising the entire Board of Directors, excluding the director being evaluated.
The Peer Group evaluation should be the mechanism to determine whether to extend the
terms of appointment of non-executive directors.
ADDITIONAL SHORT QUESTIONS AND ANSWERS
What is an Ethical Dilemma?
An ethical dilemma (ethical paradox or moral dilemma) is a problem in the decisionmaking process between two possible options, neither of which is absolutely acceptable
from an ethical perspective.
It is a situation in which a difficult choice has to be made between two courses of action,
either of which entails violating a moral principle.
What do you mean by ethics hotline?
Ethics Hotline is an anonymous reporting mechanism or tool that facilitates or allows
employees or whistle blowers to report possible illegal, unethical, or improper conduct
when the normal channels of communication have proven ineffective, or are impractical
under the circumstances.
What is ethics committee in corporate governance?
Ethics committee is a committee to review and recommend to the management and board of
directors, objectives, policies and procedures that serve the company's and to maintain a
company committed to high standards of ethics and integrity legal compliance etc.
What is whistle blowing ?
Whistle blowing means calling attention to wrongdoing that is occurring in an
organization. It is reporting the wrongdoing or a violation of the law to the proper
authorities.
Whistle blowing occurs when an individual reports wrongdoing in an organisation, such
as financial misconduct or discrimination. This person is often an employee but can also
be a third-party such as a supplier or customer.
It is one of the most effective ways to detect and prevent corruption and other
malpractices.
Whistle blowing basically is done by an employee where he finds that the ethical rules
are broken knowingly or unknowingly.
Who is a whistleblower ?
A whistleblower is a person, who could be an employee of a company, or a government
agency, disclosing information to the public or some higher authority about any
wrongdoing, which could be in the form of fraud, corruption, etc.
What is Arms Length Principle (ALP)?
The arm's length principle (ALP) is the condition or the fact that the parties of a
transaction are independent and on an equal footing. Such a transaction is known as an
"arm's-length transaction".
According to this principle the parties in a transaction act independently without one
party influencing the other
What is meant by Triple Bottom Line (TBL)
The triple bottom line (TBL)is a framework that measures a business's success in three
key areas: PROFIT, PEOPLE, AND THE PLANET.
It incorporates three dimensions of performance: Financial, Social, Environmental .