Corporate governance

“Leading towards Accomplishments”

By. Pavan Kumar VijayPast President, The Institute of Company Secretaries of India

04/10/23

…the application of best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of

wealth and discharge of social responsibility for sustainable development of all stakeholders”

Institute of Company Secretaries of India

“Corporate governance is…

Corporate Governance rests with the Vision and Perception of the Leadership

and

A Leader need to adopt a Vision for Corporate Governance

Corporate Governance Framework

Output – Input = Wealth Created ?

Sustainability

Happiness andProsperity of all

Stakeholders

Reinvestment

Distribu- tion

Research and DevelopmentHR DevelopmentInfrastructureRisk Management

SUPPLIERS Adequate ReturnsHUMAN ASSETS Adequate RemunerationCUSTOMERS Affordable PricesPUBLIC Payment of Taxes and Partnership in National Development Projects

Wealth Creation Wealth Management Wealth Sharing

EnhancedCapabilities

Best Management Practices are Vital HereLaw and Ethics are Vital Here

Constituents of

Corporate Governance

The stakeholder value chain

SUPPLIERS CUSTOMERSHUMAN RESOURCE

Supply Funds, Materials and Services

Value Addition and Management of Resources

Give Opportunity to Co. to Satisfy their Needs

Adequate Returns for Funds, Material and Services Supplied

Adequate Salary and Security for leading a Happy Life

Best Quality Products and Customer Care at Minimum Prices

ROLE OF STAKEHOLDERS

EXPECTATIONS OF STAKEHOLDERS

Potential Suppliers, Human Resources and Customers

Biological, Economic and Cultural EnvironmentPUBLIC

PUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT

The Principles of Good Governance

A Case Study on Corporate Governance - Examples from India

vs

The vision adopted in Infosys

Systematic Scheduling of Board Meetings with maximum Participation

assured.

Ensuring delegation at committee level being composed of optimum

number of Independent Directors.

Maximum tenure of independent directors is nine years.

Dissemination of regular information to investors through e-mail,

telephone, face-to-face meetings, road shows etc.

Cont…

The vision adopted in Infosys

Presentations are made by executive directors to familiarize the new

non-executive directors with the Company’s operations.

Evaluation of non-executive directors through a peer-evaluation

process.

Whistle blower policy providing direct access of employees to

Chairperson of Audit Committee.

And

That’s what makes

Infosys

A value driven organization and resuts into greater valuation and overlall

benefits

25.6

A Comparison of Infosys in IT Industry

with their P/E multiple

The Satyam Disaster!!!

Depiction of rosy picture in disclosures Lack of transparency Ineffective participation of Independent Directors Falsification of accounts Failure of Board Procedures & Systems Unproductive Whistle Blower

Eventually the whole system of Corporate Governance was treated as a mockery by not adoption of principles in Spiritual sense which resulted in a

Corporate Slaughter

The age old mantra of Indians is that

Commitment to well-being and progress of all stakeholders

Capacity, Knowledge and Resources

Maximization of stakeholders’ value and well-being and progress of humankind

TOWARDS

THROUGH

Transparency, accountability and truthful disclosure of state of affairs

Righteousness

Truth

Corporate are also expected to use their

Companies that have followed theseprinciples of

Corporate Governancehave

Consistently earned high returns, increased their net worth,

enhanced their shareholders wealth

Invested significantly in proactive research and development

Developed people into ‘achievers’ than just ‘performers’

Dealt ethically with customers, government and business partners

Maintained and updated their professional management culture, system and processes

..and accomplished

WINNINGEMPLOYEES

WINNINGEMPLOYEES

GROWINGINVESTORS

GROWINGINVESTORS

DELIGHTEDCUSTOMERS

DELIGHTEDCUSTOMERS

TRUSTEDSUPPLIERS

TRUSTEDSUPPLIERS

SATISFIEDGOVERNMENT AND

REGULATORS

SATISFIEDGOVERNMENT AND

REGULATORS

HAPPYSOCIETY

HAPPYSOCIETY

Advantages of applying Best Corporate Governance Practices

Widespread Goodwill and Brand Reputation

Access to Global Markets

Better Access to Human Capital

Ready Market for New Products

Widening Customer Base

Enhanced Trust and Confidence of all Stakeholders

EMPLOYEESEMPLOYEES

INVESTORSINVESTORS CUSTOMERSCUSTOMERS

SUPPLIERSSUPPLIERS

GOVERNMENT AND REGULATORS

GOVERNMENT AND REGULATORS

SOCIETYSOCIETY

Leading to…

Environment

Civil SocietyBusiness Society

SUSTAINABLEDEVELOPMENT OF

NATION

The Nation’s Welfare

Happier Nation World wide recognition Overall GrowthEnhanced confidence amongst foreign investors

though Primary/Secondary Market Overall stakeholders benefit Enhanced repute and significance of Citizens at the

global platform.

