CHAPTER 3 LANDMARKS IN THE EMERGENCE OF CORPORATE GOVERNANCE

Dear

Friends, Following are the important topics given by sir :1. Cadbuy Committee on Corporate Governance, 1992 2. Sarbanes-oxley Act,2002 3. Independent Director (clause 49) 4. Kumar Mangalam Birla committee 5.Internal System Cos and Pron----- Not in slides discussed in second last class. NOTE:- Only one question will come from Ethics part

OBJECTIVES
Corporate governance as a desideratum for orderly development of an economy has evolved over the past three decades, and, in its present system and structure, is the outcome of studies, research and the sum total of responses by regulators of corporate scams and debacles. This chapter traverses through the history of evolution of the concept and system of corporate governance over the years, both in the West and in India.

CHAPTER OUTLINE
Introduction Corporate Governance Committees World Bank on Corporate Governance OECD Principles McKinsey Survey on Corporate Governance SarbanesOxley Act, 2002 Indian Committees and Guidelines Working Group on the Companies Act, 1996 The Confederation of Indian Industrys Initiative SEBIs Initiatives Naresh Chandra Committee Report, 2002 Narayana MurthyCommittee Report, 2003 Dr J. J. Irani Committee Report on Company Law,

2005

Introduction
There has been a perceptible change in peoples minds as to the objective of a corporation - from one which was intended to benefit exclusively the shareholders to one which is expected to benefit all its stakeholders. The corporate scams and frauds that came to light have brought about a change in the thinking of advocates of free enterprise that the system was not self-regulatory and needed substantial external regulation, which should penalise the wrongdoers while those who abide by the rules of the game are amply rewarded

Introduction (contd)
All these measures have brought about a metamorphosis in corporations that realised that the people who invest in corporations are pretty serious about corporate governance; hence they started internalising these values and later adopting them, initially albeit selectively and sporadically.

Developments in the USA

Corporate governance gained importance with the occurrence of the Watergate scandal in the United States. Thereafter, as a result of subsequent investigations, the US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe government officials. In 1979 by the Securities and Exchange Commissions proposals for mandatory reporting on internal financial controls.

Developments in the USA (contd)

In 1985, following a series of high profile business failures in the USA, the most notable one being the Savings and Loan collapse, the Treadway Commission was formed to identify the main causes of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The Treadway Report published in 1987 highlighted the need for a proper control environment, independent audit committees and an objective internal audit function and called for published reports on the effectiveness of internal control.

Developments in the UK
In England, the seeds of modem corporate governance were probably sown by the BCCI scandal. BCCI was a global bank, constituting multiple layers of entities related to one another through an impenetrable series of holding companies, affiliates, subsidiaries, banks-within-banks, insider dealings and shareholder (nominee) relationships. With this corporate structure of BCCI and shoddy record-keeping, regulatory review and audits, the complex BCCI family of entities was able to evade ordinary legal restrictions on the movement of capital and goods as a matter of daily practice and routine.

Developments in the UK (contd)

Since BCCI was a vehicle fundamentally free of government control, it was an ideal mechanism for facilitating illicit activity by others, including such activity by officials of many of the governments whose laws BCCI was breaking. The failure of Barings Bank was another landmark that heightened peoples awareness and sensitivity on the issue and the resolve that something ought to be done to stem the rot of corporate misdeeds. Nick Leeson was posted in charge of the back office operations of Barings Bank as well. He started trading on behalf of the Bank, when he had to trade only on behalf of the

Developments in the UK (contd.)

Eventually when his strategy failed because of an earthquake in Japan, Barings Bank had already lost $ 1.4 billion and it had to shut office. As a result of these failures and lack of regulatory measures from authorities as an adequate response to check them in future, the Committee of Sponsoring Organisations (COSO) was born. The report produced by it in 1992 suggested a control framework, and was endorsed and refined in the four subsequent UK reports: Cadbury, Ruthman,

Cadbury Committee on Corporate Governance, 1992

The stated objective of the Cadbury Committee was "to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them".

