corporate governance
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opera:-!cns
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and Control,
the nurnoerSized
the Board flJeeTings. ThE.~
appropnate expertise is.
'd Committee deals with a Specific
-. ~ cu ""'y"eG and findings of the Committees are placed forconsideration of the Helw<!VE'l 'n ::;8r10in '~ases such as the Audit
the ot the 8""d ""y lical. A"olh" ad'actago oi Ii""is lhat can provide an obiectlve and Independent viewpOint ill thesecases where directors may have 8 confi/ct of Interest
10Ihe wake 01"i",oc, of bom" GOmmitt",. Ih, Boam '''Ii"" if", '0 tho"matt,,, which d'maod if, dn", att'olioo ood" Ih, law. The oth" matt'rn aeed,t"OI'd to 'he 'ommllt", eod the commifl",· ""ololio", 'halt h", Ihe "meeff", eo Ihat of fh, 80aed. How"", fhe 'ommltte,,' "'oli'lio", a" "PNfed 10 'heBoard so that all its members are aWare of the Committe(l's actiVities.Need for Board Committees
The 00'",,,,,,, 01 boaed commilt,,, is the p<odo" of "'g,,,,,, 01 modemlime,. The '''',i'''i" 01 woo, 01 a modem boaed of """00' hee made Ihei""teeiocot P'op!, Witi,di"rn, 'kill, ""otia!. The hoaeds tiod if ""ible to b,,,,.e booed ·'eeh two ",ioee oompo,,,,,,, ",,' "wo a"igo '''h "pala'ecompOC'ct a oepa,." COctmlttee.Th, oalo" ot lo,"lioos '%lgNd may"" th, pOlicy 01 the ,ompeoy Th, of commltt", doee aWay with th,~"e"ity of c,",eoiog 0 meell", of the f"" boaed "eo fN mloiet"i" aodInConseqUential tasks.~------~ .•._-_ .
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Ensuring that each drrector know", that he w!!i be (he subject of arhecriteria to be used for evaluation and the procedu;·e to be followed
Development by the Chairman of Board of evaiuatlon questions. copythe assessment lorm should be distributed to the directors to af!ow thtecp TO
make an independent assessment of their own performance
" Distributing the peer evaluation forms in case It is consldereo deSirableuse their assessment. The peers could make anonymous cormnents
the director being evaluated Each should be el1couraged 10 rnake openand honest comments
Then the chairDerson arId ShOUi'J
undisturbed environment, excr'lange assessrnentfonn a.ndin an informal and friendly manner Additional feedbaCKevaluation may be included at the chairperson's discretion.
6. It is very important to keep the meeting between chairperson and directoropen, cordial and honest. The meeting session, should not be taken as an
opportunity to discipline a wayward director. Rather the purpose is to openlydiscuss issues and come to a consensus on how to overcome them. Then
the duty of the chairperson to ensure that this objective remains a priorityduring the interview, The meeting may be adjourned if tempers are goinghigh.
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.A fonnaJ evaluatIon prOC8&S
ana aiiows the board to identify the skil, reUlJifementsthose of existing bowd membels.
The chairperson's own performance is clearly linked-chip hen to that of the
director. Therefore, the chairperson should allow a frank, two way discussionand be open to considering whether his own actions are impeding thedirector's performance.
The chairperson should rnakf3 cbserVcHlnnscomrnents included in the peer eva,luation formscompleting a director's assessment ferrr'
On receipt of completed peer evaluation formsoutstanding issues that need discussinq with the director
Various steps in evaluation procedure
The procedure of evaluatio'j variesseveral steps:
BOARD COMMITTEES
Committees are a way of governing monolithic organisations through conjointdecision-making and consultative supervision. A Committee represents a group ofpersons to whom a matter has been committed. The Boards of Directors are the
locus of almost all the corporate powers. The variegated nature of matters placedbefore them render it difficult, if not impossible to handle all the matters efficiently.The Boards have to therefore take recourse to the mechanism of board committees.
Depending on the nature and variety of matters, the number of board committees'may vary accordingly.
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. A Committee ot Maoagement;, a~o;n'ed by the GEO.o and;n oommon;oahon.OOO'd;nal;onInte,-departmenta. ooo",;nahon_ The" ;, no ""'egahon f'om 'he boa,dand h" no Powm '0 make 'eeommen">!lon to 'he Boa",. The'O a" O"ated andabolished by a management fiat.
