Corporate Governance and Indian FMCG Industry

Hitesh J Shukla*

The present study aims at examining the governance practices prevailing in the prominent companies of the Indian Fast Moving Consumer Goods (FMCG) sector within the Indian regulatory framework. The study also aims at assessing the substance and quality of reporting of the corporate governance practices in annual reports. The study includes four renowned companies in the FMCG sectorHindustan Unilever Ltd., ITC Ltd., Nestle (India) Ltd. and Tata Tea Ltd. For this purpose, parameters include the statutory and non-mandatory requirements stipulated by the revised Clause 49 of the listing agreement, as prescribed by the Securities and Exchange Board of India (SEBI) and relative amendments in the Companies Act, 1956. It has been observed that among the four renowned FMCG companies, ITC scored the highest points, followed by Tata Tea, HUL and Nestle. ITC, Tata Tea and HUL figured in the criteria of Very Good and Nestle figured in the criteria of Good.

Introduction
Globalization, to become successful, has to be preceded by good governance. The key principle for success is to ensure that growth is sustained and shared. Sustained, in that, it is robust and can withstand shock and shared, in that, it brings prosperity to many, rather than the few. There are many players involved in good (corporate) governanceowners, shareholders, board of directors, managers and employees. They are the internal architecture. The external architecture comprises the legal and statutory requirements, regulatory standards, stock markets, government policies, media, reputation, and agents such as standards and accounting bodies, all of which affect the corporations credibility and stock value. The present study aims at examining the governance practices prevailing in the corporate sector within the Indian regulatory framework using the case study method. The study was conducted to assess governance practices and processes followed by Indian corporate houses. The study also aims at quantitatively assessing the substance and quality of reporting of corporate governance practices in annual reports. The study was conducted on four renowned companies in the FMCG sectorHindustan Unilever Ltd. (HUL), ITC Ltd. (ITC), Nestle (India) Ltd. and Tata Tea Ltd.
* Associate Professor, Department of Business Management (MBA Program), Saurashtra University, Rajkot 360005, India. E-mail: hjshukla@rediffmail.com 43

2009 The Icfai University Indian All Rights Reserved.cfai University 2007 The Icfai University Press. All Corporate Governance and Press. FMCG Industry

The broader objective of the study was to evaluate the state of compliance of the various governance parameters in these companies. The parameters include the statutory and non-mandatory requirements stipulated by the revised Clause 49 (which specifies the corporate governance practices to be followed by the listed companies) of the listing agreement, as prescribed by Securities and Exchange Board of India (SEBI) and relative amendments in the Companies Act, 1956.

Empirical Study
The sample for this study comprises four renowned corporate houses representing the FMCG sector, and having a large basket of productsHUL, ITC, Nestle and Tata Tea. All four companies are listed at Bombay Stock Exchange (BSE) and are part of the BSE-100 index. The selection of these companies was made on the ground that they are renowned players in the FMCG Sector and their scripts dominate and influence the stock market movement of this sector. For the financial year ending 2007, the companies performance can be summarized as: HUL achieved a turnover of Rs. 13,717.75 cr and earned a profit before tax of Rs. 2,184.53 cr. ITC achieved a turnover of Rs. 12,369 cr and earned a profit before tax of Rs. 3,926.70 cr (Only a part of this turnover and profit comes from the FMCG division of ITC). Nestle achieved a turnover of Rs. 3,529.8 cr and earned a profit before tax of Rs. 628.61 cr. Tata Tea achieved a turnover of Rs. 1,070.35 cr and earned a profit before tax of Rs. 216.59 cr. The researcher has relied on the published annual reports of these companies, for the year 2006-2007. The reasons for selecting the period were: Clause 49 of the listing agreement was introduced by the SEBI in the year 2000. Thereafter, SEBI incorporated various committees recommendations in Clause 49 of listing agreement and then revised it seven times within the period 2000-2005. The latest and revised Clause 49 of listing agreement has been introduced on October 29, 2004 to be effective from January 1, 2006. Moreover, as many as 24 amendments in the Companies Act, 1956 have been made till date, of which at least three pertaining to corporate governance, were during the period of 1999, 2000 and 2001. Therefore, it was considered prudent to examine and review the status of corporate governance compliance by these companies (Das, 2007). Annual reports for the year 2006-2007 would give some glimpse of the state of compliance with the latest corporate governance and disclosure norms.

