chapter 2 - corporate governance

7/27/2019 Chapter 2 - corporate governance

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CHAPTER II


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Factor influence the corporate governance

1. The ownership structure

2. The structure of company boards

3. The financial structure

4. The institutional environment

problems of corporate governance

Demand for information

Monitoring costs

Supply of accounting information


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Supervisory board/committee/team

Audit committee

Internal audit

Statutory audit

Disclosure of information

Risk management framework

Internal control framework


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Corporate Governance is concerned with holding thebalance between economic and social goals and betweenindividual and communal goals. The governanceframework is there to encourage the efficient use ofresources and equally to require accountability for the

stewardship of those resources. The aim is to align as nearlyas possible the interest of individuals, corporations andsociety.

The foundation of any structure of corporate governance is

disclosure. Openness is the basis of public confidence inthe corporate system and funds will flow to centers ofeconomic activity that inspire trust.-Sir Adrian Cadbury.


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Wider use of INDEPENDENT DIRECTOR

Introduction of AUDIT COMMITTEE

Separation between CHAIRMAN and CEO

Adherence to detailed code of BEST PRACTICES.


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Protect rights of SHAREHOLDERS

Recognize the rights of STAKEHOLDERS

Timely and accurate DISCLOSURE

Responsibility of the BOARD


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The code provides a framework for efficient andtransparent running of listed companies to enhance

shareholder value. The regulators need to be vigilantto enforce the code in its true spirit.


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Non Executive Director Qualification of a Director Tenure of Director Governance Policies of the Directors Information to Directors Orientation Courses

CFO/ Co. Sec Corporate and Financial Reporting Audit Committees


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Encourage effective representation of independent non-executivedirectors, including those representing minority interests.

a. minority shareholders as a class are facilitated to contest.(through the use of proxy)

b. At least one independent director representing institutionalequity interest of financial institution. (a director nominated as adirector under section 182 and 183 not be taken as independentdirectors)

c. Executive directors not more than75% of the elected directors.(Voluntary provision)

The directors to give consent that they are aware of their duties andpowers


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Director, not to be a director in more than ten other listed companies.

ii. Director needs:a. to be registered as a National Tax Payer ; and

b. Not to a defaulter as convicted by court of a bankingcompany, development financial institution, or a non-bankingfinancial institution or as a member by the Stock Exchange.

iii Not to be director if spouse is engaged in the business of Stock

Brokerage (voluntary)

TENURE OF OFFICE OF DIRECTOR

iv. Three years, vacancy to be filled in 30 days


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Every listed company shall ensure

a. Statement of Ethics and Business practices is prepared

b. Board of directors to adopt vision statement, and overall corporatestrategy; formulate significant policies (for the purpose of riskmanagement, marketing, etc.)

c. Establish internal control

d. Documentation by resolutions passed in meetings on all seriousissues. i.e. investment and dis-investment of funds, loans, write-off ofbad debts etc.


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e. Appointment etc. of Chief Executive to be determined by theboard.

f. Investment policy of modaraba institution to be approved and

reported in annual report.

Significant issues to be placed for decision by the board ofdirectors (i.e. annual business plan, budgets, joint ventures etc.)

Orientation courses for directors.


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CFO has to be:a. professional accountant ; orb. graduate with 5 yrs experience in handling financial

affairs in a listed company or a bank.

CS has to be:a. professional accountant ; orb. member of a recognized body of corporate/chartered

secretaries or

c. lawyer ; ord. a graduate with 5 yrs experience of handling corporateaffairs.


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CORPORATE AND FINANCIAL REPORTINGFRAMEWORKDirectors report to shareholders. Give complete and candidposition of the company.

RESPONSIBILITY FOR FINANCIAL REPORTINGi. Financial statements to be duly endorsed by CEO and CFOii. Secretarial compliance certificate required with annual

returns

DISCLOSURE OF INTEREST BY A DIRECTOR.


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AUDITORS NOT TO HOLD SHARES

External Auditors and their spouse restricted to purchase shares inthe company they are auditing.

AUDIT COMMITTEE

i. not less than three member committee preferably from non-executive directors.

ii. Committee to meet at least once every quarter.

iii. CFO to attend meetings of Audit committee.


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SEBI and Clause 49

SEBI asked Indian firms above a certain size to implement Clause

49, a regulation that strengthens the role of independent directors

serving on corporate boards.