VARIOUS TYPES OF BOARD COMMITTEESAUdit Committee
The COn"ltUltonof aodo oomm;ttee fta, been "mng~ advooated by Ihe Gadb",yGomm'ttee_ Undet Ctao," 49 0' the U"'ng Ag"emen., the oon"ltollon ot aodllcommIttee ;, manda.o", to, the It'ted oompanl", Sect'on 292A ot the Compan;"Act, 1956, mek" It obltgalo", '0' eve", ""blto oompany wllh a paId-up oaplta. ot ftvecrore rupees to have an aUdit committee.
The need fo, aodlt "'mm;tte" have a';'On doe.o Ihe "expeetafton gap" "om 'heaodlto,', "port,_ The aodlto",' 'o'e have oome 'n ta, hea,>, Orilto;'m;n maoy ot theoO'po'a'e eeam, 'hat have o"oned in the U.sA and 'he U,K_ The "ed'bm~ gapbe'ween the aodlto", and the pobt~ "'old be b';dged by oon""oftng a "b-oommlttee0' the boa," ;0 'he 'hape ot an aodlt aod Gompltan" CommIttee no. '0 10<ceaOdlto",'0 wo'k aga;n,. Ihe management bol to maIntaIn ;nteg,;ty and U"ng the;, pmf""onal'''It ;mport;altywhite 'O'a;nlng"It~al detOChmen. and maln'a;n;ng the;, a"OUn'abm.y
to thOse who formally apPoint them.
Composition of AUdit Committee
tt I, oon"de"d ;mpetaftve to, 'hl, GOmm;ttee to oon",. Wholty ot ool';d,dkee.o", with an ool"de oha;'man ",pon"b'e to the boa",. Unde, C'au," 49 ot 'he""ltng Ag"emen., 'he aOdlt oomm'ttee " "qo;'Od 10 have a mln;mom of 3 nonexeMve dl"cto", and an 'ndependent Cha;'man. The objecftve 0' '"titng op 'h;,oom""ttee ;, '0 enhance 'he "ed;blllty 0' ftnano;a. d;ee.o,u'O, end 1o, pmmoftngt"'n,pa"noy_ It, tonofton ;, to "'eng'hen. The 'onct;on 0' th;, "'mm;ttee ;, the audll
job.
The actoal oompo,",on ot oommittee may va", "om Oompany to Oompany bolmajOrity ot membe" mo" be non-execoltve d"ee.o,,_ The "ze 01 'he oomm;ttee'hootd, howeve" be "'aftve'y 'malt with Opto 3o, 5 membe,,_ The oomm;ttee 'hoold'pectly 'he exP''''en" "qo;,ement, to, It, membe,,_ At lea" one ot the membe",must have financial background. ,Frequency of AUdit Committee Meetings
The CommIttee may meet 1o, a. 'ea'i th"e to low Itme, ;n a y", CO;notd;ngwllhthe Ph"" 01 extema' aOd;t. Fo, 'n"an", one ot the m,.ltng, coo'd b. 10,"'''m;na", d;eeo";on prio, '0 annoal '""It; oth., one 0' .wo meeltng, COo'd beVoted to del"mlne 'he modaltft" 01 aUdIt.A loltow op meeftng ooold OO""d., Ihetion being taken on any matter raised by the aUditors.'aluation of AUdil Commiltees
'The "0"" 0' aodlt oomm;tte" depend, co 'he extent oi "pport ane"atton P'OV;ded by Ihe 'naoagement. It, m'e I, '0 ;nv"ftga •• and adv;'e. tt
.'!O. 'ep'e" 'he exeeoft,. 0' 'he maIn boa,,1. MUch mo" 'han II, oon,,,,",,oo,~P"denoa 01 'he 00mmlll." , membw, ;, 01 mWe ,;gOmoanee_ It may lell '0• any Oom"boltoo II";, ",ed a, a m"e W;OdoW-d",,;ng devIce. Itoeo ee. e, aty va've pert;o""rly whoce '''dlto", 'nd m'"agemeOf got a. om"-pOl",,oo.
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Moreover, the empowerment of committees by the boards prevents the task ofCorporate governance from the becoming everybody's responsibility but nobody'sjob. The boards are muiti-dimensional bodies with representation of experts fromdifferent fields. Many of the Board members may be part-time outsiders. Thesemembers may lack the time and expertise to look into each and every matter broughtbefore the board. As demands on board's time increase, it is found advisable toconstitute separate committees comprising of specialists who are capable ofconsidering a matter and conveying their viewpoints to the Board.Delegation by the Board
The whole law of delegation by the Board is based on the principle "delegatesnon-protest delegate". In India, company boards can delegate their powers andfunctions to the extent authorised by the Act and the Articles of Association. Adirector individually does not have the power to bind the company unless that Powerhas been specifically delegated to him. The .Board may delegate certain specifiedpowers by means of a resolution to a committee of directors of the company Subjectto certain restrictions as contained in Proviso to Sub-section (1) of Section 292. Butdelegation does not prevent the board from still acting in regard to the delegatedmatter. The Articles of Association of a company may provide for the appointment ofboard committees delegation of powers to such committees, election of Chairman,adjournment of Board committee's meetings etc.