Analysis
This paper first analyzes the shareholding pattern of the four companies. This is important as much of the previous literature indicates that the ownership structure of the company plays an important role in deciding the corporate governance practices. Coffee (1991) identifies that by concentrating their ownership properly, the investors can exert direct influence on top managers to run the firm in their interest. The paper then proceeds to analyze the corporate governance practices using the case study method and finally tries to quantify/rate the corporate governance practices of the four firms.
44 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

Shareholding Pattern
A summary of the shareholding pattern, as per the annual report of 2006-2007, for HUL, ITC, Nestle and Tata Tea is shown in Table 1. Observations: (1) Clause 35 of SEBI listing agreement prescribes a format in which a listed company is supposed to file its shareholding pattern on a quarterly basis, with the stock exchange. Generally, the same format (as indicated in Table 1) is used by listed companies in disclosing information about their shareholding pattern in their
Table 1: Shareholding Pattern of HUL, ITC, Nestle and Tata Tea for the Year 2006-2007 Categories No. of Shares A) Promoters Holding 1. Promoters a. Indian b. Foreign 2. Persons Acting in Concert 3. Friends and Associates of Promoters Sub Total (A) B) Non Promoters Holding (%) 1. Institutional Investors a. Mutual Funds and UTI b. Financial Institutions c. Banks and Insurance companies d. FIIs Sub Total (B) C) Others (%) a. Private Corporate Bodies b. Indian Public c. NRIs and OCBs d. ADRs and GDRs e. Foreign Banks f. Others Sub Total (C) Sub Total (B&C) Grand Total (A) + (D) (D) HUL ITC Nestle 96,415,716

Tata Tea 59,029,857

2,177,463,355 3,762,222,780 52.12 0.01 52.13 2.47 12.91 14.29 29.67 1.12 16.79 0.29 18.20 47.87 100.00

32.34

61.85

0.00

61.85

32.34

37.05 12.79 49.84

5.50 6.03 7.92 19.45

10.52 16.57 1.91 12.94 41.94

15.85 0.66 1.48 32.17

1.50 16.83 0.37

22.74 0.04 2.94 25.72 67.66 100.00

45

50.16 100.00 100.00

18.70 38.15 100.00

Corporate Governance and Indian FMCG Industry

annual reports; and (2) It was observed that all four companies have furnished information about shareholding in their annual reports. The ownership system was concentrated mostly in foreign companies/promoters in case of HUL and Nestle, while in case of ITC, the control, rights, and ownership system were in the hands of non-promoters investors. In case of Tata Tea, the promoter companies were holding 32.34% shares. The management and control of operations of HUL, Nestle and Tata Tea were delegated to the managers under governance of the board controlled by the promoter groups, whereas ITCs management and control of operations were vested in the professional managers under the governance of professionally managed board. In ITC, foreign banks were holding significant 32% shares, whereas financial institutions were holding 37% shares. HUL and Nestle have not issued any American Depositary Receipts (ADR)s and Global Depository Receipts (GDR)s. The shareholding of small, individual and retail Indian investors was around 7% higher in Tata Tea when compared to the other three.

Key Governance Parameters

With the help of identified corporate governance parameters and the actual reporting of these four companies, the following analysis was done: Statement of Companys Philosophy on Code of Governance Though the Indian firms need to comply with the corporate governance guidelines of the Indian regulator, they have their own philosophy with respect to specific ideologies. They describe it in their annual reports also. HUL provides their philosophy of corporate governance in their website. It says that the company believes that the principles of fairness, transparency and accountability are the cornerstones for good governance. It also mentions that it has endeavored to continue to achieve the highest levels of governance and to benchmark itself with some of the best governed companies. ITC in its website defines corporate governance as, a systemic process by which companies are directed and controlled to enhance their wealth-generating capacity. Since large corporations employ a vast quantum of societal resources, ITC believes that the governance process should ensure that these resources are utilized in a manner that meets the stakeholders aspirations and societal expectations. This belief is reflected in the companys deep commitment to contribute to the triple bottom line, namely the development, nurture and regeneration of the nations economic, social and environmental capital. ITCs corporate governance structure, systems and processes are based on two core principles: (i) management must have the executive freedom to drive the enterprise forward without undue restraints, and (ii) this freedom of management should be exercised within a framework of effective accountability. The report also mentions the companys belief that any meaningful policy on corporate governance must empower the executive management of the company. This statement assumes importance as the company is professionally managed without an identified controlling
46 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