Cadbury Committee on Corporate Governance, 1992 (contd)

The Cadbury Code of Best Practices had 19 recommendations. Relating to the board of directors, the recommen-dations are:
o The Board should meet regularly, retain full

and effective control over the company and monitor the executive management.
o There should be a clearly accepted division of

res- ponsibilities at the head of a company, which will ensure balance of power and authority, such that no individual has unfettered powers of decision.

Cadbury Committee on corporate Governance, 1992 (contd)

The board should include non-executive directors of sufficient calibre and number for their views to carry significant weight in the board's decisions.
o

All directors should have access to the advice and services of the Company Secretary, who is res- ponsible to the Board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of company secretary should be a matter for the board as a whole.
o

Cadbury Committee on corporate Governance, 1992 (contd)

o

All directors should have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of company secretary should be a matter for the board as a whole.

Cadbury Committee on corporate Governance, 1992 (contd)

Relating to the non-executive directors the recommendations are: o Non-executive directors should bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct. oNon-executive Directors should be appointed for specified terms and reappointment should not be automatic. oNon-executive Directors should be selected through a formal process and both, this process and their appointment, should be a matter for the Board as a whole.

On reporting and controls, the Cadbury Code of Best Practices stipulate the following:
o

It is the Board's duty to present a balanced and understandable assessment of the company's position. The Board should ensure that an objective and professional relationship is maintained with the Auditors. The Board should establish an Audit Committee of at least 3 Non-Executive Directors with written terms of reference, which deal clearly with its authority and duties. The Directors should explain their responsibility for preparing the accounts next to a statement by the Auditors about their reporting responsibilities. The Directors should report on the effectiveness

The Greenbury Committee, 1995

This Committee was set up in January 1995 to identify good practices by the Confederation of British Industry (CBI) in determining directors' remuneration and to prepare a code of such practices for use by public limited companies of the United Kingdom. The Committee
o

Aimed to provide an answer to the general concerns about the accountability and level of directors' pay. Argued against statutory control and for strengthening accountability by the proper allocation of responsibility for determining

The Greenbury Committee, 1995 (contd)

o

Produced the Greenbury Code of Best Practice which was divided into four sections thus:

Remuneration committee Disclosure Remuneration policy Service contracts and compensation.

The Hampel Committee, 1995

The Hampel Committee was set up in November 1995 to protect investors and preserve and enhance the standing of companies listed on the London Stock Exchange. The Committee o Developed further the Cadbury Report o Produced the Combined Code o Recommended that The auditors should report on internal control privately to the directors The directors maintain and review all (and not just financial) controls

The Hampel Committee, 1995 (contd.)

Companies that do not already have an internal audit function should from time to time review their need for one o Introduced the Combined Code that consolidated the recommendations of earlier corporate governance reports (Cadbury and Greenbury).

The Turnbull Committee, 1999

The Turnbull Committee was set up by the The Institute of Chartered Accountants in England and Wales (ICAEW) in 1999 The committee o Provided guidance to assist companies in implementing the requirements of the Combined Code relating to internal control. o Recommended that where companies do not have an internal audit function, the board should consider the need for carrying out an internal audit annually. o Recommended that boards of directors confirm the existence of procedures for evaluating and managing key risks.

World Bank on Corporate Governance

The World Bank, both as an international develop- ment bank and as an institution interested and involved in equitable and sustainable economic development worldwide, was one of the earliest international organisations to study the issue of corporate governance and suggest certain guidelines. o Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.
o

World Bank on Corporate Governance (contd)

o

Openness is the basis of public confidence in the corporate system and funds will flow to those centres of economic activity, which inspire trust. This Report points the way to the establishment of trust and the encouragement of enterprise. It marks an important milestone in the development of corporate governance.

OECD Principles
o

The Organisation for Economic Cooperation and Development (OECD) was one of the earliest non-governmental organisations to work on and spell out the principles and practices that should govern corporations in their goal to attain long-term shareholder value.

In summary, they include the following elements.