Regulation 77 of Table A of Schedule I to the Companies Act permits the boardto delegate any of its powers to Committees consisting of such member(s) as it thinksfit. Regulation 78 provides for the election of Chairman of a Committee. Regulation 79deals with adjournment and that the decisions of the Committee shall be by majorityof votes. The Chairman will have a casting vote in the event of equality of votes.Regulation 80 declares the actions of a Committee to be valued notwithstanding thesubsequent discovery of any defeCt in the appointment or qualifications of anydirector.
Nature of composition of Board Committees
The Board Committees may have the following varieties of composition:(a) A Committee consisting entirely of inside directors.
(b) A Committee consisting entirely of outside directors.
(c) A Committee consisting of an admixture of inside and outside directors.
The composition of committees is not however an easy task. Those deprivemembership of an important Committee may feel let down. Since many ofmatters do not come before the full board, a kind of latent resentment may buildagainst the members of Committees. Another problem could be to strike an optimbalance between too many and too few committees. It would be better to leave~matter to the discretion of the board except where certain committees are mandat,~Board Committees vis-a-vis Committees of Management
A Board Committee is constituted by the board to do any work assigned lQ
board has the power to appoint as wel! as 10 abrogate the appointmenti;committees function under the overriding control of the board. These cscreen and make recommendations to Ihe full board. The authority of finalmaking rests with the board itself.
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2. " ,hOuld have a clearly e,tab!;,hed calenda', ,peclfying the dat.' ofmeetings, subject to be covered at. e~h meeting and the materials to be
provided to member for preparation befo?e each meeting.3. Tha oommittee mu,t publl'h a ,tatament 01 '" Charta" ,pamng out tha
criteria used to evaluate the performance of the directors and the rationale forthe remuneration Suggested.
4. The Committee should consult the Company Chairman and/or CEO abouttheir proposals and have access to professional advice inside and outsidethe company.
DisclosuresThe committee should make a report each year to the shareholders on behalf of
the Boa,d. Tha report ,hall ,a ••a a' tha medium of a"ountahllity to ,hareholda" 1mdirectors' remuneration. The report should set out the company's policy on executiveremuneration, remuneration levels, existing remuneration levels in comparable groupof companies individual components, performance criteria and measurement,pe",on p,"vi,ion" cont"'c" ot ,eNica, ",mpen •• tion payahie on aarly te,m'nation.The salary details of each individual director shall be set out in the report.
Relevant considerations in drafting the remuneration policyThe remuneration package Suggested by the committee should be capable ofattracting, retaining and motivating directors of required quality. Butcommittee should avoid paying more than is necessary.Remuneration should be fixed after evaluating the position of the company inrelation to other companies.The performance-related elements of remuneration should be designed toalign the interests of director and sharetlOlders and to motivate director toperform at the highest level.Consideration should be given to providing long-term incentives to directors.These incentives should be weighed against traditional share option schemes.Directors should be encouraged to hold their shares for a longer period.Executive share options should not be issued at discount.Annual bonuses and benefits in kinds should not be pensionable.
Thus for ensuring better compensation governance, remuneration committeesare inevitable.
Nomination committee
The role of nomination committee is to fill up vacancies on the Board and todevelop a policy on the size and composition of board. The nomination committeeadds a glosS of professionalism and objectivity to the process of deciding boardmembership. The committee may be composed of 4-5 members with ap,epande,anca 01ou,,'da d"acto". Tha be,t cou". i, to hava an axcluoive au"idedi'acto< to be p,e,ant in thi, cmnmittaa. NACO' B'ua Ribb'n com,ni"ion (1994) oilCEO and Boa'" Eva'uation ha' "gga,ted that at a m'nimum, the comm'ttee shouldconsider the following:
(i) Boa,d phil",ophY; (i1) currant situation of the company; (iii) 51" andComposition of Board; (iv) Specific board needs including diversity of age,experience. gender, race, geography and business background.
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The areas to be covered by audit committee include, financial control;reporting, assigning of work to internal and external auditors, compliafinancial laws and other regulations.
The audit committee is an unfettered channel between non-executiveami external auditors to tone up the quality of financial reporting. The ben
aspects of this committee are as follows:.,- enhancing the efficiency and effectiveness of Board by means of delega'
of relevant tasks;
improving the working relationship between auditors and the client firm;
maintaining the independence of auditors;
stimulating management by means of an independent assessment atfinancial reporting in addition to the evaluation of financial records by theauditors.