promoter. The report goes on to explain the check which also says, , governance must create a mechanism of checks and balances to ensure that the decision-making powers vested in the executive management are used with care and responsibility to meet the stakeholders aspirations and societal expectations. From this 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 creates the right corporate culture that fulfils the true purpose of corporate governance. On the other hand, Nestle is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and ethical values of its management and employees. In addition to compliance with regulatory requirements, Nestle India endeavors to ensure that the highest standards of ethical and responsible conduct are met throughout the organization. Unlike the previous three companies, Tata Tea is a family controlled firm. The annual report/ website of Tata Tea also mentions about its corporate governance philosophy. It says that their philosophy is, .to ensure transparency in all dealings and in the functioning of the management and the Board. These policies seek to focus on the enhancement of long-term shareholder value without compromising on integrity, social obligations and regulatory compliances. The company operates within accepted standards of propriety, fair play and justice and aims at creating a culture of openness in relationships between itself and its shareholders. The annual report indicates about the whistle blower policy also and says that, (the company) has set up a system which enables all its employees to voice their concerns openly and without any fear or inhibition. Board of Directors/Board Issues The researcher examined various aspects of the board of directorsBoard Structure, Board Strength and Size, Directors Attendance and a few others in the study. Board Structure, Strength and Size: The Board composition in terms of its size and structure, to a greater extent, influences the corporate governance practices and firm performance. Kiel and Nicholson (2003) reported a positive correlation between firm size and performance. On the contrary, Yermack (1996) found firms with smaller boards performing better on both financial measures and market valuation, The board structure, strength and size of HUL, ITC, Nestle and Tata Tea is presented in Table 2. Observations: ITC has larger board structure and size compared to the other sample companies. HUL and Tata Tea have a non-executive chairman on the board, while ITC and Nestle have an executive chairman on the board. It was not clear whether the chairmen of HUL, ITC and Nestle were promoter directors of the company, as no such specific information was furnished in the corporate governance report. ITC has larger percentage (70%) of non-executive directors followed by Nestle (66%) and HUL (60%). The percentage of independent directors was highest in ITC (54%), followed by Nestle and HUL (50%). It signified that the ITCs board activities were having larger involvement of professional directors.
Corporate Governance and Indian FMCG Industry 47

Table 2: Board Structure, Strength and Size Categories 1. Total No. of Directors a. No. of Executive Directors (EDs) (i) Promoters (ii) Others b. No. of Non-Executive Directors (NEDs) (i) Promoters (ii) Independent Directors (IDs) (iii) Nominees (iv) Others 2. Total Number and Percentage of: (i) Executive Directors (EDs) (ii) Non-Executive Directors (NEDs) (iii) Independent Directors HUL 10 1 3 5 1 (C ) 4 (40%) 6 (60%) 5 (50%) ITC 13 4 7 2 4 (30%) 9 (70%) 7 (54%) Nestle 6 2 3 1 2 (33%) 4 (66%) 3 (50%) Tata Tea 10 3 2 4 1 (C ) 5 (50%) 5 (50%) 4 (40%)

However, according to the provisions of Clause 49 of the listing agreement: (i) The board of directors of the company shall have an optimum combination of executive and non-executive directors, with not less than 50% of the board of directors comprising of non-executive directors, (ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. Directors Attendance in Board Meetings: The role of the board in monitoring the activities of the company would be fulfilled only when the board members actively participate in the board meetings. For that, they need to attend the meetings. It is mandatory for the Indian listed companies to provide the attendance details of the directors in the board meeting. Table 3 provides information about the Directors attendance in Board Meetings in the sample companies. Both HUL and Nestles board met seven times, ITC board met five times while, Tata Tea board met nine times during the financial year. Out of 13 directors, at ITC, nine directors (including the chairman) attended all five board meetings, recording almost 70% attendance in the total board meetings. This can be considered as a reasonably good attendance, indicating a high level of accountability of the board members towards their stakeholders. Out of 10 directors at Tata Tea, three have attended all board meetings, which indicates an attendance of 30%, considered as less adequate. Attendance of directors in the board meetings of HUL and Nestle appears to be poor. In HUL, only one director attended all the seven meetings while, four directors (including chairman) attended six meetings. In Nestle, only one director attended all seven meetings while three directors (including the chairman) attended six meetings. With regard to the directors attendance in the last Annual General Meeting (AGM), Nestle has 100% directors attendance, followed by Tata Tea (90%), ITC (85%) and HUL (70%).
48 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

Table 3: Directors Attendence in Board Meetings Categories 0 1 2 3 4 5** 6 7* 8 9*** 10 Last Annual General Meeting Attended
Note: * Total no. the year * * Total no. *** Total no.

HUL 1 2 1 1 4 (C ) 1 7

ITC 1 3 9 (C ) 11

Nestle 1 1 3 (C ) 1 6

Tata Tea 3 2 2 (C ) 3 9

of Board meetings held in HUL during the year 2006-2007 and in Nestle during 2007. of Board meetings held in ITC during the year 2006-2007. of Board meeting held in Tata Tea during the year 2006-2007.