The Rights of Shareholders

The rights of shareholders include a set of rights to secure ownership of their shares, the right to full disclosure of information, voting rights, participation in decisions on sale or modification of corporate assets mergers and new share issues. Equitable Treatment of Shareholders The OECD is concerned with protecting minority shareholders rights by setting up systems that keep insiders, including managers and directors, from taking advantage of their roles.

The Role of Stakeholders in Corporate Governance The OECD recognises that there are other stakeholders in companies in addition to shareholders. Banks, bondholders and workers, for example, are important stakeholders in the way in which companies perform and make decisions.

Disclosure and Transparency The OECD lays down a number of provisions for the disclosure and communication of key facts about the company ranging from financial details to governance structures including the board of directors and their remuneration.

The Responsibilities of the Board The OECD guidelines provide a great deal of details about the functions of the board in protecting the company and its shareholders. These include concerns about corporate strategy, risk, executive compensation and performance as well as accounting and reporting systems.

McKinsey Survey on Corporate Governance

McKinsey, the international management consultant organisation conducted a survey with a sample size of 188 companies from six emerging markets (India, Malaysia, Mexico, South Korea, Taiwan and Turkey), to determine the correlation between good corporate governance and the market valuation of the company.

McKinsey Survey on Corporate Governance (contd)

In short, good corporate governance increases market valuation by:
o o

Increasing financial performance; Transparency of dealing, thereby reducing the risk that boards will serve their own selfinterest; Increasing investor confidence.

McKinsey Survey on Corporate Governance (contd)

McKinsey rated the performance on corporate governance of each company based on the following parameters:
o

Accountability: Transparent ownership, Board size, Board accountability, Ownership neutrality Disclosure and Transparency of the Board, Timely and accurate disclosure, Independent Directors

McKinsey Survey on Corporate Governance (contd)

Through the survey, McKinesy found that companies with good corporate governance practices have high price-to-book values indicating that investors are willing to pay a premium for the shares of a well-managed and governed company. Additionally, the survey revealed that investors are willing to pay a premium of as much as 28% for shares of such a corporate governance based company.

McKinsey Survey on Corporate Governance (contd)

Companies in emerging markets often claim that Western corporate governance standards do not apply to them. However, the survey revealed that studies of the six emerging markets show that investors the world over look for high standards of good governance. Additionally, they are willing to pay a high premium for shares in companies that meet their requirements of good corporate governance.

Sarbanes-Oxley Act, 2002

The Sarbanes--Oxley Act (SOX Act), 2002 is a serious attempt to address all the issues associated with corporate failures to achieve quality governance and to restore investor confidence. The Act contains a number of provisions that dramatically change the reporting and corporate directors governance obligations of public companies, the directors and officers.

Sarbanes-Oxley Act, 2002 (contd)

Important provisions contained in SOX Act are briefly given below: Establishment of Public Company Accounting Oversight Board (PCAOB) All accounting firms will have to register themselves with this board and submit among other details particulars of fees received from public, company clients for audit and non-audit services, financial information about the firm, list of firms staff who

Sarbanes-Oxley Act, 2002 (contd)

participate in audits, quality control policies, information on civil criminal and disciplinary proceedings against the firm or any of the staff. The board will conduct annual inspections of firms, which audit more than 100 public companies, and once in three years in other cases. The board will establish rules governing audit quality control, ethics, independence and other standards. It can conduct investigations and displinary proceedings and can impose sanctions on auditors. The board reports to SEC.

Audit Committee
o

The SOX Act provides for a new improved Audit Committee. The audit committee is responsible for appointment, fixing fees and oversight of the work of independent auditors. The committee is also responsible for establishing reviewing the procedures for the receipt, treatment of accounts, internal control and audit complaints received by the company from the interested or affected parties.

Audit Partner Rotation

o

The SOX Act provides for mandatory rotation of lead audit or co-ordinating partner and the partner reviewing audit once every five years.