Remuneration Committee
This Committee of the board is the critical link in the establishment andadministration of a sound and effective executive directors' remuneration programme.This committee executes the link between shareholder interest and directors'performance. The object of this committee is not to serve as a "pay watchdog",. In UKthe remuneration of directors and the remuneration committees have received adetailed treatment at the hands of Greenbury Committee. In India, the listedcompanies have the discretion to appoint a remuneration committee comprising of atleast three directors all of whom should preferably be non-executive directors. ItsChairman must be an independent director. Under clause 49, the object of theremuneration committee is to recommend to the Board, the remuneration package ofthe executive directors including pension rights and compensation payable in event oftermination of the contract. It has also been made obligatory for the Chairman of thisCommittee to be present at the Annual General Meeting to facilitate the consideringof shareholders' queries on remuneration fixed by the Committee and the factorsconsidered in such remuneration.
The task of this committee is to determine the company's policy on executiveremuneration and specific remuneration packages for each of the executive director.
Members of the Committee including its Chairman should be:
(i) independent, free of substantial ties to the company and its executivesespecially the CEO;
(ii) experienced and well-informed in compensation management;
(Hi) fully committed to represent the long-term interests of the shareholders;
(iv) knowledgeable about company's business.
The Chairman of the committee should be a senior, experienced director whomeets the above requirements and is available to work with the committee members.
Pre-requisites of an effective remuneration committee:
1. Care should be taken to avoid interlocking remuneration committeemembership with other boards.
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STUDY Xf/
REPORTS OF VAAIOUS COMMITTEES ONCORPO~ TE GOVERNANCEIntrOduction
Ooe key elemeol 10 Impmvlog e'oOomi, emoleeoy I, 'o'Pomie govemaeoe.Good '0'Pomle goveman,e help, 10 eO'uce Ihal '0'Pomlloo, lake 1010a'ooUoi IheIO/emel' 01 a wide cong, of eOO'"luenele" aod Ihallheic Boa"" ace a"oomab/e IeIhe Company aod 'ha"hold,,,. Thl" In 10m, help, 10 a"uce Ihal OO'Poca/loo,opecal, ioc the beoelll of al/ elakeholde". The "edlbllliy of ,0Cpocale govemaoee'Yelem, help, 10 malOialo Ihe oonHden,e 01 inveelo" bOlh focelgo and domeelle Ie
attract more long-term capital.
SU"e"'ve 'ocP"a/e fallu", have been c"POo,lb/e '0' loeu,,," a"eo/loo 00cocPomie govemaoee. The A,'an Floaoda! ",,,, ""hed Ihe "bjee/ol e0'POmt,governance 1o Ihe 'uclace In A'ia. ReceOi "anda/, dielucbed Ihe Olhe"",e placidond ,0mplacemeOi eocpocale laod"ape 10 Ihe US. They 'pawned a eew 'el ofInilia/lve, io 'OCPocale govemaoee In Ihe Us aod Icl9geced IC"h debale in Ih,European Union as well as in Asia.
Inilial ellOrt, 10'ey"al/i" "aoda"', 1oc"'Pocale gov,maoee began io 'OUOlde,/lke Ihe Uolied Siale' and Ihe Uniled Kiogdom Inteceel 10 cefom" 01 oo'Pocategovemaoee ha, 'Ub,equeolly 'Pcead 10 othec coumcle,. All" 1990 Ihe Icao,ilioolcom 'eOical Plaeeiog 10 mackel OOOOOmie"partl,ulacly Ihe Privatizalion 01 'lale.oWnedcompao'" aOd the need 10Pcovlde govemaoee cu/e, I" Ihe emecglog pcl"ale'00/", bcoughllhe I"u, of cocpocale govemaeoe 10 Ibe foce. Sln,e Ihe 1997 cd,",A"an OOUOSc'"have alce beoome keeoly iOieceeled10Ihe I"u,
The drive 10 come forth WITh100ema/lonaieocpo,ale govemaoee ,/andacd, h"beeo laklog place On bolh Offl"al and pclvale level. The focal polOiof o"bal e"ort,ha, been Ihe OECD PC'oelple, 01 eocpocale Govemaoee. The PciOolple, acee"OOlially ba,ed on Ihe eXi'"ng legaf and cegula/oey aCmngemeol, a, wel/ a, Ih,bosl pm"~e among mackespartl'ipam, 10Ihe OECD OOUOSc'e,
10 addilion 10 Ihe gOvemmeOial view eoeap'uled in Ih, OECD PCleolp/e"pclvalegcouP' have 'orne lorth wilh Ihelc owo View, On 100ema/ionai elandacd,. Themo" peomloeOl gcouP 01 pelvale mackel Partbpallon elclvlng 10 dOVelop gOodgo"man'e "aodacd, ha, bean I,,/l/ullooal in""o". lO"de Ihi, ,ommunlly, Ih,meel Importam gcouP 'eeklng 10 PCOmole impcoved govemaeoe ha, beeo Ih,100e'oatiooal Cocpoc"e Gov,mance Nelwock (lCGr-l) locmed 10 1995. The Woc/dBon, and Ihe IMF ace Imp/emen/log govemaeoe cefocm 10ellI/'aillng mock"" aod
• de"gnlng po/lele, 10"em aoy PO"'b/e Hoaoelal ec'", la'!lely 10ce'po"e 10Ihe
USes of 1980s.
