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Corporate Governance


September 2013

Lakshmi Ananth


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Corporate Governance
The set of processes, customs, policies, laws and institutions
affecting the way in which a corporation is directed,
administered or controlled
Includes the relationships among the many players involved (the
stakeholders) and the goals for which the corporation is
governed
Sound corporate governance is reliant on external marketplace
commitment and legislation, plus a healthy board culture which
safeguards policies and processes



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Corporate Governance Framework
Separation of ownership from control loss of effective control by
shareholders in managerial decisions
Encourage efficient use of resources and equally to require
accountability for the stewardship of those resources
To align as nearly as possible the interests of individuals, corporations
and society
Specifies the rules and procedures for making decisions on corporate
affairs
Structure through which the company objectives are set, as well as the
means of attaining and monitoring the performance of those objectives
Perceived quality of a company's corporate governance can influence
its share price as well as the cost of raising capital



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Corporate Governance Controls
Internal
Internal corporate governance controls monitor activities and then take
corrective action to accomplish organisational goals
Monitoring by Board of Directors
Remuneration
Audit Committee
External
External corporate governance controls encompass the controls external
stakeholders exercise over the organisation

Debt covenants
External auditors
Government regulation


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Structure of Corporate Governance
Determined by:
Legal and regulatory framework outlining the
rights and responsibilities of all parties
involved in corporate governance
De facto realities of the corporate
environment in the country
Each corporations articles of association


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Indian Corporate Governance


Year Name of the
Committee / Body
Areas/Aspects Covered

1998 Confederation of Indian
Industry (CII)
Desirable Corporate Governance : A Code voluntary
code
1999 Kumar Mangalam Birla
Committee
Corporate Governance
2002 Naresh Chandra
Committee
Corporate Audit & Governance
2003 N. R. Narayana Murthy
Committee
Corporate Governance


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Overview of Clause 49 of the Listing Agreement
Board of Directors
Composition of Board
Non executive directors compensation and disclosures
Other provisions as to Board and Committees
Code of Conduct
Audit committee
Qualified and Independent Audit Committee
Meeting of Audit Committee
Powers of Audit Committee
Role of Audit Committee
Review of information by Audit Committee
Subsidiaries


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Overview of Clause 49 of the Listing Agreement
Disclosures
Basis of related party transactions
Disclosure of Accounting Treatment
Board Disclosures Risk management
Proceeds from public issues, rights issues, preferential issues etc.
Remuneration of Directors
Management
Shareholders



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Qualified and Independent Audit Committee
Minimum three directors. Two-thirds of the members to be independent
directors
All members to be financially literate and at least one member to have
accounting or related financial management expertise
Chairman to be an independent director
Chairman of Audit Committee to be present at AGM to answer shareholder
queries
Finance director, head of internal audit and a representative of the statutory
auditor may be present as invitees for the meetings of the audit committee
The Company Secretary to act as the secretary to the committee


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Meeting of Audit Committee
At least four times in a year with a gap of not more than four
months between two meetings
Quorum - Two members or one third of the members of the audit
committee whichever is greater, but there should be a minimum
of two independent members present
Powers of Audit Committee
To investigate any activity within its terms of reference
To seek information from any employee
To obtain outside legal or other professional advice
To secure attendance of outsiders with relevant expertise, if it
considers necessary



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Role of Audit Committee
Oversight of the companys financial reporting process
Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees
Approval of payment to statutory auditors for any other services rendered by the statutory
auditors
Reviewing, with the management, the annual financial statements before submission to the
board for approval, with particular reference to:
Matters required to be included in the Directors Responsibility Statement to be included
in the Boards report in terms of clause (2AA) of section 217 of the Companies Act, 1956
Changes, if any, in accounting policies and practices and reasons for the same
Major accounting entries involving estimates based on the exercise of judgment by
management
Significant adjustments made in the financial statements arising out of audit findings
Compliance with listing and other legal requirements relating to financial statements
Disclosure of any related party transaction
Qualifications in the draft audit report




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Role of Audit Committee
Reviewing, with the management, the quarterly financial statements before submission to the
board for approval
Reviewing, with the management, performance of statutory and internal auditors, adequacy of
the internal control systems
Reviewing the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting
structure coverage and frequency of internal audit
Discussion with internal auditors any significant findings and follow up there on
Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board
Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern
To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non payment of declared dividends) and creditors
To review the functioning of the Whistle Blower mechanism, in case the same is existing
Carrying out any other function as is mentioned in the terms of reference of the audit
committee




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Corporate Governance Report
Clause 49 of the Listing Agreement - formulated for the improvement of corporate
governance in all listed companies
Companies to submit a quarterly compliance report to stock exchange in the
prescribed form
Separate section on corporate governance in the annual report with a detailed
compliance report
Code of conduct
Audit committee
Shareholders/Investors Grievance Committee
Disclosures
CEO / CFO certification
Company to obtain a certificate either from auditors or practising company
secretaries regarding compliance of conditions as stipulated and annex the same
to the director's report



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Mandatory Review

Financial statement / audit report / quarterly / half- yearly financial information
Management discussion and analysis of financial condition and results of
operations
Statement of significant related party transactions submitted by management
Management letters / letters of internal control weaknesses issued by the
statutory auditors
Internal audit reports relating to internal control weaknesses
Appointment, removal and terms of remuneration of the Chief internal auditor



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Corporate Governance failure at Enron
Chairman and CEO
Audit Committee only cursory review
Independence and Conflicts of Interest
Flow of information
Too many Directorships


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Areas of concern Indian Corporate Governance
Many sanctions seem inadequate - need for stricter enforcement of
governance violations
Clarity in division of regulatory responsibility between SEBI, the Department
of Company Affairs (DCA), and the individual stock exchanges - to prevent
oversight from slipping between jurisdictional flagstones
Strengthening of Board practices to avoid director rubber stamping,
especially by establishing credible institutions for training board members on
their fiduciary responsibilities
Institutional investors and large independent shareholders still need to
become important forces to monitor insiders and play a disciplining role in
the governance of corporations