Improper Influence on Conduct of Audits

o

It will be unlawful for any executive or director of the firm to take any action to fraudlently influence, coerce, manipulate or mislead any auditor engaged in the performance of an audit with the view to rendering the financial statements materially

Prohibition of Non-audit Services

o

Non-audit services include: (i) book-keeping or other services related to the accounting records or financial statements of the client; (ii) financial information system, design and implementation; (iii) appraisal or valuation services, fairness opinions; (iv) acturial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser, or investment banking services; (viii) legal services or expert services unrelated to the audit and (ix) any other service that the board determines, by regulation, is impermissible. However, the

CEOs and CFOs Required to Affirm Financials

o

Chief Executive Officers and Chief Finance Officers are required to certify the reports filed with the Securities Exchange Commission. If the financials are required to be restated due to material non-compliance as a result of misconduct of CEO or CFO, then such CEO or CFO will have to return to the company bonus and any other incentives received by him. False and or improper certification can attract fine ranging from $ 1 million to $ 5 million or up to 10 years imprisonment or both.

Loans to Directors
o

The SOX Act prohibits U.S. and foreign companies with securities traded within U.S. from making or arranging from third parties any type of personal loan to directors.

Attorneys
o

The attorneys dealing with the publicly traded companies are required to report evidence of material violation of securities law or breach of fiduciary duty or similar violations by the company or any agent of the company to the Chief Counsel or CEO and if the Counsel or CEO does not appropriately respond to the evidence the attorney must report the evidence to the audit committee or the board of directors.

Securities Analysts
o

The SOX Act has a provision under which brokers and dealers of securities should not retaliate or threaten to retaliate an analyst employed by the broker or dealer for any adverse, negative or unfavourable research report on a Public Company.

Penalties
o

The penalties prescribed under SOX Act for any wrongdoings are very stiff. Penalties for willful violations are even stiffer. Any CEO or CFO providing a certificate knowing that it does not meet with the criteria stated may be fined upto $ 1 million and/or imprisonment upto 10 years.

Indian Committees and Guidelines

Working Group on the Companies Act, 1956. The government accordingly set up a Working Group in August 1996 for this purpose. The Working Group on the Companies Act has recommended a number of changes and also prepared a working draft of Companies Bill 1997. The Bill was introduced in the Rajya Sabha on 14 August 1997, containing the following recommendations.

Financial disclosures recommended by the Working Group on the Companies Act

o

A tabular form containing details of each directors remuneration and commission should form a part of the Directors Report. A listed company must give certain key information on its divisions or business segments as a part of the Directors Report in the Annual Report. Where a company has raised funds from the public by issuing shares, debentures or other securities, it would have to give a separate statement showing the end-use of such funds. The disclosure on debt exposure of the company should be strengthened.

Non-Financial disclosures recommended by the Working Group on Companies Act

1.

A comprehensive report on the relatives of directors - either as employees or Board members - to be an integral part of the Directors Report of all listed companies. Companies have to maintain a register, which discloses interests of directors in any contract or arrangement of the company. 3. Likewise, the existence of the directors shareholding register and the fact that members in any AGM can inspect it should be explicitly stated in the notice of the AGM of all listed companies.

2.

3.

Non-Financial disclosures recommended by the Working Group on Companies Act (contd.)

4.

Details of loans to directors should be disclosed as an annex to the Directors Report in addition to being a part of schedules of the financial statements. Appointment of sole selling agents for India will require prior approval of a special resolution in a general meeting of shareholders. Subject to certain exceptions there should be a Secretarial Compliance Certificate forming a part of the Annual Returns that is filed with the Registrar of Companies.

5.

6.

Non-Financial disclosures recommended by the Working Group on Companies Act (contd.) 7.

The Compliance Certificate should certify in prescribed format that the secretarial requirements under the Companies Act have been adhered to.

Deficiencies of the Companies Act

(i) Though non-executive directors can play a significant role in providing independent and objective opinion in discussions on many strategic areas in board deliberations, the Act does not assign them any formal role between executive and non-executive directors

(ii) In actual practice, non-executive directors have only ornamental value.

Deficiencies of the Companies Act (contd.)

(iii) With regard to financial reporting, the provisions of the Act make it more rule-based and ritualistic, rather than being transparent. (iv) The Act does not prescribe any formal qualifications for a director of a company, with the result even an incompetent and mediocre person can become a member of the board.

