Corporate Governance

WRITING GUIDELINES

Definitions: Should talk about the code in relation with Cadbury report. Provide two if
possible.
CG requirements and tools: Importance of Corporate governance.
Best practices: By various companies.
First about the Cadbury committee, why did Cadbury report published i.e. SCAMS.
Mention what changes they made in corporate governance rules.
Talk about the UK combined code and other reports published.
Conclusion: How codes are helpful.

DISTRIBUTION

Definition
Cadbury Report
- Board of Directors
- Non-executive Directors
- Remuneration
- Financial Reporting
- Other Recommendations
Combined Code
- Independence
- Diligence
- Professional Development
- Board Performance & Evaluation
Mayners Report
Higgs Report
Smith Report
Best practices
ITC
- Transparency
- Empowerment & accountability
- Control
- Ethical Corporate Citizenship
- Corporate social responsibilities
Taj Hotels
Conclusion
Definition: The first corporate governance definition recorded was given by Tricker in 1984, it
stated Corporate governance is the governance role which is not concerned with the running of
the business of the company per se, but with giving overall direction to the enterprise, with
overseeing and controlling the executive actions of management and with satisfying legitimate
expectation of accountability and regulation by interests beyond the corporate boundaries.

Cadbury Report: According to Cadbury report, 1992, Corporate governance is the system by
which companies are directed and controlled. Although the definition describes basic role of
corporate governance, the definition was not completely agreed and was argued on many terms
and factors.

The spur for the Committee's creation was an increasing lack of investor confidence in the
honesty and accountability of listed companies, occasioned by the sudden financial collapses of
two companies, wallpaper group Coloroll and Asil Nadir's Polly Peck consortium: neither of
these sudden failures was at all foreshadowed in their apparently healthy published accounts.

Even as the Committee was getting down to business, two further scandals shook the financial
world: the collapse of the Bank of Credit and Commerce International and exposure of its
widespread criminal practices, and the posthumous discovery of Robert Maxwell's appropriation
of 440m from his companies' pension funds as the Maxwell Group filed for bankruptcy in 1992.
The shockwaves from these two incidents only heightened the sense of urgency behind the
Committee's work, and ensured that all eyes would be on its eventual report.

The effect of these multiple blows to the perceived probity and integrity of UK financial
institutions was such that many feared an overly heavy-handed response, perhaps even
legislation mandating certain boardroom practices.

Cadbury Report: Chaired by Adrian Cadbury, the Cadbury Report was the first one of its kind
initiative to help rearrange the corporate governance model in state of worldwide fiscal crisis.
The committee was set up by Financial Reporting Council of London Stock Exchange. The
report was divided into four major sections, Role, duties and composition of board of directors.
Role of non-executive directors, dealing with their remuneration, and answering the question of
financial reporting and control.
 Board of Directors The board should meet regularly, have full and effective control over
company monitoring executive management. The non-executive directors should be qualified
enough in the respective field to carry out activities, and provide views. The composition as
well should be considered given the size of the company to ensure fair recommendations.
The board should be able to access company secretary, making sure all board activities are
carried out in a systematic compliant manner. And any question for removal of CS should be
a collective board decision.
Non-executive Directors: Strategy, Performance, resources and other key appointments in the
company should be an independent decision of non-executive directors. They should be
appointed for a specific tenure, and reappointment shouldnt be automatic. A formal selection
procedure should be in place for election of a non-executive director, which is agreeable to
the entire board.
Remuneration: Future service contracts should be of only three years, and future renewal
should be a decision of board. Shareholders should ensure remuneration of board is fair and
competitive. AGM should be used as a tool to decide on board benefits and fees.
Financial Reporting: Board is responsible to provide a fair and balanced financial document.
A professional and strictly objective relationship is to be maintained with the audit
committee. The board should appoint an audit committee with at least three non-executive
directors as members with their role and duties specified. Directors are expected to report
control mechanism in the company for internal control. Directors are to report any concern
with supporting assumptions.
Other Recommendations: No single person should hold the power to make any major
decision. Majority of directors should be non-executive directors in the board. Term of
directors can only be extended upon approval of the board. Decisions of remuneration
committee are to be considered final. Audit details of listed companies should be made public
with regular rotation of auditors.

