Corporate Governance

“Satyam Vada Dharmam Chara”

- Taittariya Upanishad

“Forever speak the truth and follow the

dharma”

Governance Concept in ‘Ramayana’

To provide “the maximum happiness for the

maximum number of people for the maximum

period, based on the principles of Dharma –

righteousness and moral values.”

- Ayodhya Kand

Corporate GovernanceWhat is Governance?

Purpose of corporate governance is to have a demonstrableIMPACT on a corporation’s FINANCIAL PERFORMANCE.

“Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”.

-The Institute of Company Secretaries of India

Driving Forces of CG in India

1) 1) Unethical Business PracticesUnethical Business Practices– Security Scams ---Harshad Mehtha Security ScamSecurity Scams ---Harshad Mehtha Security Scam

• Equity allotments at discount rates to the controlling Equity allotments at discount rates to the controlling groupsgroups

• Disappearance of Companies (1993-94) - around 4,000 Disappearance of Companies (1993-94) - around 4,000 • companies with 25,000 crores without starting businesscompanies with 25,000 crores without starting business

– Misdeed of CompaniesMisdeed of Companies• Plantation, Sheep rearing, etc.Plantation, Sheep rearing, etc.

2) 2) Impact of GlobalizationImpact of Globalization– Integration with Foreign MarketIntegration with Foreign Market– Foreign Investors expectationsForeign Investors expectations– New Business Opportunities --- IT & ITES, BPO etc.,New Business Opportunities --- IT & ITES, BPO etc.,– New Capital formation – FII, FDINew Capital formation – FII, FDI

3) 3) Impact of PrivatisationImpact of Privatisation – New structure of ownershipNew structure of ownership– Multinational CompaniesMultinational Companies

• Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse

• The initiative in India was initially driven by an industry association, the Confederation of Indian Industry

– In December 1995, CII set up a task force to design a voluntary code of corporate governance.

– The final draft of this code was widely circulated in 1997.

– In April 1998, the code was released. It was called Desirable Corporate Governance: A Code.

– Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others

Brief history of corporate governance in India

• Following CII’s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies

• The Birla Committee Report was approved by SEBI in December 2000

• Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan:

– 2000-01: All Group A companies of the BSE or those in the S&P CNX Nifty index… 80% of market cap.

– 2001-02: All companies with paid-up capital of Rs.100 million or more or net worth of Rs.250 million or more.

– 2002-03: All companies with paid-up capital of Rs.30 million or more

Brief history of corporate governance in India

• Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees.

• In 2001-02, certain accounting standards were modified to further improve financial disclosures. These were:

– Disclosure of related party transactions.– Disclosure of segment income: revenues, profits and capital

employed.– Deferred tax liabilities or assets. – Consolidation of accounts.

• Initiatives are being taken to (i) account for ESOPs, (ii) further increase disclosures, and (iii) put in place systems that can further strengthen auditors’ independence.

Brief history of corporate governance in India

Board of Directors: frequency of meetings and composition

• Board must meet at least four times a year, with a maximum time gap of four months between two successive meetings.

• If the chairman of the Company is a non-executive then one-third of the board should consist of independent directors, and 50% otherwise.

• ‘Independent’ defined as those directors who, apart from receiving director’s remuneration do not have any other monetary relationship or transactions with the company, its promoters, management or subsidiaries, which in the view of the board may affect independence of judgment.

Mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition

• The frequency of board meetings and board committee meetings, with their dates, must be fully disclosed to shareholders in the annual report of the company.

• The attendance record of all directors in board meetings and board committee meetings must be fully disclosed to shareholders in the annual report of the company.

• Full and detailed remuneration of each director (salary, sitting fees, commissions, stock options and perquisites) must be fully disclosed to shareholders in the annual report of the company.

• Loans given to executive directors are capped (no loans permitted to non-executives), and must be fully disclosed to shareholders in the annual report of the company.

Mandated CG guidelines and disclosures

Board of Directors: information that must be supplied

• Annual, quarter, half year operating plans, budgets and updates.• Quarterly results of company and its business segments.• Minutes of the audit committee and other board committees.• Recruitment and remuneration of senior officers.• Materially important legal notices and claims, as well as any

accidents, hazards, pollution issues and labor problems.• Any actual or expected default in financial obligations.• Details of joint ventures and collaborations.• Transactions involving payment towards goodwill, brand equity

and intellectual property.• Any materially significant sale of business and investments.• Foreign currency and other risks and risk management.• Any regulatory non-compliance.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee

• Audit Committee is mandatory.

• Must have minimum of three members, all non-executive directors, the majority of whom are independent.

• Chairman must be an independent director, and must be present at the annual shareholders’ meeting to answer audit or finance related questions.

• At least one member must be an expert in finance/accounts.

• Must have at least three meetings per year, including one before finalisation of annual accounts.