1010dlaIhe'e begao io 1998 wllh Ihe locmu/abon of de'''ab/e COde 01 C0'Pocaleveman,e a Vo/umaey 'Ode PUbli'hed by COoledeca/ion of Indiao Induelcle' (CI/).WevecIh, 'oe/u"oo of Clau,e 49 In Ihe lieling AgmemeOi ba'ed on Ihe Kumacgalam Blrta Commillee RepOrtPcovlde, /1", 10cmallegallCamew"k 1ocC0'Pocal,emaoee app/I,able 1o /I,'ed ,ompaole,. Re,eol/y, Ihe Nace'h ChandcaInlltee ha, al,o made "oommeodallo", on Ihe AUdll".Compaoy celallo",hlp
'other aspects relating to Corporate Governance.
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Every year or two, the Committee should review the board for the above factors.analyse and discover the weaknesses of the board and determine the methods tosolve those weaknesses. It will be better for the committee to hflve a written charter.
Candidates for board membership may be picked up from different resourcessuch as shareholder groups, major business and government organisations andbusiness leaders. After the candidates have been short listed, the full board shouldconsider these names. This will make the board appointments transparent.
Nomination Committee may be also assigned the job of evaluating the ChiefExecutive Officer in terms of a format prepared and endorsed by the full Board. Theevaluation format should be prepared keeping in view the current job description ofthe CEO. The performance score of the CEO can then be graded against thestandard criterion. Individual directors may also provide their appraisal report on CEOperformance which may be compiled into a total report card.
Nomination committees are justified in the case of only large companies. In the caseof small companies, nomination committee is not essential. The companies having abroad shareholders base, may solicit nominations from different shareholder groups.Compliance Committee
Faiiure of corporations like Enron and the dismal performance by many of thecompanies has been due to poor compliance record. There are heavy costs ofcompliance breaches. Consequently, the monitoring of compliances has becomeimperative particularly in view of onerous regulatory burden. Sub-committee of theboard could be specifically carved out to monitor the Compliances by the company.The Committee could devise an effective compliance system and integrate it intocorporate procedure. The focus of the committee would be on:
- due diligence;
prevention of legal breaches;- discovering and reporting violations.
The compliance committee will make a regular review of company's complianceliabilities and develop appropriate compliance procedures based on these liabilityexposures. The committee will have at least one insider and the staff at its disposal toenable it to fulfill the company's compliance obligation.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to besubmitted for evaluation)
1. What are the core principles of Corporate Governance?2. Discuss the role of Board in corporate governance.
3. Describe the responsibilities of Board in the context of Corporategovernance.
4. What are the various steps in evaluation of the Board?5. What is need for Board Committees?
6. Discuss the various types of Board Committees.
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t"responsible for the governance of their companies. The shareholders' role in'~governance is to appoint the directors and auditors and to satisfy themselves that an
appropriate governance structure is in place. The responsibilities of the board includesetting the company's aims, providing the leadership to put them into effect,supervising the management of the business and reporting to the shareholders ontheir stewardship. The Board's actions are subject to laws, regulations and theshareholders in general meeting."
The committee has summarized its recommendations in a Code of Best Practice.The Code is designed to achieve the necessary high standards of corporatebehaviours. The principles on which the code is based are those of openness,integrity and accountability. The Code is directed to the Board of Directors of all listedcompanies in United Kingdom and the London stock exchange intends to require alllisted companies, as a continuing obligation of listing, to state whether they arecomplying with the Code and to give reasons for any areas of non-compliance. Thisrequirement is expected to know whether the companies in which they have invested,stand in relation to the Code. The recommendations set out in the Code are asfollows:
Board of Directors
(i) The Board should meet regularly, retain full and effective control ove"- thecompany and monitor the executive management.
(ii) There should be a clearly accepted division of responsibilities at the head ofa company, which will ensure a balance of power and authority, so that noone individual has unfettered powers of decisions. Where the Chairman isalso the chief executive, it is essential that there should be a strong andindependent element on the Board, with recognized senior members.