Combined Code: Combined Code was another effort by Financial Reporting Council, published
in 2003. The Financial Reporting Council was handed over the responsibility of Regulation of
corporate affairs by the London Stock Exchange. The code grouped the major recommendations
under categories such as Independence, Diligence, Professional Development, and Board
Performance Evaluation.
 Independence: At least half the board, excluding the chairman should consist of Non-
Executive Director who are independent of the company. Audit committee and remuneration
committee should be formed entirely with Independent Director. Most nomination committee
members should also be independent. Definition of Independence as well was defined stating
that an independent director should not be employed in the company for past five years. The
director should not be having any material business relationship with the company for the
past three years. Shareholding value shouldnt be significant. And lastly, shouldnt have
served the board for more than nine years.
Diligence: Non-executive directors are expected to disclose all their commitments prior to
becoming a director, to ensure that sufficient time is given to the organization. The decision
to select lies in the hand of shareholders. The appointment process should be rigorous and
transparent in nature.
Professional Development: All directors are required to go through an induction process,
training them with the company policies and philosophies. Directors should regularly be
updated on relevant skills, knowledge and be familiar with the company working.
Board Performance & Evaluation: Board should go through an evaluation process to mark
their performance. Annual assessments should be carried out for measuring individual
performance as well as board performance.

Mayners Report: Published in 2001, it was a Report on institutional investors which

concentrated more on the trusteeship aspects of the institutional investors and the legal
requirement for trustees. With the aim of raising the standards and promoting greater shareholder
engagement. For eg. Mayners report expects that institutional investors should be more
proactive.

Higgs (2003): Report is on the role and effectiveness of non-executive directors.

Recommendation given are the number of meetings of the board and its main committee should
be reported in annual meeting report. CEO should not be CM of the same company. Meeting of
Non-Ex director in absence of Ex Director at least once a year, and the same should be recorded
in annual meeting report. Chief Executives should consider implementing new EDP for suitable
individuals in their company for future directors roles. Shareholders should be informed as to
how & why they have appointed specific Non-Executive Director. There should be
comprehensive program for New Non-Executive Directors. Resources should be available for
ongoing development of the Directors. The performance of the Board, its committee and its
individual should be evaluated at least once a year. Executive Director should not hold more than
one Non-Ex Directorship or become Chairman of a major company. Executive Director should
not hold more than one Non-Ex Directorship or become Chairman of a major company.

Smith (2003): The Smith Review of Audit Committees, a group appointed by Financial
Reporting Council. The review made clear the key role of Audit Committee. While all the
Directors have a duty act in the interest of the company, the Audit Committee has a role, acting
independently from the executive, to ensure that the interests of shareholder are properly
protected in relation to financial reporting and internal control. The review defined the Audit
Committee role in terms of a high-level overview it needs to satisfy by itself that there is an
appropriate system of controls in place but it does not undertake the monitoring itself.

Best practices: Best practices ideally are referred to the processes, practices, and systems that
are practiced by the top performing companies in the hospitality sector, usually these companies
are recognized for improving the overall performance of the company. Companies with strong
corporate governance have outperformed their competitors in their sector. Corporate social
responsibility come under best practices of corporate governance, as it refers to organizations
considering and managing their impact on internal but mainly on the external stakeholders.
Corporate social responsibility is all about how the organization will manage the impact of their
operation on economy, society, and environment, and exceeding the requirements imposed by
regulations. The main argument is that has CSR helped in correcting the course of corporate
governance to stop damage to internal and external stakeholders.

According to Companies Act, 2013, companies should adhere specific practices to stay under the
corporate governance rules:

Follow trusteeship to protect shareholders.

A code of conduct should be followed across all the sectors.
A transparent & independent process should be functioned by the board.
Focus on sustainability.
Every company should have a concern for corporate social responsibilities.
ITC: Taking into consideration the practice followed by Indian Tobacco Company (ITC)
Welcome group of hotels diligently follows them under the company act 2013. ITC believes that
practicing of all these factors leads to a creation of right corporate culture, practices followed are:

Trusteeship: ITC is certain that huge organizations like itself have both social and economic
purpose. ITC as a company represents the association of interest such as shareholders,
stakeholders, business associates and employees of the organization. The belief of associating
themselves casts a responsibility of trusteeship on the companys board of director. Shareholder
value is protected and enhanced by the trustees, on the other hand, fulfilling its responsibilities to
other stakeholder and solving their concerns.