• Must meet with statutory auditors and internal auditors; have the powers to seek any financial, legal or operational information from the management; obtain outside legal or professional advice.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

• Oversight of the company’s financial reporting process to ensure that the financial statement is correct, sufficient and credible

• Appointment / removal of external auditor and fixing of audit fees• Reviewing with management the annual financial statements before

submission to the board, focusing on:– Changes in accounting policies and practices– Major accounting entries– Qualifications in draft audit report– Significant adjustments arising out of audit– The going concern assumption– Compliance with accounting standards, with stock exchange and

legal requirements– Any related party transactions

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

• Adequacy of internal audit and internal control systems, through discussion with internal and statutory auditors as well as management.

• Significant findings, follow-up and action taken reports.

• Discussion with internal and statutory auditors about scope and design of audits.

• Reviewing financial and legal risks and company’s risk management policies.

• Examining reasons behind any materially significant default to creditors, bond-holders, suppliers and shareholders.

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&Land cash flow statement

• Board composition (executive, non-exec, independent).

• Qualifications and experience of directors.

• Number of outside directorships held by each director (capped at director not being a member of more than 10 board-level committees, and Chairman of not more than 5).

• Attendance record of directors.

• Remuneration of directors.

• Relationship (familial or pecuniary) with other directors.

• Warning against insider trading, with procedures to prevent such acts.

• Details of grievances of shareholders, and how quickly these were addressed.

• Date, time and venue of annual general meeting of shareholders.

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

• Dates of book closure and dividend payment.

• Details of shareholding pattern.

• Name, address and contact details of registrars and/or share transfer agents.

• Details about the share transfer system.

• Stock price data over the reporting year, and how the company’s stock measured up to the index.

• Financial effects of stock options.

• Financial effects of any share buyback.

• Financial effects of any warrants that are to be exercised.

• Chapter reporting corporate governance practices

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L andcash flow statement

• Detailed chapter on Management Discussion and Analysis focusing on markets, operations, finances, accounts, risks, opportunities and threats, internal control systems.

• Consolidated financial statement, incorporating accounts of all subsidiaries (over 50% shares held by reporting company).

• Details of all significant related party transactions.

• Detailed segment reporting (revenues, costs, operating profits and capital employed).

• Deferred tax liabilities and assets and debit/credit in the P&L for the reporting year

Mandated CG guidelines and disclosures

Recent Misconducts: The List Goes On…

• Computer Associates:– Artificially inflated revenue and improperly rewarded top

executives.

• CMS Energy

– Overstated revenues in 2000 and 2001 thru ‘round trip’ energy trades?

• Dynegy– Transactions to cut taxes and artificially increase cash flow ?

• Kmart– Suspected improper accounting for vendor allowances

• Lucent Technologies– Adjusted fiscal 2000 revenues by $679 million.

• Several more names, respected world-over– AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone

Systems, Microstrategy, Mirant, Network Associates, Reliant Resources, Vivendi Universal, Xcel Energy, Xerox.

Corporate Mis-Governance

Theories of Corporate Governance

• Anglo-American model

• German model of CG

• Japanese model of CG

&

Infosys Technologies: The Best among Indian Corporates

• As per the Credit Lyonnais Securities Analysis (CLSA), the corporate governance ratings of the Software firms are higher than those of other Indian firms.

• Infosys, based in Bangalore, is a publicly held, ISO 9001 certified company offering information technology consulting & software services.

• The software offered include application development, E-Commerce & Internet Consulting, Software Maintenance.

• Respected across the country, with very strong systems, high ethical values & a nurturing working atmosphere.

• Net income of US 1,155 million and revenue of US 4,176 million.

• At present having US 20.4 billion market capitalisation.

Achievements

• Voted as the Best Managed Company in Asia.

• Biggest exporters of Software.

• First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991.

• Championed Corporate Governance in India.

Narayana Murthy’s Global Strategy

1) Global Delivery Model – Producing where it is most cost effective to produce & selling where it is most profitable to sell.

2) Moving up the Value Chain – Getting involved in a software development project at the earliest stage of its life cycle.

3) PSPD Model – Predictability of Revenues, Sustainability of Revenues, Profitability, De-risking.

Best Governed Companies

ICSI National Award for Excellence in Corporate Governance

Concluding Observations

• Code of CG should be redesigned to reflect international best Code of CG should be redesigned to reflect international best practicespractices

• Stringent enforcement of LawStringent enforcement of Law

• More effective coordination and cooperation between SEBI, DCAMore effective coordination and cooperation between SEBI, DCA

• CG mechanism should be flexible and suitableCG mechanism should be flexible and suitable

• Overall ethical values in all segments should be promoted for Overall ethical values in all segments should be promoted for effective effective

• accounting, auditing, disclosure and transparent system.accounting, auditing, disclosure and transparent system.

WINNINGEMPLOYEES

WINNINGEMPLOYEES

GROWINGINVESTORS

GROWINGINVESTORS

DELIGHTEDCUSTOMERS

DELIGHTEDCUSTOMERS

TRUSTEDSUPPLIERS

TRUSTEDSUPPLIERS

SATISFIEDGOVERNMENT AND

REGULATORS

SATISFIEDGOVERNMENT AND

REGULATORS

HAPPYSOCIETY

HAPPYSOCIETY

GROUP-8Debojit Roy – H66Sritanu Das Mahapatra – H57Abhisek Sahu – H3Krishnakant Pandey – H25Biswajit Ghosh – H12