However, all four companies met the norms and provisions of Section 285 of the Companies Act and Clause 49 of the listing agreement, regarding the minimum number of board meetings to be held in a year, and the gap between two board meetings. The norm is that the firms need to have at least four board meetings every year and the gap between two meetings should not be more than four months. Chairman and CEO Duality A good corporate governance principle expects that there should be a clear division of responsibilities at the helm of the company. Such a division of responsibility would ensure a balance of power and authority, such that no individual has unfettered power of decision. Hence, separating the posts of Chief Executive Officer (CEO) and the Chairman is always advisable to have effective monitoring of the executive management of the company besides, ensuring proper corporate governance practices. However, the results of research on the effects of duality on company performance are mixed. The studies using stock market measures have found no significant effects (Rechner and Dalton, 1989; Baliga et al., 1996; Brickley et al., 1997 and Daily and Dalton, 1997). Other studies which analyzed the financial measures have shown mixed results, with some indicating duality enhanced performance (Donaldson and Davis, 1991 and Kiel and Nicholson, 2003). In India, it is not a mandatory requirement as per Indian Companies Act or Clause 49 of the listing agreement. It was observed that at Nestle and ITC, the posts of CEO and Managing Director are not separated and are occupied by the same person. Whereas in case of HUL and Tata Tea, the posts of the Chairman and CEO/Managing Director are separated.
Corporate Governance and Indian FMCG Industry 49

Disclosure of Tenure and Age Limit of Directors The code of best practices demands that independent directors may have a limited tenure say nine years on the board of the company. Although the companies have the right to decide the age limit for directors to retire, the corporate boards should have an adequate mechanism of self-renewal as part of corporate governance best practices. As a good practice, for directors to retire after a particular age, the companies should fix the retirement age. In all four companies, the appointments of executive chairman and MD were contractual, spanning a 2-5 years period. The Non-Executive Directors/Independent Directors did not have a specified term, but retired by rotation and were eligible for reappointment. Though the companies might have policies regarding the tenure and age limitations, none of the four companies in our sample mentions about such limitations in their annual reports. Disclosure of Definition of Independent Directors, Financial Experts and Selection Criteria for Board Members Including Independent Directors A good governance system demands that a company should (in its annual report) disclose the definition of independent directors, financial experts. Besides, the annual report should also provide the selection criteria for board members followed by the corporate board for nominating new board members. Post Board Meeting Follow-up System and Compliance of the Board Procedure ITC disclosed without much detail, the compliance of board procedure. However, no information was provided by Nestle, Tata Tea and HUL regarding compliance of the board procedure and post-board meeting follow-up system. Appointment of Lead Independent Director As per the international standards of corporate governance, it is a good governance practice that irrespective of whether the posts of Chairman and CEO are held by different persons or by the same individual, there should be a strong and independent non-executive element on the board as lead independent director (other than the chairman), to whom concerns can be conveyed. It is the responsibility of the lead independent director to act as a spokesperson for the independent directors as a group, work closely with Chairman/CEO, and take a lead role in the board evaluation process, apart from other important board functions. A lead independent director should be identified in the annual report. The study reveals that none of the four companies have appointed lead independent directors and hence, did not disclose any information in this regard. Disclosure of Other Provisions as to the Boards and Committees HUL, ITC, Nestle and Tata Tea disclosed that none of their directors were members of more than 10 committees or the chairman of more than five committees individually across companies. The reports also disclosed the committee positions occupied by the individual directors in other companies. Remuneration Policy and Remuneration of Directors Clause 49 of the listing agreement demands the list companies to establish and disclose a formal and transparent policy on executive remuneration and for fixing packages of individual
50 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

directors based on the principles of fairness, reasonableness and accountability. There should be a clear relationship between responsibility and performance vis--vis remuneration. All the four companies disclosed the remuneration paid to their non-executive/independent directors in terms of sitting fees and commission on net profits. However, all four companies failed to elaborate on the remuneration policy in their corporate governance reports. Code of Conduct According to Clause 49 1 (D) of the Listing Agreement, the board of a listed company is required to lay down a code of conduct for all members and senior management. All board members and senior management personnel need to affirm compliance with the code on an annual basis. The annual report of the company shall also contain a declaration to this effect, signed by the CEO. The annual reports of all these companies reveal that they furnished information about adoption of the code of conduct applicable to all officers, directors and employees. It was observed that all the four companies of our sample did affirm compliance with the code of conduct through their respective CEOs declaration in the annual reports. Statutory Board Committees Audit Committee: The board of directors has primary responsibility for the financial statements which are prepared by the accounting function. However, all the board of directors might not have the expertise to analyze them and hence, the idea of an audit committee was conceived. The directors may delegate the responsibility for an overview of the financial reporting process and the external and internal audit functions to an audit committee. Bradbury (1990) argued that audit committees reduce information asymmetry between executive and non-executive board members. The responsibilities of an audit committee include the oversight of a firms financial reporting, risk management practices and internal and external audit functions, with the audit committee serving as the link between the board and these functions (Wolnizer, 1995). In India, it is mandatory for the listed firms to have an audit committee on the board. The status of the audit committee in HUL, ITC, Nestle and Tata Tea in the year 2006-2007 is given in Table 4. All the four companies comply with most of the requirements of Clause 49 of the listing agreement. However, the information about literacy and financial expertise of the committee members was not adequately furnished in the corporate governance reports. Except ITC, no other companies had the record of full attendance of all members in all audit committee meetings in the year 2006-2007. All companies furnished information regarding participation of the heads of finance, audit, internal audit and statutory auditor in the audit committee meetings. Only ITC and Tata Tea adequately disclosed audit committee terms of reference in the corporate governance reports. None of these companies published the audit committee report in the corporate governance reports. Investors Grievance Committee: Investors Grievance Committee is a special mandatory feature of Clause 49, which is not a common one in other regulatory environments. This Committee is responsible for the redressal of Shareholder Grievances. The status of shareholders/investors
Corporate Governance and Indian FMCG Industry 51

