Corporate Governance

Financial Management

What do you know about them ?

Satyam y Lehman brothers y Enron y Subhiksha y Sub prime crisis y Bernie Madoff
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Corporate Governance
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Corporate governance (Clause 49 listing agreement) Corporate governance rating

What is corporate governance ?

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Corporate governance refers to the distribution of rights and responsibilities among different participants is an organization / corporate / corporate entity such as the Board of Directors, management, stakeholders and other stakeholders such as lenders/creditors Corporate governance code spells out rules and procedures for making decision on corporate affairs.

(Clause 49 Listing Agreement)

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The SEBI has mandated corporate governance as a part of the requirement in Clause 49 of the Listing Agreement between the corporate and the stock exchange(s).The main contents of the clause relate to,

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Board of directors (BOD) Audit committee Audit reports and qualifications Whistle blower policy Subsidiary companies Basis of party related transaction CEO/CFO (Chief Financial Officer)certification Report of corporate governance and compliance

Board of directors
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The Board of Directors of the company should consist of at least 50 % non-executive directors. Non executive director (NED, also NXD) or outside director is a member of the board of directors of a company who does not form part of the executive management team At least one-third or one-half of the Board should comprise of independent directors in case of nonexecutive and executive chairman respectively

Independent director
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An independent director means a non-executive director who, apart from receiving directors remuneration, does not have any material pecuniary relationship/ transaction with the company /its promoters/ directors/ senior management is not related to promoters/persons occupying management position at the Board/ has not been an executive in the preceding 3 financial years is not a material supplier/service provider/customer/lessee of the company is not a substantial shareholder owning 2 per cent or more of the voting shares. Fee/compensation including stock options, paid to all nonexecutive directors should be approved by the shareholders.

Board of Directors
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The Board of Directors should meet at least 4 times a year. A director can be a member of 10 committees or act as chairman of 5 committees across all companies in which he is a director. The Board should periodically review compliance reports of all laws applicable to the company. It should also lay down a code of conduct for all Board members and senior management, who should affirm compliance with the code on an annual basis.

Audit committee
A qualified and independent Audit Committee should be set up with at least 3 memberdirectors, two-thirds being independent. y All members should be financially literate and at least one member should have accounting or related financial management expertise. y The chairman of the audit committee should be an independent director and the company secretary would be its ex-officio secretary. The committee should meet at least 4 times in a year.
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Role of Audit committee

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Overview of the financial reporting process to ensure correctness, sufficiency and credibility of the financial statements; To recommend the appointment/re appointment/replacement of auditors and their fee; A review with the management (a) the annual and quarterly financial statements for submission to the Board for approval, (b) performance of auditors/adequacy of internal control systems; Review the adequacy of internal audit function; review the findings of any internal investigation into suspected fraud/irregularity/ failure of internal control systems of a material nature; look into reasons for substantial default in payment to depositors/ creditors/debenture holders and so on; review the functioning of the Whistle Blower mechanism and so on

Subsidiary companies
A material non-listed Indian subsidiary company should have on its Board, at least one independent director of the holding company. y Its minutes of Board meetings should be placed at the Board meeting of the listed holding company. y Its financial statements should also be reviewed by the audit committee of the listed company.
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CEO/CFO Certification
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The CEO and the CFO should certify to the Board of Directors that, The financial statements present a true and fair view, no transaction is fraudulent, illegal/violative of the code of conduct, They accept full responsibility for establishing/ maintaining internal controls and They have indicated to the auditors/audit committee significant changes in internal control/accounting policies and instances of significant frauds which they became aware of.

Annual report on Corporate Governance

The annual reports should contain a separate section on Corporate Governance. y Non-compliance of any mandatory requirement with reasons and the extent of adoption of non-mandatory requirements should be highlighted. y The companies should submit a quarterly report signed by the compliance officer/CFO, to the stock exchanges, within 15 days from the close of the quarter in the prescribed format.
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Compliance
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The company should annex with the directors report to the shareholders, a certificate from the auditors/company secretaries regarding compliance with the conditions of corporate governance. This should also be sent to the stock exchange, along with the companys annual report. The non-mandatory requirements may be implemented at the discretion of the company.