On August 26, 2003, SEBI announced an amended Clause 49 of the

listing agreement which every public company listed on an Indian

stock exchange is required to sign. The amended clauses come into

immediate effect for companies seeking a new listing.

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The major changes to Clause 49

1.Independent Directors1/3 to depending whether the chairman ofthe board is a non-executive or executive position.

2.Non-Executive Directors ----The total term of office of non-executive

directors is now limited to three terms of three years each.

3.Board of Directors-----The board is required to frame a code of

conduct for all board members and senior management and each of themhave to annually affirm compliance with the code.

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Clause 49..4.Audit Committee----Financial statements and the draft audit report of

management discussion and analysis of

Financial condition Result of operations of compliance with laws

Risk management letters

Letters of weaknesses in internal controls issued by statutory

Internal auditors

Removal and terms of remuneration of the chief internal auditor

5.Whistleblower Policy ----This policy has to be communicated to all

employees and whistleblowers should be protected from unfair treatment

and termination.

6.Subsidiary Companies-----50% non-executive directors & 1/3 &

independent directors depending on whether the chairman is non-

executive or executive.18


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7.Disclosures----Contingent liabilities./Basis of related party transactions.

/Risk management/ . Proceeds from initial public offering/ .

Remuneration of directors.

8.Certifications -> reviewed the necessary financial statements and

directorsreport; established and maintained internal controls,

disclosed to the auditors and informed the auditors and audit

committee of any significant changes in internal controland/or of accounting policies during the year.


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Board of Directors: frequency of meetings and composition

Board must meet at least four times a year, with a maximum timegap of four months between two successive meetings.

If the chairman of the Company is a non-executive then one-thirdof the board should consist of independent directors, and 50%otherwise.

Independent defined as those directors who, apart from receiving

directors remuneration do not have any other monetaryrelationship or transactions with the company, its promoters,management or subsidiaries, which in the view of the board mayaffect independence of judgment.

Mandated CG guidelines anddisclosures


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Board of Directors: frequency of meetings and composition

The frequency of board meetings and board committee meetings,with their dates, must be fully disclosed to shareholders in theannual report of the company.

The attendance record of all directors in board meetings and boardcommittee meetings must be fully disclosed to shareholders in theannual report of the company.

Full and detailed remuneration of each director (salary, sittingfees, commissions, stock options and perquisites) must be fullydisclosed to shareholders in the annual report of the company.

Loans given to executive directors are capped (no loans permittedto non-executives), and must be fully disclosed to shareholders inthe annual report of the company.



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Board of Directors: information that must be supplied

Annual, quarter, half year operating plans, budgets and updates.

Quarterly results of company and its business segments.

Minutes of the audit committee and other board committees.

Recruitment and remuneration of senior officers.

Materially important legal notices and claims, as well as anyaccidents, hazards, pollution issues and labor problems.

Any actual or expected default in financial obligations.

Details of joint ventures and collaborations. Transactions involving payment towards goodwill, brand equity

and intellectual property.

Any materially significant sale of business and investments.

Foreign currency and other risks and risk management.

Any regulatory non-compliance.



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Board of Directors: Audit Committee

Audit Committee is mandatory.

Must have minimum of three members, all non-executive directors, the

majority of whom are independent.

Chairman must be an independent director, and must be present at theannual shareholders meeting to answer audit or finance relatedquestions.

At least one member must be an expert in finance/accounts.

Must have at least three meetings per year, including one beforefinalisation of annual accounts.

Must meet with statutory auditors and internal auditors; have thepowers to seek any financial, legal or operational information from the

management; obtain outside legal or professional advice.



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Board of Directors: Audit Committee functions

Oversight of the companys financial reporting process to ensurethat the financial statement is correct, sufficient and credible

Appointment / removal of external auditor and fixing of audit fees

Reviewing with management the annual financial statementsbefore submission to the board, focusing on:

Changes in accounting policies and practices

Major accounting entries

Qualifications in draft audit report

Significant adjustments arising out of audit

The going concern assumption

Compliance with accounting standards, with stock exchangeand legal requirements

Any related party transactions



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Board of Directors: Audit Committee functions

Adequacy of internal audit and internal control systems, throughdiscussion with internal and statutory auditors as well asmanagement.

Significant findings, follow-up and action taken reports.

Discussion with internal and statutory auditors about scope anddesign of audits.

Reviewing financial and legal risks and companys risk management

policies.