Table 4: Status of Audit Committee in Companies Sl. No.

1.

Particulars
Transparency in composition of Audit Committee

HUL
Committee consists of four NED/Independent Directors, Chairman being independent All members are independent directors, as required by Clause 49 of listing agreement Six meetings held, one member (C ) attended all six meetings, two members attended five meetings and one Member attended two meetings All members reported having adequate literacy and expertise in finance and accounting Internal auditors, Statutory auditors and other invitees participated in the meetings

ITC
Committee consists of three NED/Independent Directors, Chairman being independent All members are independent directors, as required by Clause 49 of the listing agreement Nine meetings held, all members attended all meetings

Nestle
Committee consists of three NED/Independent Directors, Chairman being independent All members are independent directors, as required by Clause 49 of the listing agreement Six meetings held, one member attended all meetings, two members attended five meetings

Tata Tea
Committee consists of three NED/Independent Directors, Chairman being independent All members are independent directors, as required by Clause 49 of the listing agreement Seven meetings held, two members attended all meetings, one attended six meetings

2.

Compliance of minimum requirement of the number of independent directors in committee Compliance of minimum requirement of the number of meetings of committee

3.

4.

Information about literacy and finance expertise of the committee members

All members reported having adequate literacy and Two members have expertise in finance and accounting Internal auditors, Statutory auditors and other invitees participated in the meetings

All members reported having adequate literacy and Two members have expertise in finance and accounting Internal auditors, Statutory auditors and other invitees participated in the meetings

All members reported having adequate literacy and expertise in finance and accounting Internal auditors, Statutory auditors and other invitees participated in the meetings

5.

Information about participation of head of finance, statutory auditors, chief internal auditor and other invitees in meeting Disclosure of audit committee charter and terms of reference

6.

Audit committee charter not disclosed in corporate governance report Not published in corporate governance report

Audit committee charter not disclosed in corporate governance report, terms of reference mentioned Not published in corporate governance report

Audit committee charter not disclosed in corporate governance report Not published in corporate governance report

Audit committee charter not disclosed in corporate governance report, terms of reference mentioned Not published in corporate governance report

7.

Publishing audit committee report

52

The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

grievance committees in HUL, ITC, Nestle and Tata Tea for the year 2006-2007 is given in Table 5.
Table 5: Status of Shareholders Grievance Committee Sl. No.
1.

Particulars

HUL

ITC
The three member committee consists of one NED and Ind. (Chairman), two NED Members Zero complaints pending out of 13 33 meetings held: one member attended 31, one member attended nine and one member attended 32 meetings No survey conducted

Nestle
The two member committee consists of one NED (Chairman), and one C&MD

Tata Tea
The three member committee consists of one NED and Ind. (Chairman), two NED Members Zero complaints pending out of six Two meetings held all members attended the same

Transparency in The two member the composition committee of the committee consists of one NED (Chairman), one WTD and one C&MD Info about nature Two complaints of complaint and pending out of 190 queries received and disposed Info about number of committee meetings Two meetings held, all members attended the same

2.

Zero complaints pending out of 29 Five meetings held, all members attended the same

3.

4.

Info about No survey investor/ conducted shareholder survey conducted Publishing of Not Published in committee report Corporate Governance Report

No survey conducted

No survey conducted

5.

Not Published in Corporate Governance Report

Not Published in Corporate Governance Report

Not Published in Corporate Governance Report

All these companies had set up shareholder/grievance committee in line with the requirements of Clause 49 of the listing agreement, to look into the various complaints and queries of shareholders, expeditiously. Except ITC, all the members of the committee had attended all the meetings. All companies had given details of the queries and complaints received and replied in the corporate governance reports. Except HUL, no company had any pending complaint as mentioned in the corporate governance reports. No attempt seems to have been made by any of these companies to conduct an investors/shareholders survey for assessing the satisfaction level of their shareholders. No company published the report of shareholders/investors grievance committee in the corporate governance reports. Non-Mandatory Board Committees Remuneration Committee: The CEOs may set a very high compensation for themselves in the absence of a proper control mechanism. Hence, it was recommended by various corporate governance committees that boards should have Remuneration/Compensation committee with a majority of non-executive directors, then in 1990s. However, the idea of having such a committee was there even in the 1980s. Braiotta and Sommer (1987) reported that in 1985
Corporate Governance and Indian FMCG Industry 53

some 86% of the top 1,000 US firms had remuneration committees. In India, formation of remuneration committee is a non-mandatory requirement of Clause 49 of the listing agreement. The status of the remuneration committee in HUL, ITC, Nestle and Tata Tea for the year 2006-2007 is given in Table 6.
Table 6: Status of Remuneration Committee Sl. No.
1.