Corporate Governance Rating

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Corporate governance rating indicates the relative level to which a corporate entity accepts and follows the codes and guidelines of corporate governance practices. The key variables that are analyzed while arriving at the CGR for a corporate entity are as follows: Shareholding structure Governance structure and management processes Board structure and processes Stakeholders relationship Transparency and disclosures Financial discipline

Corporate Governance Rating (CGR)

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CGR 1: Highest assurance on the quality of corporate governance. CGR2: High level of assurance on the quality of corporate governance. CGR 3: Adequate level of assurance on the quality of corporate governance. CGR 4: Moderate level of assurance on the quality of corporate governance. CGR 5: Inadequate level of assurance on the quality of corporate governance. CGR 6: low level of assurance on the quality of corporate governance.

Corporate Governance voluntary Guidelines 2009

The main elements of the Corporate Governance Voluntary (Government) Guidelines are: y Board of Directors y Responsibilities of the Board y Audit Committee y Auditors y Secretarial Audit y Mechanism for Whistle Blowing
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Appointment of directors
Formal letter of appointment to all directors y Name disclosure on website/ exchange y Different roles and offices for chairman and MD/CEO y Independent nomination committee y Limit on the number of companies a person can become director
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Independent directors
Certificate of independence y Tenure strictly six years y Cap of seven companies directorship y Independent directors should have y (i) the option and freedom to interact with the company management frequently and (ii) adequate office space and other resources/support.
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Remuneration of directors
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Remuneration should be liked to with corporate and individual performance. For Non executive director -fixed component For Chairman/members of the audit committee or other committees of the Board fixed + variable For independent directors adequate sitting fees Remuneration committee three people majority non executive and at least one independent director

Responsibility of board
Induction of directors through familiarization process y System for information to director y Risk management policy y Annual evaluation of performance of committees and individual directors y Review of internal records effectiveness y Ensuring of fulfillment of compliance requirement
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Audit Committee
The audit committee of the Board should have at least three members, having knowledge of finance, audit and accounts, with a majority of the independent directors. y It should have the power to, inter-alia, access information from the records of the company and obtain professional advise from external sources. Its responsibility should be to y (i) monitor the integrity of the financial statements (ii) review the internal financial controls/internal audit function/risk management systems and (iii) review/monitor the external auditors independence/objectivity and the effectiveness of the audit process.
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Audit committee
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First point of reference regarding the appointment of auditors. Its duty should be, to examine/review the documentation/certificate for proof of independence of the audit firm and recommend appointment/reappointment/ removal of the statutory auditors. Every auditor should submit a certificate to the effect that he has not undertaken any prohibited non-audit assignments for the company. A policy of rotation of auditors must be followed by the companies ranging between three years (for audit partners) and five years (for audit firm) with a similar cooling off period. The internal auditor should not be an employee of the company.

Secretarial audit and whistle blowing

Companies should get their secretarial audited conducted by a competent professional and the Board should comment on it in its report to the shareholders y Companies should ensure the institution of a mechanism for whistle blowing by employees and provide for adequate safeguards against victimisation of employees who avail of the mechanism
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Particulars I. Board of Directors (A) Composition of Board (B) Non-executive Directorscompensation disclosures & 491

Clause of Listing agreement 49 (IA) 49 (IB)

Compliance Status Yes/No

Remarks

(C) Other provisions as to Board and Committees (D) Code of Conduct II. Audit Committee (A) Qualified & Independent Audit Committee (B) Meeting of Audit Committee (C) Powers of Audit Committee (D) Role of Audit Committee (E) Review of Information by Audit Committee III. Subsidiary Companies IV. Disclosures (A) Basis of related party transactions (B) Disclosure of Accounting Treatment (C) Board Disclosures

49 (IC) 49 (ID) 49 (II) 49 (IIA) 49 (IIB) 49 (IIC) 49 II(D) 49 (IIE) 49 (III) 49 (IV) 49 (IV A) 49 (IV B) 49 (IV C)

(D) Proceeds from public issues, rights issues, 49 (IV D) preferential issues etc. (E) Remuneration of Directors 49 (IV E) (F) Management (G) Shareholders V. CEO/CFO Certification VI. Report on Corporate Governance VII. Compliance 49 (IV F) 49 (IV G) 49 (V) 49 (VI) 49 (VII)

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