Examining reasons behind any materially significant default tocreditors, bond-holders, suppliers and shareholders.



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Disclosures to shareholders in addition to balance sheet, P&Land cash flow statement

Board composition (executive, non-exec, independent).

Qualifications and experience of directors.

Number of outside directorships held by each director (capped at

director not being a member of more than 10 board-levelcommittees, and Chairman of not more than 5).

Attendance record of directors.

Remuneration of directors.

Relationship (familial or pecuniary) with other directors.

Warning against insider trading, with procedures to prevent suchacts.

Details of grievances of shareholders, and how quickly these wereaddressed.

Date, time and venue of annual general meeting of shareholders.



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Disclosures to shareholders in addition to balance sheet, P&L

and cash flow statement

Dates of book closure and dividend payment.

Details of shareholding pattern.

Name, address and contact details of registrars and/orshare transfer agents.

Details about the share transfer system.

Stock price data over the reporting year, and how thecompanys stock measured up to the index.

Financial effects of stock options. Financial effects of any share buyback.

Financial effects of any warrants that are to be exercised.

Chapter reporting corporate governance practices



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Disclosures to shareholders in addition to balance sheet, P&L and

cash flow statement

Detailed chapter on Management Discussion and Analysis focusingon markets, operations, finances, accounts, risks, opportunities and

threats, internal control systems.

Consolidated financial statement, incorporating accounts of allsubsidiaries (over 50% shares held by reporting company).

Details of all significant related party transactions.

Detailed segment reporting (revenues, costs, operating profits andcapital employed).

Deferred tax liabilities and assets and debit/credit in the P&L for thereporting year



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Disclosures

(A) Basis of related party transactions

I. A statement in summary form oftransactions with related parties in theordinary course of business shall beplaced periodically before the auditcommittee.

II. Details of material individual transactionswith related parties which are not in thenormal course of business shall be placedbefore the audit committee.

III. Details of material individual transactionswith related parties or others, which arenot on an arms length basis should beplaced before the audit committee,together with Managements justificationfor the same


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Disclosures(B) Disclosure of Accounting Treatment

To disclose in the financial statements,if an accounting treatment other thanprescribed in Accounting Standard hasbeen followed alongwith explanation.

(C) Board Disclosures Riskmanagement

Internal and external business risks

Procedures to inform Board membersabout the risk assessment andminimization.

Periodically reviewed


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Disclosures

(D) Proceeds from public issues, rightsissues, preferential issues etc.

To disclose to the Audit Committee, onuse/application of funds as and when anyissue is made

(E) Additional disclosures:

In the Annual Report the criteria of makingpayments to NEDs to be disclosed or areference to be made that the same isavailable on the companys website

number of shares and convertibleinstruments held by NEDs.

NEDs shall disclose their shareholding(both own or held by / for other personson a beneficial basis) in the company inwhich they are proposed to be appointedas directors, prior to their appointment.


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Disclosures

F) ManagementA Management Discussion andAnalysis report to form part of theAnnual Report.

G) ShareholdersDisclosures to shareholders in case ofappointment /reappointment ofdirectors, quarterly results and

presentations made, shareholdersgrievance committee and sharetransfer committee, shareholdingpattern-change


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CEO/CFO certificationThe CEO, i.e. Managing Director and the CFO

i.e. whole-time Finance Director or head ofthe finance function to certify to the Boardthat:

(a) They have reviewed financial statementsand the cash flow statement for the year and

these statements:(i) do not contain any materially untrue statement

or omit any material fact or contain statementsthat might be misleading;

(ii) together present a true and fair view of thecompanys affairs and are in compliance with

existing accounting standards, applicable lawsand regulations.

(b) no transactions entered into by thecompany during the year which arefraudulent, illegal or violative of thecompanys code of conduct.


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CEO/CFO certification (contd)

(c)They accept responsibility for establishing and

maintaining internal controls and that theyhave evaluated the effectiveness of the internalcontrol systems of the company and they havedisclosed to the auditors and the AuditCommittee, deficiencies in the design oroperation of internal controls, if any, of whichthey are aware and the steps they have takenor propose to take to rectify these deficiencies.

(d)They have indicated to the auditors and theAudit committee(i) Significant changes in internal control during the

year;(ii) Significant changes in accounting policies

during the year and that the same have beendisclosed in the notes to the financial statements;and

(iii)Instances of significant fraud of which they have

become aware and the involvement therein if

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