Corporate Governance

The Latest Initiatives

Corporate governance voluntary guidelines 2009• Board of Directors• Responsibilities of the Board • Audit committee of the

Board • Auditors • Secretarial Audit • Institution of Mechanism of

Whistle Blower • Corporate Social

Responsibility

The Existing Initiatives

• Securities Laws Listing Agreement Prohibition of Insider

Trading Regulations Capital Market

Regulations • Companies Act, 1956

Existing Vs Latest

BOARD OF DIRECTORS – Appointment of Directors

• Appointment of Board Issuance of formal letter of appointment containing

specified details Such letter to be formed part of disclosures and should

be placed at the website of the company

• Separation of the office of managing Director & ChairmanTo ensure independent and effective decision making

Cont…

BOARD OF DIRECTORS - Appointment of Directors

• Nomination Committee To be chaired by independent director and formed of

effective mix of directors for the purpose of screening and appointing Non executive directors (including independent) and fixing their term of appointment

Such procedure to be disclosed in the annual report • Limit to directorship of any Director

Limit to include public limited and subsidiaries of public companies

For an executive director, maximum no. of companies wherein he can serve as Non executive director should be restricted to seven

BOARD OF DIRECTORS - Remuneration of Directors

Remuneration• Guiding Principles-Linking Corporate and Individual

Performance

specifying performance benchmark for deciding remuneration

Remuneration policy should be laid for Board and KMPs specifying proper mix of fixed and flexible pay-out

Performance related incentive to be specifically emphasized for Executive directors

Cont…

BOARD OF DIRECTORS - Remuneration of Directors

Remuneration• Remuneration of Non-Executive Directors (NEDs)

Specific policy bearing fixed and flexible component (in form of share of net profit/ESOP) to be specified for such directors

Minimum lock in period after his exit from the Board to be fixed

• Structure of Compensation to NEDsRemuneration package should be defined in terms of fixed,

variable and additional variable payment , the details of which should be disclosed in the annual report

Cont…

BOARD OF DIRECTORS - Remuneration of Directors

Remuneration• Remuneration of Independent Directors (IDs)

Sitting fee to be increased Payment should not be made in the form of stock options

or profit linked commission, which may hamper their independence

BOARD OF DIRECTORS - Remuneration of Directors

Remuneration Committee

• Constitution – at least one to be independent director • Objective - to determine remuneration packages of all

executive directors • Basis – to determine the principle, basis and rationale behind

remuneration • Roles – recommendation and making available such

information for the shareholders

RESPONSIBILITIES OF THE BOARD

• Training of Directors• Enabling Quality Decision making• Risk Management• Evaluation of Performance of Board of Directors, Committees

thereof and of Individual Directors• Board to place Systems to ensure Compliance with Laws

Annual review the compliance of all laws and its effectiveness

Adoption of ‘comply and explain principle’Discuss the Impact Analysis on Minority Shareholders on

each Board agenda item

AUDIT COMMITTEE OF BOARD

• Audit Committee – Constitution

• Audit Committee – Enabling Powers

• Audit Committee - Role and Responsibilities

AUDITORS

• Appointment of Auditors

• Certificate of Independence

• Rotation of Audit Partners and Firms

• Need for clarity on information to be sought by auditor and/or provided by the company to him/it

• Appointment of Internal Auditor

SECRETARIAL AUDIT

Arrangement for an independent audit by professionals to ensure transparent, ethical and

responsible governance of the company.

INSTITUTION OF MECHANISM FOR WHISTLE BLOWING

• Provide for code specifying unethical behavior, actual or suspected fraud, or violation of the company's code of conduct or ethics policy.

• Ensure safeguards for the person blowing the whistle.