Particulars
Transparency in formation of the committee

HUL
Committee consists of four NEDs/independent directors

ITC
Committee consists of five NEDs/independent directors Three meetings held

Nestle
No separate remuneration committee has been constituted

Tata Tea
Committee consists of three NEDs/ independent directors

2.

Information about Four meetings number of held committee meetings Compliance of minimum requirement of the number of NEDs in the committee Committee consists of all NEDs/ IDs, complying with minimum requirement of Clause 49 of listing agreement Chairman of the committee is an independent director

Not mentioned in Three meetings held corporate governance report No separate remuneration committee has been constituted

3.

Committee consists of all NEDs/ IDs, complying with minimum requirement of Clause 49 of listing agreement Chairman of the committee is an independent director

Committee consists of all NEDs/ IDs, complying with minimum requirement of Clause 49 of listing agreement

4.

Compliance of the provision of the independent director as chairman of the committee Information about participation of all members in the committee meetings

Not mentioned in Chairman of the committee is an corporate governance report independent director

5.

Two members attended all four meetings, one attended three meetings and one did not attend any meeting

Not mentioned in All members Three members attended the two corporate attended all governance report meetings meetings, two attended two meetings

6.

Not published in Not published in Not published in Not published in Publishing of corporate committee report corporate corporate corporate govergovernance report governance report governance report nance report

All companies, except Nestle, set up remuneration committees and adhered to the norms stipulated in listing agreement. Matters of remuneration of executive directors in Nestle were considered by the board of directors of the company, with the interested executive director(s), not participating or voting. Therefore, it did not set up a separate remuneration committee. In case of Tata Tea, all members attended all the meetings. However, HUL and ITC could not ensure all members presence in the meetings of remuneration committee. None of these companies published the report of the committee in the corporate governance reports.
54 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

Other Board Committees: Apart from the above mentioned board committees, the boards constitute certain other committees as well. They are:

Nomination Committee; Health Safety and Environment Committee; Ethics and Compliance Committee; Investment Committee; and Share Transfer Committee.

It was observed that HUL had constituted other functional committees such as committee for approving disposal of surplus assets of the company, committee for allotment of shares under ESOP and committee for buy back of shares, to raise the level of governance and also to meet the specific business needs. ITC, had also constituted a nomination committee and disclosed the details of nomination committee meetings and related reports. It had also constituted a corporate management committee and also disclosed its role. Its other committee included divisional management committee/SBU Management Committee. Nestle has not mentioned about the formation of any other committee in its corporate governance report. Tata Tea had constituted Nomination Committee and Ethics and Compliance Committee. Over and above these, it had also constituted Corporate Sustainability and Reporting Committee. Disclosures and Transparency Disclosures in the reports of corporate governance in the annual reports of HUL, ITC, Nestle and Tata Tea, were as required by Clause 49 of the listing agreement, and have been studied in two parts: (1) Statutory Requirements/Disclosures, (2) Non-Mandatory Requirements/Disclosures. Statutory Requirement/Disclosures: Some of the most important items of disclosure requirements and their status of compliance in HUL, ITC, Nestle and Tata Tea are given in Table 7. Significantly related party transactions were disclosed properly by ITC, followed by Nestle, Tata Tea and HUL. All the sample units have no compliance related to capital market matters during the last three years. Shareholders information was properly disclosed by all the companies. Non-Mandatory Statutory Requirement/Disclosures: A few important items of non-mandatory requirements/disclosures and their status of compliance in HUL, ITC, Nestle and Tata Tea are presented in Table 8. Shareholders right, audit qualification, training of board members, evaluation of non-executive directors and whistle blower policy was disclosed equally by ITC and Nestle, followed by Tata Tea and HUL.
Corporate Governance and Indian FMCG Industry 55

Table 7: Statutory Requirement/Disclosures Sl. No.

1.

Particulars
Significant related party transactions having potential conflict with the interests of the company

HUL
Disclosed that there was no materially significant related party transactions having potential conflict with the interest of the company No non-compliance reported

ITC
Disclosed that there was no materially significant related party transactions having potential conflict with the interest of the company No non-compliance reported

Nestle
Disclosed that there was no materially significant related party transactions having potential conflict with the interest of the company No non-compliance reported

Tata Tea
Disclosed that there was no materially significant related party transactions having potential conflict with the interest of the company No non-compliance reported

2.