Deficiencies of the Companies Act (contd.)

(v) Though the Act formally provides for the appointment of auditors by shareholders, in practice they work more closely with the company management. Shareholders hardly have a chance to interact with the auditors.

THE CONFEDERATION OF INDIAN INDUSTRYS INITIATIVE

In 1996, the Confederation of Indian Industry (CII) took a special initiative on Corporate Governance, the first ever institutional initiative in Indian industry. This initiative by CII flowed from public concerns regarding the protection of investors interest, especially of the small investor; the promotion of transparency within business and industry; the need to move towards international standards in terms of disclosure of information by the corporate sector and through all of this, to develop a high level of public confidence in business and industry.

THE CONFEDERATION OF INDIAN INDUSTRYS INITIATIVE (contd.)

A National Task Force that was set up with Mr.Rahul Bajaj, past President of CII as the Chairman and members from industry, the legal profession, media and academia, presented the draft guidelines and the Code of Corporate Governance in April 1997 at the National Conference and Annual Session of CII.

The Confederation of Indian Industrys Initiative (contd.)

The CII has pioneered the concept of corporate governance in India and has been internationally recognised as one of the best in the world. These are:

Recommendations of the CIIs Code of Corporate Governance

1. A single board, if it performs well, can maximise long-term shareholder value. The board should meet at least six times a year, preferably at intervals of 2 months. 2. A listed company with a turnover of Rs.100 crores and above should have professionally competent and recognised independent nonexecutive directors who should constitute at least 30 percent of the board, if the Chairman of the company is a non-executive director or at least 50 percent of the board, if the Chairman and Managing Director is the same person.

Recommendations of the CIIs Code of corporate governance (contd.)

3. A person should not hold directorships in more than 10 listed companies.

4. For non-executive directors to play a significant role in corporate decision making and maximising long term shareholder value they need to

become active participants in boards and not passive advisors; have clearly defined responsibilities within the board such as the Audit Committee; and know how to read a balance sheet, profit and loss account, cash flow statements, and

Recommendations of the CIIs Code of Corporate Governance (contd.)

5. To secure better effort from non-executive directors, companies should pay a commission over and above the sitting fees for the use of the professional inputs. 6. While re-appointing members of the board, companies should give the attendance record of the concerned directors.

Recommendations of the CIIs Code of Corporate Governance (contd.)

7. Key information that must be reported to, and

placed before the board, must contain: Annual operating plans and budgets, together with up-dated long term plans; Capital budgets, manpower and overhead budgets; Internal audit reports including cases of theft and dishonesty of a material nature; Fatal or serious accidents, dangerous occurrence, and any effluent or pollution problems; Default in payment of interest or non-payment of the principal on any public deposit and/or to

Recommendations of the CIIs Code of Corporate Governance (contd.)

Defaults such as non-payments of the principal on any company or materially substantial nonpayments for goods sold by the company; Details of any joint venture or collaboration agreement; Transactions that involve substantial payment towards goodwill, brand equity or intellectual property; Recruitment and remuneration of senor officers just below the board level, including appointment or removal of the Chief Financial Officer and the Company Secretary; Labour problems and their proposed solutions and Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement,

Recommendations of the CIIs Code of Corporate Governance (contd.)

8. For all companies with paid-up capital of Rs.20 crores or more the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue. 9 Companies that default on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments or declare dividends until the default is made good.

Recommendations of the CIIs Code of Corporate Governance (contd.)

11. Major Indian Stock Exchanges should insist upon a compliance certificate, signed by the CEO and the CFO which should clearly state:

The company will continue business in the course of the following year; The accounting policies and principles conform to the standard practice; The management is responsible for the preparation, integrity and fair presentation of financial statements and other information contained in the Annual Report. The board has overseen the companys system of internal accounting and administrative

SEBIs Initiatives

The Securities and Exchange Board of India (SEBI) appointed a committee on corporate governance on May 7, 1999, with eighteen members under the Chairmanship of Kumar Mangalam Birla to promoting and raising the standards of corporate governance.