Transparency: Transparency according to ITC is to explain all the companys policies and
action to whom it has responsibilities. With jeopardizing the Companys strategic interest the
transparency must lead to appropriate disclosure to the concerned party. Internal transparency
brings openness between the company and their employees as well as the conduct of its
business. ITC believes that accountability can be enhanced through transparency.
Empowerment & accountability: The Companys first main principle of governance is that
management should have freedom to take the enterprise in the right direction. ITC states that
empowerment is a process of knowing & experimenting the potential of its employees.
Empowerment leads to unleashing creativity and innovation throughout the organization. The
management is accountable to the board and board are accountable to the shareholders. ITC
believes that accountability combined with empowerment improves the performance and
effectiveness which leads in increasing the shareholder value.
Control: Control according to ITC is a necessary aspect of its set of the core principle of
governances that the freedom of management should be practiced under certain checks and
balances. Control helps in prevention of misuse of power, change has a managed time to
settle inside the organization, and the risk that occurs during the business are prevented and
effectively managed.
Ethical Corporate Citizenship: Set exemplary standards of ethical behavior should be
followed by huge companies like ITC, internally in the organization as well as their external
relationships. ITC believes that unethical behavior undermines stakeholder value by
corrupting the organizational culture.
 ITC hotels have implemented two corporate social responsibilities over the years keeping in
mind the environment and other stakeholders. ITC Green Centre which is the headquarters of
ITCs hotel business located in Gurgaon. They are fully committed to sustainability. ITC
Hotels Empowering Differently-abled people signifies that differently abled people also
can also contribute to the workplace, families, and communities. This shows the sensitive and
caring nature of the organization.

These are some of the best practices performed by ITC in the organization and many of the other
hospitality organizations are taking the path followed by ITC to succeed. The practices
performed helps the organization in a longer run and for achieving better results. Best practices
will keep on evolving as per the demand and the changes in the market. There is no set standard
of best practices, each company has its own set of best practices. These practices are set
according to the companys mission and vision. CSR of the company should be meaningful and
need-based to the society; it is an economically satisfied action which is capable of transforming
of transforming the business environment to sustain it.

Taj Hotels: Another example of good corporate governance is Indian Hotels Company
Limited. A century old hospitality firm that has grown to be one of Indias largest hotel
company. IHCL is a part of Tata Sons that has 15 domestic subsidiaries, and 15 international
subsidiaries. IHCL also has 15 international and domestic associates along with joint venture
with 6 Indian and 2 international brands. Even before corporate governance was mandated by
SEBI in 2001, IHCL has been an active participant striving for good practices. Out of more than
5000 companies listed under Bombay Stock Exchange, IHCL stands in A Group category,
which only comprises of 200 top listed companies.
The tough criteria for selection of A Group companies prove the quality of corporate
governance in the company. Market Capitalization, Liquidity, History in listing, Industry
representation, and track record of compliance to law are criteria for A Group companies. IHCL
is known for going beyond the mandatory requirements of corporate governance, promoting fair
and transparent business.

Taj Hotels Resorts and Palaces believe in making contributions in all the neighboring
communities of the ones they operate. The principles of Tata suggest that society and
environment are important stakeholders of the corporation, and that the philosophy says the sole
purpose of business is development of the society. Supporting the local community and reducing
the environmental footprint of operations have been priority of the company. To facilitate the
same the theme of corporate social responsibility initiatives of Taj Group has been Livelihoods,
Neighborhoods and Welfare. Whereas the environment protection program is called EARTH.
(Environmental Awareness and Renewal at Taj Hotels). Mandatory recommendations suggest
that only a mere 2% of average net profit over past 3 years needs to be invested in CSR
activities. But by the above programs Taj Group has been pioneers of corporate social
responsibility in India developing communities and helping reduce environmental footprint. To
develop community, IHCL hosts a skill training and development program in select hotels and
affiliated institutes to provide education related to the hospitality industry. To strengthen their
environmental commitment IHCL through EARTH reduces their energy consumption, wastage
and water pollution along with EarthCheck Worlds leading environmental management
program suited for hospitality and tourism. As far as internal stakeholders of the company are
concerned, IHCL hosts the program Safety First that ensures constant food quality checks,
workplace safety standards are met, and security of everyone. In one of a kind initiative it
benefits both the working staff as well as the guests associated with the hotel. The policy is based
on Tata Code of Conduct and Tata Safety Policy to ensure higher standards of working.
The Taj Public Service Welfare Trust is an initiative to provide aid to people affected by the
Mumbai Terror Attacks in 2008, as well as other disasters both man-made and natural helping the
society stand back in tough times. Taj group strives on transparency and communication. All the
sustainability efforts by the group are published for public reading ensuring that people are aware
of money being spent under CSR initiative even before it was mandated. Taj is an active follower
of ten principles set by United Nations Global Compact and the Global Reporting Initiative G3
framework. Give Back Employee Volunteering annually leads to almost 7000 employees helping
the community with livelihood opportunities, promoting cleanliness and hygiene along with
initiatives to support a childs education.

All the above initiatives are proof of the extra effort being taken by the IHCL group towards
betterment of internal and external stakeholders. To look after the same, there exists a Corporate
Social Responsibility Committee as well head by Mr. Rakesh Sarna the CEO along with two
independent directors.

Conclusion