group 2 - corporate governance

7/29/2019 Group 2 - Corporate Governance

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Corporate Governance

Suggestions of the Adrian Cadbury

report, the Kumarmangalam reportand their ethical ramifications.


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What is Corporate Governance?

Corporate governance is "the system by which companies are

directed and controlled

It involves regulatory and market mechanisms, and the roles

and relationships between a companys management, its

board, its shareholders and other stakeholders, and the goals

for which the corporation is governed.

An important theme of corporate governance is the nature

and extent of accountability of people in the business.


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Principles of Corporate Governance

Rights and equitable treatment of shareholders:

Organisation 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.


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Principles of Corporate Governance

Integrity and ethical behaviour:

Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations

should develop a code of conduct for their directors and

executives that promotes ethical and responsible decision

making.

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.


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Introduction

Contemporary discussions of corporate governance

tend to refer to principles raised in three documents

released since 1990:

TheCadbury Report (UK, 1991)

The Principles of Corporate Governance (OECD, 1998 and

2004)

The Sarbanes-Oxley Act of 2002 (US, 2002).


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Adrian Cadbury Report

Sir George Adrian Hayhurst Cadbury (born 1929) is a former

British Olympic rower and Chairman of Cadbury and Cadbury

Schweppes for 24 years.

He has been a pioneer in raising the awareness and

stimulating the debate on corporate governance and

produced the Cadbury Report.


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The origin of the report

The committee on the financial aspect of corporate

governance, forever after known as Cadbury Committee, was

established in may 1991 by the financial reporting council, the

London Stock Exchange and the accountancy profession.

The committee was created due to lack of an increasing

investor confidence in the honesty and accountability of listed

companies.

eg. Wallpaper group coloroll and Asil Nadirs Polly Peck

Consortinum


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Even as the committee was getting down to business, 2

further scandals shook the financial world.

Bank of credit and Commerce international


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Features of the report

Sir Adrian Cadbury was a visionary chairman who

energetically promoted the committee

recommendations

The committee reflected the main shareholders

The investigation produced the draft report

followed by an extensive process of consultation

A final report was produced whoserecommendation was widely accepted and

adopted


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Objective of the report

Uplift the low level of confidence

Review the structure, rights & role

Address various aspects of accountancyprofession

Raise the Standard of corporate governance


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The contents of the Report

The central component of the voluntary code- Cadbury Code:

That there be a clear division of responsibilities at the top

That the majority of the board be comprised of outside directors

That remuneration committees for the Board members be made up in

the majority of the non-executive directors and

That the Board should appoint an Audit Committee including at least

three non-executive directors.


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Recommendations in the Cadbury

code of best practices

Directors service contracts should not exceed 3 years without

shareholder's approval.

There should be a full and clear disclosure of their total

payments including pension contribution, Director etc.

Separate figures for salary and performance-related elements

and on what basis the performance is measured.

Exec. Directors pay should be subject to the recommendations

of a Remuneration Committee made up wholly or mainly of

non-executive Directors.

It is the Boards duty to present a balanced and

understandable assessment of the companys position.


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The board should establish an Audit Committee of atleast 3

non-exec. Directors with written terms of reference which

deal clearly with its authority and duties.

The director should explain their responsibility for preparing

the accounts next to a statement by the auditors about their

reporting responsibilities.

The Directors should report on the effectiveness of the

companys system of internal control.

The directors should report that the business is a going

concern, with supporting assumption or qualifications as

necessary


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Reactions to Report


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KUMAR MANGALAM REPORT ORIGIN


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Another important aspect of corporate governance relates to

issue of insider trading. It is important that insiders, which

include corporate insiders also, do not use their position of

knowledge and access to inside information, to take unfair

advantage over the uniformed stockholders and otherinvestors transacting in the stock of the company.

To achieve this, the corporate are expected to disseminate the

material price sensitive information in a timely and proper

manner and also ensure that till such information is madepublic, insiders abstain from transacting in the securities of

the company.


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The committees recommendations look at corporate

governance from the point of view of the stake holders and in

particular that of the shareholders, because they are the

raison for the corporate governance and also the prime

constituency of SEBI. The control and reporting functions ofboards, the role of various committees of the board, the role

of the management, all assume special significance when

viewed from this perspective.

The other way of looking at corporate governance to theefficiency of a business enterprise, to the creation of the

wealth and to the countrys economy.


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At the heart of the committee's report is the set of

recommendations & they are as follows

Distinguishes responsibilities & obligation of the Boards &

Management

Disclosure of financial report within the specified date

Separate disclosure of annual report & report on corporate

governance


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Objective of the report

To enhance shareholder value & keeping in view the interest of

other shareholder

To treat the important not as the mere structure but as the way of

life

Proactive initiative taken by companies themselves and not in

external measure


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Recommendationa proposal that an appropriate course of action

Relating to director the recommendation are

The board should meet regularly & retain full and effective control over

the company and monitor the executive management.

The board should include non executive director of sufficient caliber and

number for their view to carry significant weight in the board decision. The firm should have formal schedule of matter especially reserve to it for

decision to ensure that the direction and control of the company in its

hand.

All director should have access to advice an services of the company

secretary who is responsible for the board to ensure that boardprocedure are followed and applicable rules and regulation are complied

with.

Any question of removal of company secretary should be matter of board

as a whole.


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There are some mandatory & non mandatory

recommendation

Mandatory recommendation

The board of company should have optimum combination of executive and non

executive director with not less than 50% of the board comprising the nonexecutive director

The board of company should set up the qualified and independent audit

committee.

The audit committee have minimum three member, all being non executive

director and at lest one having financial & accounting knowledge.


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Non mandatory recommendation

The board should set up a remuneration committee to determine thecompanies polices on specific remuneration package for executive director.

Half yearly declaration of financial performance including summery of the

significant event in the last six month should be sent for every shareholder.

Non executive chairman should be entitle to maintain chairman office at

the companies expenses. This will be enable him to discharged theresponsibilities effectively.


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Implementation of recommendations

Provision of clause 49

Requirement of clause 49


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Provision of clause 49

Composition of board :-

in case of full tome chairman 50% non executive director and

50% executive director

Constitution of audit committee:-

With 3 independent director with chairman having a financial

background. Finance director and internal audit head to be

special invitee and minimum 3 special meeting to be convened.


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Requirement of clause 49

Remuneration of director:- remuneration of non executivedirector to be decide by the board. Detail of remuneration package,stock option performance incentive of director to be disclose.

Board procedure :- at lest 4 meeting in year. Director not bemember of 10 committee and chairman of 5 across the all

companies . Management discussion & analysis report :- it should

includeindustries development and structure.

opportunities and threats .

segment wise and product wise performance.

internal control systems and its adequacy.

discussion on final performance.


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group 2 - corporate governance

Documents