(iii) The Board should include non-executive directors of sufficient caliber andnumber for their views to carry sufficient weight in the board's decision.
(iv) The Board should have a formal schedule of matters specifically reserved toit for decision to ensure that the direction and control of the company is firmlyin its hands.
(v) There should be an agreed procedure for directors in the furtherance of theirduties to take independent professional advice, if necessary, at thecompany's experse.
(vi) All directors should have access to the advice and services of the companysecretary, who is responsible to the Board for ensuing that board proceduresare followed and that applicable rules and regulations are complied with. Anyquestion of the removal of the company secretary should be a matter for theboard as a whole.
Non-executive Directors (NEDs)
(i) Non-executive directors should bring an independent judgement to bear onissues of strategy, performance, resources, including key appointments andstandards of conduct.
(ii) The majority should be independent of management and free from anybusiness of other relationship which could materially interfere with theexercise of their independent judgement apart form their fees andshareholding. Their fees should reflect time which they commit to thecompany.
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A list of the various important committees which had examined theaspects of Corporate Governance is given below:
I. GLOBAL PERSPECTIVE
1. Sir Adrian Cadbury Committee on Financial Aspects of CorpGovernance (1992).
2. Mervya E. King's Committqe on Corporate Governance, South Africa (193. Greenbury Committee on Director's f:lemuneration (1995).
4. CaIPERS-Global Governance Principles (1996).
5. Business Roundtable - Statement on Corporate Governance (1997).6. Hampel Committee on Corporate Governance (1998).
7. Blue Ribbon Committee on improving the effectiveness of Corporate AuditCommittees (1999).
8. OECD Principles of Corporate Governance (1999).
9. CACG Principles for Corporate Governance in Commonwealth (1999).
10. Euro shareholders' Corporate Governance Guidelines (2000).
II. COMMITTEES ON CORPORATE GOVERNANCE IN INDIA
1. Confederation of Indian Industries' (CII) Code of Desirable CorporateGovernance (1998).
2. Kumar Mangalam Birla Committee on Corporate Governance (2000).III. OTHER REPORTS
1. Combined Best Code of Governance (London Stock Exchange).2. Code of General Motors Board of Directors (USA).
3. Report of NACD Blue Ribbon Commission on Directors' Professionalism(USA).
4. Corporate Governance Standards (Canada).
5. Hellebuyck Commission on Corporate Governance (France).
The summaries of reports of some of the well-known committees on theCorporate Governance are given below:
Cadbury Committee on Financial Aspects of Corporate Governance (U.K.)
The Committee was set up in May 1991 by the Financial Reporting Council, theLondon Stock Exchange and the accountancy profession to report on the financialaspects of Corporate Governance. The objective stated by committee in its Reportwas to help to raise the standards of Corporate Governance and the level ofconfidence in financial reporting and auditing by setting out clearly what it sees as therespective responsibilities of those involved ~d what it believes is expected of them.Dwelling upon the 'Board effectiveness' the Committee stated in its report that "Thecountry's economy depends on the drive and efficiency of its companies. Thus, theeffectiveness with which their Board discharges their responsibilities determinesBritain's competitive position. They must be free to drive their companies forward butexercise that freedom within a framework of effective accountability. This is theessence of any system of good Corporate Governance. Corporate Governance is thesystem by which companies are directed and controlled. Boards of directors are
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2. The Board should set-up a remuneration committee to determine on theirbehalf and on behalf of the shareholders with agreed terms of reference the
company's policy on remuneration package including pension rights and anycompensation payment to executive directors.
3. The Remuneration Committee should consist of three directors at theminimum all of whom should be non-executive directors. The Chairman ofthe Committee is to be an independent director.
4. All the members of Remuneration Committee shall be present at meeting.
5. The Chairman of Remuneration Committee should be present at AGM toanswer the shareholders' queries. However it would be up to the Chairman todecide who should answer the queries.
6. Shareholders shall be sent a half-yearly declaration of financial performanceincluding summary of significant events of the past six months.
7. Postal Ballot facility for the shareholders who may not be able to attend thegeneral meetings. Some of the critical matters which should be decided bypostal ballot are given below:
(i) Matters relating to alteration in the memorandum of association of thecompany like changes in name, objects, address of registered office etc.
(ii) Sale of whole or substantially the whole of the undertaking.
(iii) Sale of investments in the companies, where the shareholding or thevoting rights of the company exceeds 25%.
(iv\ Making a further issue of shares through preferential allotment or privateplacement basis.
(v) Corporate restructuring.
(vi) Entering a new business area not germane to the existing business ofthe company.