INDEPENDENT DIRECTORS

Roles &

Responsibilities

Roles of Independent Director

• Ensuring effective, balanced and rational board• Challenge the company proposals in light of the overall

analysis• Scrutinize performance of management and key officials• Examine the role of and work performed by the auditor in the

company • Contribute to the betterment of the company by the varied

thoughts and specialization• Reconfirm the financial information in consensus with the

Statutory Auditors Cont …

Roles of Independent Director

• Formulate and deal in effective investor interaction/redressal forum

• Oversee the whole procedure and practices adopted by the company and the manner of performance

• Active role in being the whistle blower for any mal practice adopted in the company

• Review fulfillment of any commitment made by the company with its shareholders such as utilization of IPO proceeds

• Secretly review the internal control and internal audit system in the company and give suggestions for its improvement

Responsibility of Independent Director

• Review the legal compliances in the company and the steps taken to curb its deficiencies

• To take effective measures towards the responsibilities granted by virtue of different positions held in the company

• To act as an advisor and inspector to any policies/decisions performed by the company

• To follow a proper information dissemination system and report of any malfunctioning in the company to the general public

• Not to extract any undue privilege or benefit from the company

CORPORATE GOVERNANCE VOLUNTARY GUIDELINES 2009

Further Initiative • Attributes of Independent Directors

To specify the positive attributes with reference to such directors The certificate of independence to be taken and placed on company

website• Tenure of Independent Directors

Fixing the maximum years of directorship to 7 years Period of 3 years should lapse before such person is given different

designation in the company No more than 3 tenure to any independent director Maximum no of companies to be fixed to 7

• Independent Directors to have the Option and Freedom to meet Company Management periodically

Corporate Social

Responsibility(CSR)

What is CSR?CSR is about alignment of business behaviors and values with the expectations and needs of stakeholders, which includes, not just investor and customers , but also the employees, suppliers, communities, regulators, special interest groups and society as a whole.

It describes the social commitment of an organization on a macro level.

It is not philanthropy activity but a voluntary effort of going beyond any statutory requirement or obligation

CSR The core elements

• Care for all Stakeholders• Ethical functioning• Respect for Workers' Rights and Welfare• Respect for Human Rights• Respect for Environment• Activities for Social and Inclusive Development

CSR - The implementation

• Creation of CSR Policy• Laying down investment strategy• Allocation of specific amount• Association with specified persons • Dissemination of information regarding the CSR initiatives

taken

PSU’s & CSR

Net profit CSR Amount

less than US$ 22.5 million (100 crores) 3-5 per cent of profit

between US$ 22.5 million - US$ 112.5 million(100 – 500 crores)

2-3 per cent

over US$ 112.5 million (500 crores) 0.5-2 per cent of net profits

The guidelines to PSU provides

Such investment to be in project based & mere donation to charity and philanthropic activity would not be included in this . Expenditure related to staff excluded

The Corporate Failures

Company Country What went wrong Ahold NL earnings overstated Enron USA inflated earnings, hid debt in SPEs Parmalat Italy false transactions recorded Tyco USA looting by CEO, improper share deals, evidence

of tampering and falsifying business records WorldCom USA expenses booked as capital expenditure Xerox USA accelerated revenue recognition Satyam India Board failure, accounts falsification Lehman Brothers

USA Failure of Board, management & regulator

Corporate Governance Reasons of Collapse

• Insufficient dissemination of information • Lack of awareness amongst the Investor • Board Manipulations • Insufficient contributions from Independent

Directors • Lack of internal control and internal audit systems • Lack of proper accountability • In sufficient cross verification

Failure of Corporate Governance - Impact & Preparation

Impact Preparation

Loss of Investor Trust India Inc. Caution and initiation of steps towards good governance

Failure of trust on intermediaries such as Statutory Auditors, Internal Auditors, Secretarial Auditors etc.

Effective information dissemination

Overall loss of the economy through market loss

Activated role of the regulator

Outstanding Performance, Higher Profits,

Expanded Market Reach and the like FAILS

to protect a company which has put good governance & ethics

at the back burner….

History is Witness

D

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..…Only the culture of strict adherence to good compliance can keep a company

ahead on sustainable basis , bring in larger profits!!!

Secret behind building foundations

S

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C

C

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Corporates should act like Honeybee which suck the nectar of the flowers without effecting its fragrance and produce honey for the well –being of society .

The Ancient Indian Philosophy

Thank youPavan Kumar Vijay Managing Director

Corporate Professionals (India) Pvt. Ltd.D – 28, South Ext- I,New Delhi 1100049

Tel: +91.11.40622200,Fax: +91.11.40622201

Email: info@indiacp.com

Visit us at:www.corporateprofessionals.com