Corporate governance

Define:- corporate governance is about promoting corporate fairness, transparency and accountability. It can also be defined as the formal system of accountability and control for ethical and socially responsible organizational decisions and use of resources Accountability relates to how well the content of workplace decisions is aligned with the organizations stated strategic direction. Control involves the process of auditing and improving organizational decisions and actions.

It is concerned with structures and processes for decision making, accountability, control and behavior at the top level of organizations. It influences how the objectives of an organization are set and achieved, how risk is monitored and assessed and how performance is optimized. The core objectives of corporate governance are focus, predictability, transparency, participation, accountability, efficiency & effectiveness and stakeholder satisfaction.

Corporate governance measures: It includes appointing non-executive directors, placing constraints on management power and ownership concentration, as well as ensuring proper disclosure of financial information and executive compensation. Indian companies are required to comply with clause 49 of the listing agreement primarily focusing on following areas: Board composition and procedure Audit committee responsibilities Subsidiary companies Risk management CEO/CFO certification of financial statements and internal controls Legal compliance Other disclosures Whistle blower policy

Corporate governance-development abroad:

The trend of developing corporate governance guidelines and codes of best practice began in the early 1990s in UK and Canada in response to problems in performance in some leading organizations, presumably due to lack of effective board oversight leading to pressure from institutional investors for change. Developments in India: The confederation of Indian industry took the lead in framing a desirable code of corporate governance in April 1998. This was followed by the recommendations of the Kumar Mangalam Birla committee on corporate governance .This committee was appointed by the securities and exchange board of India. The recommendations were accepted by SEBI in December 1999, and enshrined in clause 49 of the listing agreement of all stock exchanges in India. In august 2002,the department of company affairs, government of India , constituted a nine-member committee under the chairmanship of Mr. Naresh Chandra, to examine the auditor- company relationship, role of independent directors, disciplinary mechanism for auditors committing irregularities and the CEO/CFO certification introduced by SOX. SEBI having analyzed disclosures made by many companies under clause 49 constituted a review committee under the chairmanship of Mr N.R.Narayana Murthy. The Narayana Murthy committee report, 2003, suggested further improvements and in alignment with these recommendations, the revised clause 49 has been made effective.

Benefits of corporate governance : Protection of investor interests and strong capital markets. Studies show clear evidence that good governance is rewarded with a higher market valuation. Ensure commitment of commitment of the board in managing the company in a transparent manner. By good corporate governance practices , companies can reduce vulnerability to financial crises.

Corporate social responsibility: Corporate Social Responsibility is a concept that organizations, have an obligation to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations. Corporate social responsibilities is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workplace and their families as well as of the local community and society at large CSR may mean different things to different people : for an employee it can mean fair wages, no discrimination , acceptable working conditions etc. for a shareholder it can mean making responsible and transparent decisions regarding the use of capital. For suppliers it can mean receiving payment on time,etc. For customers it can mean delivery on time, etc. For local communities and authorities it can mean taking measures to protect the environment from pollution. For non-governmental organizations and pressure groups it can mean disclosing business practices and performance on issues ranging from energy conservation and global warming to human rights and animal rights, from protection of the rainforests and endangered species to child and forced labor, etc.

For a company, however, it can simply be seen as responding to the needs and concerns of people who can influence the success of the company and/or whom the company can impact through its business activities , processes and products. Need for CSR: Economic responsibilities Legal responsibilities Ethical responsibilities Discretionary responsibilities

Corporate governance at ITC ltd.: (source :www.itcportal.com) ITC defines corporate governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, they believe that the governance process should ensure that these

companies are managed in a manner that meets stakeholders aspirations and societal expectations. Core principles: ITCs corporate governance initiative is based on two core principles. These are: Management must have the executive freedom to drive the enterprise forward without undue restraints This freedom of management should be exercised within a framework of effective accountability.

ITC believes that any meaningful policy on corporate governance must provide empowerment to the executive management off the company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.

Cornerstones: From the above definition and core principles of corporate governance emerge the cornerstones of ITCs governance philosophy , namely trusteeship , transparency , empowerment and accountability , control and ethical corporate citizenship . ITC believes that the practice of each of these leads to the creation of the right corporate citizenship. ITC believes that the practice of each of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfills the purpose of corporate governance. Trusteeship: ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the companys board of directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the company fulfills its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely , that the rights of all shareholders , large or small , are protected. Transparency: ITC believes that the transparency means explaining companys policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the companys strategic interests. Internally, transparency

means openness in companys relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability. Empowerment and accountability: Empowerment is an essential concomitant of ITCs first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualizing the potential of its employees. Empowerment unleashes creativity and innovation throughout the organization by truly vesting decision-making powers at the most appropriate levels in the organizational hierarchy. ITC believes that the board of directors are accountable to the shareholders, and the management is accountable to the board of directors. We believe that empowerment, combined with accountability, provide an impetus to performance and improves effectiveness, thereby enchasing shareholder value. Control: ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances , control should prevent misuse of power , facilitate timely management response to change , and ensure that business risks are pre-emptive and effectively managed.