(vii) Variation in rights attached to class of securities.(viii) Matters relating to change in management.
ANNEXURES
ANNEXURE!Information to be placed before Board of Directors
1. Annual operating plans-and budgets and any updates.2. Capital budgets and any updates.
3. Quarterly results for the company and its operating divisions or businesssegments.
4. Minutes of meetings of audit committee and other committees of the board.
5. The information on recruitment and remuneration of senior officers just belowthe board level, including appointment or removal of Chief Financial Officerand the Company Secretary.
6. Show cause, demand, prosecution notices and penalty notices which arematerially important.
Fatal or serious accidents, dangerous Occurrences, any material effluent orPOllution problems.
have a potential conflict with the interest of the company at large (for e.g. dealing incompany shares, commercial dealings with bodies, which have shareholding ofmanagement and their relatives etc.)
VI. Shareholders
Disclosure relating to appointment/re-appointment of directors
In case of the appointment of a new director of re-appointment of a director, theshareholders must be provided with the following information:
(e) A.brief resume of the person;
(f) Nature of his expertise in specific functional area; and
(g) Names of companies in which the person also holds the directorship and themembership of Commir.ees of the Board.
The information like quarterly results, presentation made by companies to analysis,shall be put on company's web-site, or shall be sent in such a form so as to enable thestock exchange on which the company is listed to put it on its own web-site.
Obligation to appoint shareholders/Investors Grievance Committee
A board committee under the chairmanship of a non-executive director shall beformed to specifically look into the redressing of a shareholder and investorcomplaints like transfer of shares, non-receipt of balance-sheet, non-receipt ofdeclared dividends etc. The Committee shall be designated as shareholders/Investors Grievance Committee. Further, in order to expedite the process of sharetransfers the board of the company shall delegate the power of share transfer to anofficer or a committee or to the registrar and share transfer agents. The delegatedauthority shall attend to share transfer formalities at least once in a fortnight.
VII. Report on Corporate Governance
There shall be a separate section on Corporate governance in the annual reportsof company, with a detailed compliance report on Corporate Governance. Noncompliance of any mandatory requirement Le. which is part of the listing agreementwith reasons thereof and the extent to which the non-mandatory requirements havebeen adopted shall be specifically highlighted.
(For the suggested list of items to be included in the Report on corporategovernance in the annual report of companies, please refer Annexure II to this study).
VIII. Compliance
The company shall obtain a certificate from the auditors of the companyregarding the compliance of condition of corporate governance as stipulated andannex the certificate with director's report, which is sent annually to the shareholdersof the company. The certificate should also be sent to the Stock Exchange along withthe annual returns filed by the company.
Non-Mandatory Requirements
The non-mandatory requirement~ which have been specified in Annexure 3 toythe Clause 49 of the listing agreement, are as follows:
1. A non-executive Chairman should be entitled to maintain Chairman's Office,at the expense of the Company and be allowed reimbursement of expense~incurred in performance of his duties. to
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5. Shareholders Committee \name of non-executive director heading the committee
name and designation of compliance officer
number of shareholders complaints received so far
number not solved to the satisfaction of shareholders
number of pending share transfers
6. General Body meetingslocation and time, where last three AGMs held.
_ whether special resolutions were put through postal ballot last year,details of voting pattern.
person who conducted the postal ballot exercise
are proposed to be conducted through postal ballot
procedure for postal ballot J7. Disclosures
disclosures on materially significant related party transactions i.e.transactions of the company of material nature, with its promoters, thedirectors or the management, their subsidiaries or relatives etc. that mayhave potential conflict with the interests of company at large.details of non-compliance by the company, penalties, strictures imposedon the company by Stock Exchange or SEB! or any statutory authority,on any matter related to capital market, during the last three years.
8. Means of communication
half-yearly report sent to each household of shareholders.
quarterly resultswhich newspapers normally published in.
any website, where displayed
whether it also displays official news releases; and
the presentations made to institutional investors or to the analysis.
_ whether MD&A is a part of annual r,eportor not.
9. General Shareholder InformationAGM: Date, time and venue
_ financial Calendar
_ date of Book Closure
_ dividend Payment date
listing on Stock Exchanges
- stock Code
market Price Data: High/Low during each month in last financial year.
performance in comparison to broad-based indices such as BSESensex, CRISIL index etc.
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8. Any material default in financial obligations to and by the comsubstantial non-payment for goods sold by the company.
9. Any issue, which involves possible public or product liability clsubstantial nature, including judgement or order which, may have
strictures on the conduct of the company or taken an adverse view reg;irlanother enterprise that can have negative implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equor intellectual property.