Non-Compliance related to capital markets matters during last three years Accounting Treatment

3.

Applicable accounting standards followed without any material departure reported Not adequately described

Applicable accounting standards followed without any material departure reported Laid down procedure to inform risk board members about risk assessment and minimization procedure for board review Management discussion and analysis report included in annual report

Applicable accounting standards followed without any material departure reported Not adequately described

Applicable accounting standards followed without any material departure reported Laid down procedure to inform risk board members about risk assessment and minimization procedure for board review Management discussion and analysis report included in annual report

4.

Board DisclosureRisk Management

5.

Management Discussion and Analysis

6. a. Appointment of new director/reappointment of retiring directors

Management Management discussion and discussion and analysis report analysis report included in included in annual report annual report Shareholders information on: Disclosed compliance Disclosed compliance Disclosed compliance

Disclosed compliance

b. c.

Quarterly results Disclosed and presentations compliance Share Transfers Directors responsibility statement Disclosed Compliance Disclosed compliance

Disclosed compliance Disclosed compliance Disclosed compliance

Disclosed compliance Disclosed compliance Disclosed compliance

Disclosed compliance Disclosed compliance Disclosed compliance

d.

56

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Table 8: Non-Mandatory Requirements Sl. No.

1.

Particulars

HUL

ITC

Nestle
Disclosed compliance Disclosed compliance Disclosed compliance

Tata Tea
Disclosed compliance Disclosed compliance Not disclosed in corporate governance report Not disclosed in corporate governance report Disclosed compliance

Disclosed Shareholder rights Disclosed on companys website compliance Disclosed Audit qualification Not disclosed in compliance corporate governance report Training of board Not disclosed in Disclosed members compliance corporate governance report Evaluation of non-executive directors Whistle blower policy Disclosed Not disclosed in compliance corporate governance report Disclosed compliance Disclosed compliance

2.

3.

4.

Disclosed compliance

5.

Disclosed compliance

General Body Meetings With regard to reporting of information on the companys general body meetings, the following information is to be compulsorily included in the annual report: (1) Location and timing of general meetings held in the last three years; (2) Details of special resolutions passed in the last three AGMs/ Extraordinary General Meetings (EGM)s, (3) Details of resolution passed in the previous year through postal ballot, including the name of the conducting official and voting pattern/procedure. It was observed that all the companies provided information regarding the above mentioned items in their corporate governance reports. Means of Communication and General Shareholder Information All the sample companies have provided general shareholder information and adopted various means of communication every year, as prescribed in the listing agreement to be included in their report of corporate governance. CEO and CFO Certification Clause 49 of the listing agreement has mandated CEO and CFO certification to the board of directors of a listed company on certain specific matters and the disclosure of the same in the corporate governance report. It was observed that all four companies published the certificate in their annual reports. The contents and the quality of certification were more or less similar for all four companies. Disclosure of Stakeholders Interest Here, the focus is on the reports provided by some other companies, which include the various initiatives and measures taken by them on the following items to meet the commitments, expectations and interests of stakeholdersEnvironment, Health and Safety, Human Resources
Corporate Governance and Indian FMCG Industry 57

Development, Corporate Social Responsibility and Industrial Relations. All the companies have indicated the various steps taken by them in the above mentioned areas. Neither of the steps taken in these areas fall under the corporate governance report, nor were a part of the Clause 49 of the listing agreement. HUL, in its annual report described the projects initiated by the company for social development in various parts of the country. The annual report also mentions that it continued to involve itself in social welfare initiatives across the country, both through charity and social investment around issues like education, health, nutrition and initiatives for the economic upliftment of the underprivileged. Similarly, other companies have also provided details of the various steps taken by them as a social responsibility.

Evaluation of Governance Standard

After an analysis of the governance structure, process and disclosures made on corporate governance, the question that comes to mind is, what was the standard and quality of governance that has been achieved by HUL, ITC, Nestle and Tata Tea? Considering the fact that there have been certain genuine difficulties due to non-availability of inside information, and no scope for discussion with the key officials of these companies, their auditors, internal auditors, directors and major shareholders etc., the author has developed an evaluation criteria, to analyze the performance of these four companies. The criteria, described in Table 9 was designed using the parameters given in Clause 49. This point based method gives weightage to the various components and ultimately, each of these companies has been awarded different points on key parameters.