Ethical corporate citizenship: ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organization, as well as in their external relationships. They believe that unethical behavior corrupts organizational culture and undermines stakeholders value. The governance structure: Following from the philosophy and core principles, corporate governance in itc shall take place at three interlinked levels, namely Strategic supervision by the board of directors Strategic management by the corporate management committee Executive management by the divisional chief executive assisted by the divisional management committee

It is ITCs belief that the right balance between freedom of management and accountability to shareholders can be achieved by segregating strategic supervision from strategic and executives management. The board of directors (board) as trustees of the shareholders will exercise strategic

supervision through strategic direction and control , and seek accountability for effective strategic management from the corporate management committee. The CMC will have the freedom within , board approved direction and framework , to focus its attention and energies on the strategic management of the company. The divisional chief executives , assisted by the divisional management committee , will have the freedom to focus on the executives management of the divisional business. The 3- tier governance structure thus ensures that: Strategic supervision (on behalf of the shareholders) ,being free from involvement in the task of strategic management of the company, can be conducted by the board with the objectivity , thereby sharpening accountability of management. Strategic management of the company, uncluttered by the day- to day tasks of executive management, remains focused and energized Executives management of the divisional business, free from collective strategic responsibilities for ITC as a whole, gets focused on enhancing the quality, efficiency and effectiveness of its business.

Roles: The core roles of the various entities at the three levels of corporate governance will be as follows:

Board of directors: the primary role of the board of directors is that of trusteeship to protect and enhance shareholder value through strategic of ITC, its wholly owned subsidiaries and their wholly owned subsidiaries . As trustees they will ensure that the company has clear goals relating to shareholder value and its growth. They will provide direction, and exercise appropriate control to ensure that the company is managed in a manner that fulfills stakeholder aspirations and aspirations and societal expectations. The ITC board will be a balanced board. Consisting of executive and non executive directors, the latter including independent professionals. Executives directors, including the executive chairman, shall not generally exceed 1/3rd of the total strength of the board. The non- executive directors shall comprise eminent professionals, drawn from amongst persons with experience in business/ finance/ law / public enterprises. Non executive directors are expected to play a critical role in imparting balance to the board processes by bringing an independent judgment to bear on issues of strategy, performance, resources, standards of company conduct, etc. The board shall meet at least six times a year and as far as possible meeting will be held once in two months. The annual calendar of meetings shall be agreed upon at the beginning of each year.

As laid in the AOA of the company, the quorum for meetings shall be one third of members and decisions shall be taken by simple majority, unless statutorily required otherwise. Meeting shall be governed by a structured agenda. All major issues included in the agenda shall be backed by comprehensive background information to enable the board to take informed decisions. The board shall have the following committees whose term of reference shall be determined by the board from time to time: Audit committee: to provide assurance to the board on the adequacy of internal control systems and financial disclosures. Compensation committee: to recommend to the board compensation terms for executive directors and the senior most level of management below the executive director. Nomination committee: to recommend to the board nominations for membership of the cmc and the board, and oversee succession for the senior most level of management below the executive directors. Investor service committee: to look into redressal of shareholder and investors grievance, approval of transmissions, sub division of shares, issue of duplicate shares etc. Compensation committee : non executive directors, as may be decided by the board , with the director accountable to the board for the hr function as the secretary. One of the independent directors, to be determined by the board. Nomination committee: the executive chairman and all the non executive directors, executive chairman. Investor service committee: directors of the company, as may be decided by the board, with the company secretary as the secretary. One of the non executive directors, to be determined by the board. Corporate management committee: the primary role of the CMC is strategic management of the companys business within board approved direction/ framework. The CMC will operate under the superintendence and control of the board. Executive chairman of ITC: the executive chairman of ITC shall operate as the chief executive for ITC as a whole. The primary role is to provide leadership to the board and CMC for realizing company goals in accordance with the charter approved by the board. As chairman of the CMC he will be responsible for its working, for ensuring that all relevant issues are on the agenda, for ensuring that all CMC members are enabled and encouraged to play a full part in its activities. Divisional management committee: composition of the DMC shall be determined by the line director with the approval of the CMC .the DMC shall generally meet at least once a month to

review divisional performance and related issues. Quorum for meetings shall be 50% of the members subject to a minimum of three members. Decisions shall be taken by simple majority. Divisional CEO: the divisional CEO shall functional as the chief operating officer with executive responsibility for day to day operation of the divisional business, and shall provide leadership to the divisional management committee in its task of executive management committee in the task of executive management of the divisional business.