Kumar Mangalam Birla Committee

The Committees recommendations consisted of (i) mandatory recommendations, and (ii) nonmandatory recommendations.

Mandatory Recommendations
1. Applicability

Applicable to all listed companies with paid-up share capital of Rs. 3 crore and above

2. Board of directors

The Board of Directors of a company must have an optimum combination of executive and nonexecutive Directors. The number of independent Directors should be at least onethird in case the company has a non-executive Chairman and at least half of the Board in case the company has an executive Chairman.

Mandatory Recommendations (contd.)

3. Audit Committee The Audit Committee should have a minimum 3 members. The Chairman should be an independent Director and must be present at the Annual General Meeting to answers shareholders queries.

Remuneration Committee of the Board

The Board of Directors should decide the remuneration of non-executive directors. Full disclosure of the remuneration package of all the directors covering salary benefits, bonuses, stock options, pension fixed component, performance linked incentives along with the performance criteria, service contracts, notice period, severance fees, etc., is to be made in the section on corporate governance of the annual report.

Board Procedures

The Board meeting should be held at least four times a year with a maximum time gap of four months between any two meetings.

Management
Management

discussions and analysis report covering industry structure, opportunities and threats, segment-wise or product-wise performance outlook, risks, internal control systems, etc. are to form a part of Directors Report or as an addition thereto.

Shareholders

In case of appointment of a new Director or re-appointment of existing Director, information containing a brief resume, nature of expertise in specific functional areas and companies in which the person holds Directorship, Committee Membership, must be provided to the benefit of shareholders.

Shareholders (contd.)

A Board committee under the chairmanship of a non-executive director is to be formed to specifically look into the redressing of shareholder complaints of declared dividends etc.

Shareholders (contd.)

In order to expedite the process of share transfers, the Board should delegate the power of share transfer to an officer or a committee or to the Registrar and share transfer agents with a direction to the delegated authority to attend to share transfer formalities at least once in a fortnight.

Non-mandatory Recommendations 1. Chairman of the Board

The Chairmans role should in principle be different from that of the Chief Executive, though the same executive can perform both the roles.

Non-mandatory Recommendations (contd.)

2. Remuneration Committee The Board of Directors should set up a Remuneration Committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference the companys policy on specific remuneration packages for executive directors including pension rights and any other compensation payment.

Non-mandatory Recommendations (contd.)

3. Shareholders Rights Half-yearly declaration of financial performance including summary of the significant events in the six months should be sent to each of the shareholders. 4. Postal Ballot

NARESH CHANDRA COMMITTEE REPORT, 2002

The Naresh Chandra Committee was appointed as a High Level Committee to examine various corporate governance issues by the Department of Company Affairs on 21st August, 2002. The Committees recommendations mainly concerned: (i) The Auditor Company relationship; (ii) disqualifications for audit assignments; (iii) List of prohibited non-audit services; (iv) Independence standards for consulting; (v) Compulsory audit partner rotation; (vi) Auditors disclosure of contingent liabilities; (vii) Auditors disclosure of qualifications and consequent action;

NARESH CHANDRA COMMITTEE REPORT, 2002 (contd.)

(viii) Managements certification in the event of auditors replacement; (ix) Auditors annual certification of independence; (x) Appointment of Auditors; (xi) Certification of annual audited accounts by CEO and CFO; (xii) Auditing the Auditors; (xiii) Setting up of the independent Quality Review Board; (xiv) Proposed disciplinary mechanism for auditors; (xv) Independent Directors; (xvi) Audit Committee Charter; (xvii) Exempting non-executive directors from certain liabilities; (xvii) Training of independent directors; (xix) Establishment of Corporate Serious Fraud Office; (xx) SEBI and Subordinate Legislation

The committee has further recommended

Tightening of the noose around the auditors by asking them to make an array of disclosures, Called upon CEOs and CFOs of all listed companies to certify their companies annual accounts, besides suggesting Setting up of quality review boards by the Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India, instead of a Public Oversight Board similar to the one in the United States.