Table 9: Criterion for Evaluation of Governance Standard for the Year 2006-2007 SI. No. 1. 2. 3. i) ii) iii) iv) v) Governance Parameters Points/Score Assigned (Max)> 1 2 3 4 5 2 2 5 (Contd...)
58 The Icfai University Journal of Corporate Governance, Vol. VIII, No. 1, 2009

Statement of companys philosophy on code of governance Structure and strength of board Chairman and CEO duality Promoter Executive Chairman-Cum-MD/CEO Non-promoter Executive Chairman-Cum-MD/CEO Promoter Non-Executive Chairman Non Promoter Non-Executive Chairman Non Executive Independent Chairman

Table 9: Criterion for Evaluation of Governance Standard for the Year 2006-07 (...contd) Sl. No. 4. 5. i) ii) iii) 6. 7, 8, 9, i) ii) 10, i) ii) 11, A i) ii) iii) iv) v) vi) Governance Parameters Disclosure of Tenure and Age limit of directors Disclosure of : Definition of Independent Director Definition of Financial Expert Selection criteria of Board of Directors, incl. Independent Directors Post-board meeting follow up system and compliance of the board procedures Appointment of lead Independent Director Disclosure of other provisions as to the boards and committees Disclosure of: Remuneration Policy Remuneration of Directors Code of Conduct Information on Code of Conduct Affirmation of compliance Board Committee Audit Committee Transparency in composition of audit committee Compliance of minimum requirement of the number of independent directors in the committee Compliance of minimum requirement of the number of meetings of the committee. Information about literacy and expertise of committee members Information about participation of head of finance, statutory auditor and chief internal auditor in the committee meeting Disclosure of audit committee charter and terms of reference Points/ Score Assigned 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 1

2 3 2 2 1 2 2 8 6

vii) Publishing of audit committee report B i) ii) Remuneration/Compensation Committee Formation of the committee Information about number of committee meetings

(Contd...)
Corporate Governance and Indian FMCG Industry 59

Table 9: Criterion for Evaluation of Governance Standard for the Year 2006-2007 (...contd) Sl. No. iii) iv) v) vi) C i) ii) iii) iv) v) D i) ii) E F G H 12. A B C D Governance Parameters Points/ Score Assigned 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 1 5 2 1 1 1 1 25 (Contd...)
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Compliance of minimum requirement of number of Non-Executive Directors in the Committee Compliance of the provision of Independent Director as a Chairman of the Committee Information about participation of all members in the Committee meeting Publishing of Committee report Shareholders/Investors Grievance Committee Transparency in Composition of the Committee Information about the nature of complaints and queries received and disposed item-wise Information about the number of Committee meetings Information about action taken and investors/shareholders survey Publishing of Committee report Nomination Committee Formation of the Committee Publishing of Committee Charter and Report Health, Safety and Environment Committee Ethics and Compliance Committee Investment Committee Share Transfer Committee Disclosure and Transparency Significant related party transactions having potential conflicts with the interest of the company Non-Compliance related to capital market matters during last three years Accounting Treatment Board DisclosureRisk Management i) Information to the board on Risk Management ii) Publishing of Risk Management Report

Table 9: Criterion for Evaluation of Governance Standard for the Year 2006-07 (...contd) Sl. No. E F Governance Parameters Points/ Score Assigned 2 1 1 1 1 2 2 2 2 2 1 1 1 10 5 2 2 2 2 2 3 2 2 10 10 100

Management Discussion and Analysis Shareholders Information i) Appointment of new Director/re-appointment of Existing director ii) Quarterly Results and Presentation iii) Share Transfers iv) Directors Responsibility Statement

G H I J K 13. i) ii) iii) 14. 15. 16. i) ii) 17. i) ii) iii) iv) v)

Shareholder Rights Audit Qualification Training of Board Members Evaluation of Non-Executive Directors Whistle Blower Policy General Body Meetings Location and time of general meetings held in last three years Details of Special Resolution passed in last three AGMs/EGMs Details of resolution passed in the previous year through postal ballot, incl. conducting official and voting process Means of communication and general shareholder information CEO/CFO Certification Compliance of Corporate Governance and Auditors Certificate Clean Certificate from Auditor Qualified Certificate from auditors Disclosure of Stakeholders interests : Environment, Health and Safety Measures (EHS) Human Resource Development (HRD) Initiative Corporate Social Responsibility (CSR) Industrial Relations (IR) Disclosure of policies on EHS, HRD, CSR and IR T O T A L

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Ranking: Score Range 86-100 71-85 56-70 41-55 Below 41 Rank Excellent Very Good Good Average Poor

Conclusion
It has been observed from Table 9, that among the four renowned FMCG companies, ITC scores the highest (79) points. It was also awarded the Institute of Company Secretaries of India (ICSI) national awards for excellence in corporate governance. ITC was followed by Tata Tea which scored 77 points, HUL, 72 points and Nestle, 69 points. ITC, Tata Tea and HUL figured in the criteria of Very Good and Nestle figured in the criteria of Good. However, the qualitative analysis indicates that the FMCG companies still have a long way to go in order to achieve excellence in their corporate governance practices. J

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