12. Significant labour problems and their proposed solutions. Any significadevelopment in Human Resources/Industrial Relations front like signing 0wage agreement, implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not innormal course of business.
14. Quarterly details of foreign exchange exposures and the steps taken bymanagement to limit the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory nature or listing requirementsand shareholders service such as non-payment of dividend, delay in sharetransfer etc.
ANNEXURE II
Suggested List of items to be included in the Report on Corporate Governancein the Report of Companies
1. A brief statement on company's philosophy on code of governance.2. Board of Directors:
composition and category of directors for example promoter, executive,non-executive, independent non-executive, nominee director, whichinstitute represented as Lender or as equity investor.
attendance of each director at the BoD meetings and the last AGM.
number of other 800s or Board Committees he/she is a member orChairperson of;
number of BoD meetings held, dates on which held.3. Audit Committee.
brief description of terms of reference
- composition, name and members and Chairperson
- meetings and attendance during the year4. Remuneration Committee.
brief description of terms of reference
composition, name of members and Chairpersonattendance during the year
remuneration policy
details of remuneration to all the directors, as per format in main report.••
. ,,,"t'~"C=~
Suggested Readings
1. Corporate Governance - The New Paradigm - N. Gopafsamy
2. Report of Cadbury Committee on the Code of Best Practice
registrar and Transfer Agents
- share Transfer System
distribution of Share holding
dematerialisation of Shares and liquidity
outstanding GDRs/ADRs/Warrants or any Convertible Instruments,Conversion date and likely impact on equity
- plant locationsaddress for correspondence..
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not tobe submitted for evaluation)
1. Discuss in brief 'Code of Best Practice' as evolved by the CadburyCommittee.
2. Discuss the composition of Remuneration Committee as recommended byGreenbury Committee on Director's remuneration.
3. In order to review the implementation of findings of Cadbury Committee andGreenbury Committee, another Committee was constituted in the year 1998.Discuss.
4. Every Corporation should have its own Code of Ethics. Discuss it in the lightof recommendation of King's Committee on Corporate Governance.
5. What are the rights of shareholders?
6. Discuss in brief CACG - Guidelines on Corporate Governance.
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STUDY XIII
INTERNATIONAL DIMENSIONS OF COMPANY LAWThe Extension of Corporate Activity beyond National Frontiers
Ths origin of trade associations referred to as companies can be traced back tothe sixteenth century, where they existed as merchants' guild formed for the purposeof monopolies over certain commodities. A century later jOint stock companies
emerged, which shared some of the characteristics of the modern company, exceptthat they did not include limited liability for their members. This meant that theirprivate assets could be taken by the company's creditors in order to pay their debts.
There were many companies carrying on trade outside the British Islands andthose companies were given a number of privileges by the British Government. Incourse of time, these companies became rulers of colonieslterritories
The formation of the South Sea company and its historic collapse six monthsafter it was formed in 1711 induced legislation of the Bubble Act, 1720, which madeincorporation of a company difficult; acting as a corporation without the sanction of anAct of Parliament or a Charter was made a criminal offence. To have transferableshares was also a criminal offence. With the result, the development of company lawwas sluggish. It was not until 1825 that this Act was repealed and a gradualimprovement was effected in enabling businesses to form companies.
From the late nineteenth to dwell into the twentieth century, most foreign directinvestment (FD/) was focused on the development of natural resources, with somespin off growth of ancillary services. Latin America and Asia were particularly notable
reCipients of this investment. FDI in manufacturing expanded slowly through the earlytwentieth century and more dramatically in the period after World War II, and thegeographic center for such investment shifted to Western Europe. This trend in turnwas overtaken by developments in the service sector (particularly in finance) in thepast two decades, with East Asia and Western Europe, along with the United States,as major areas of investment activity.
Although there have been periods of single-country dominance in outwardinvestment (the United Kingdom between the 1880s and 1914, and the United Statesin the 1950s and 1960s), perhaps more significant has been the consistent growth of
~rnultinational operations over the past century. During the pre-World War I era,j{lvestment flows were tied to some extent to the "imperial· territories of various
ropean nations (with regions such as Latin America becoming a battleground for
ropean and American investors), and OCcurred through a peculiar (and primarilyitish) form called "free-standing companies" (local enterprises owned by foreignndicates). ,
'Owth of multinationals and transnationals
The terms multinational and transnational company broadly cover any company,ich carries on directly or indirectly business in more than one country. The parentpany in a multinational group will necessarily be registered in a particular Country,the group headquarters and a preponderance of shareholders may also beI!ed there. The profit and income flows that they generate are part of the foreign~alflows moving between countries. As local markets throughout the World are
deregulated and liberalized foreign firms are looking to locate part of the
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