Rationale for a Review of the Birla Code

In the perception of SEBI, there was a need to appoint a committee as a follow-up of the Birla Committees report and the experience gained from the analysis of compliance reports.

Rationale for a Review of the Birla Code (contd.)

SEBI, therefore, set out to form another committee with the twin perspectives: (a) to evaluate the adequacy of the existing practices, and (b) to further improve them. This committee on corporate governance was constituted under the chairmanship of N.R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Ltd. and comprised representatives from stock exchanges, chambers of commerce, investors associations and professional bodies.

NARAYANA MURTHY COMMITTEE REPORT, 2003

The Committee on Corporate Governance set up by SEBI under the Chairmanship of N.R.Narayana Murthy which submitted its Report in February, 2003

NARAYANA MURTHY COMMITTEE REPORT, 2003 (contd.)

The Committees report expresses its total concurrence with the recommendations contained in the Naresh Chandra Committees report on Disclosure of contingent liabilities Certification by CEO and CFO Definition of independent directors Independence of audit committees

Mandatory Recommendations
Audit Committee: An Audit Committee is the bedrock of quality governance. The Committee recommended a bigger role for the audit committee.

Narayana Murthys Committee has not taken a view on rotation of auditors

Related Party Transactions A statement of all transactions with related parties including their bases should be placed before the audit committee for formal approval/ratification

Proceeds from Initial Public Offerings

Companies raising money through initial public offering should disclose to the audit committee the uses and application of funds under major heads on a quarterly basis.

Risk Management

The Committee has deemed it necessary for the boards of companies to be fully aware of the risks involved in the business and that it is also important for shareholders to know about the process by which companies manage their business risks. The mandatory recommendations in this regard are:

Risk Management (contd.)

Procedures should be in place to inform board members about the risk assessment and minimisation procedures. These procedures should be periodically reviewed to ensure that executive management controls risks through means of a properly defined framework.

Risk Management (contd.)

Management should place a report before the entire board of directors every quarter documenting the business risks faced by the company, measures to address and minimise such risks and any limitation to the risk-taking capacity of the corporations. The board should formally approve this document.

Code of Conduct

The Committee has recommended that it should be obligatory for the board of a company to lay down a code of conduct for all board members and senior management of the company. This code should be posted on the companys website

Nominee Directors

The Committee recommended doing away with nominee directors. If a corporation wishes to appoint a director on the board, such appointment should be made by the shareholders. The Committee insisted that an institutional director, if appointed, shall have the same responsibilities and shall be subject to the same liabilities as any other director. Nominees of the Government on public sector companies shall be similarly elected and shall be subject to the same responsibilities and liabilities as other directors.

Other mandatory recommendations are:

Compensation to non-executive directors (to be approved by the shareholders in general meeting; Whistle blower policy to be in place in a company.

Dr.J.J. Irani Committee Report on Company Law, 2005

Appointed in December 2004. It submitted its Report in May 2004. The committee recommended: (i) One-third of the Board of listed company should be independent directors, should be independent directors, (ii) Corporates should be allowed to maintain pyramidal structure, ie, a subsidiary of a holding company itself be a holding company; (iii) Full liberty to shareholders to do decide to issues; (iv) Mooted the concept of single person company; (v) companies encouraged to self-regulate their affairs; (vi) Provided Stringent penalties for wrongdoers and recommended publication of the punishment; (vii) Suggested continuation of Audit and Accounting standards of ICAI; and (viii)

CONCLUSION

Although India has been fortunate in not having to go through the massive corporate failures such as Enron and Worldcom, it has not been wanting in its resolve to incorporate better governance practices in the countrys corporates emulating stringent international standards.

CONCLUSION (contd.)

However, as the Naresh Chandra Committee on Corporate Audit and Governance pointed out: There is scope for improvement. For one, while India may have excellent rules and regulations, regulatory authorities are inadequately staffed and lack sufficient number of skilled people. This has led to less than credible enforcement. Delays in courts compound the problem. For another, India has had its fair share of corporate scams and stock market scandals that has shaken investor confidence. Much can be done to improve the situation.