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Showcasing Best Practices in Corporate Governance by
Medium Sized Family Managed Public Limited Companies- Three Case Studies
A SPJIMR Study and Proceedings of the Round Table Sponsored by
National Foundation for Corporate Governance Prepared by
Jiban K. Mukhopadhyay Professor / Coordinator, Corporate Governance Initiatives, SPJIMR
&
Dolly Dhamodiwala Senior Researcher, SPJIMR
March 2010, Mumbai
Preface
National Foundation for Corporate Governance (NFCG) has been set up by the Ministry of Corporate Affairs, Government of India, in partnership with Confederation of Indian Industry (CII), Institute of Chartered Accountants of India and Institute of Company Secretary of India. NFCG’s goal is to promote better corporate governance practices in India in many ways. NFCG has accredited SPJIMR as a partner institute where research and training on corporate governance would be regularly conducted. SPJIMR submitted the following two research proposals to NFCG for the year 2007-08:
1. Pilot Research Study on Corporate Governance in Medium Sized Family Managed Public Limited Companies.
2. Showcasing Best Practices in Corporate Governance by Medium Sized Family Managed Public Limited Companies (Two/ Three Case Studies)
The proposal for the second study was accepted by NFCG. A grant of Rs. 3 lakh was sanctioned for conducting this study. Subsequently, NFCG also granted another Rs. 3 lakh for organizing a Round Table in 2008-09 to dissemininate and discuss the findings of the study. We are thankful to NFCG for their sponsorship, funding as well as encouragement. Both the studies have been initiated since October 2006. The second study, i.e. the present study, is in fact, embedded in the first study. The present report is the second study submitted to NFCG. The study has been based on both secondary research as well as primary survey. We have interviewed CMDs / CEOs / Company Secretaries of 30 Medium Sized Family Managed Public Limited Companies in Mumbai based on a structured Questionnaire. We are thankful to CMD/ CEOs/ Company Secretaries as well as other top executives of these companies for their cooperation in conducting the survey. Our approach on Showcasing Best Practices in Corporate Governance of the selected companies has largely been based on: Compliance (both mandatory and non-mandatory criteria) to SEBI Clause 49 of the Listing Agreement of the companies with the Stock Exchanges of India (made legislatively compulsive from January 2006) as well as a large number of selected criteria for practices Beyond Compliance. While all the 30 companies interviewed had to comply with mandatory compliance criteria of Clause 49, we have observed that about one-third of these companies had adopted very good corporate governance practices with respect to both mandatory and non-mandatory criteria under Clause 49, besides taking a number of initiatives extending Beyond Compliance. The study was prepared by Prof. Jiban K Mukhopadhyay, Professor / Coordinator, Corporate Governance Initiatives, SPJIMR and Ms. Dolly Dhamodiwala, Senior Researcher, SPJIMR. The study / report (about 200 pages) was eventually submitted to NFCG in September 2008. A half day Round Table was organized on April 27th, 2009 by S P Jain Institute of Management & Research which was supported by NFCG. The Round Table was organized to disseminate the salient findings of the study and discuss the various issues contained in the study in an open forum. The Round Table was attended by over 60 participants.
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The Round Table was spread over two sessions. The first session was the Inaugural Session, chaired by Mr. Gopal Chalam, Dean, ICSI – CCRT. Welcome address was delivered by Dr. Sesha Iyer, Director, SPJIMR. This was followed by an introduction on SPJIMR’s Family Managed Business Centre by Prof. Parimal Merchant. The keynote address was delivered by Mr. Vijay Kapur, Director, ICAI, which was followed by a power point presentation of the salient findings of the study by Prof. Jiban K Mukhopadhyay. The second session was the Presentation of the Three Case Studies. The case study of Godrej Consumer Products Ltd. was presented by Mr. Adi Godrej, Chairman, Godrej Group, that of Bajaj Electricals Ltd. by Mr. R Ramakrishnan, Executive Director and that of Hexaware Technologies Ltd. by Mr. Dipendra Chumble, Chief People Officer. We are profoundly thankful to all of them for extending their cooperation despite their extremely busy schedule. We are also thankful to all Core Group of Experts of NFCG, to Mr. Rajesh Menon, Fmr. Executive Director, Mr. Marut Sengupta, Executive Director, NFCG and Ms. Shalini Budathoki, Deputy Director, of CII. We have received valuable guidance and comments from Dr. M.L. Shrikant (D.B.A Harvard), Hon. Dean, SPJIMR and are very grateful to him. We are also thankful to Prof. S. D. Kshirsagar for his cooperation and guidance. Ms. Manjula Harikrishnan and Ms. Kirti Rao, both Research Assistants, have provided extremely useful support. Mr. Mukesh Gujaran has very competently handled the production job. Without their sincere efforts it would not have been possible to produce this document. March, 2010 Mumbai
Jiban K Mukhopadhyay Dolly Dhamodiwala
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Executive Summary
Part I
Showcasing Best Practices in Corporate Governance by
Medium Sized Family Managed Public Limited Companies – Three Case Studies
Background
SPJIMR, one of the top ten among 700 management institutes in India, has pioneered the Family
Managed Business program since 1997. The institute has developed an insight into the management
and performance of family managed businesses in India. National Foundation for Corporate Governance
(NFCG) accredited SPJIMR as an institute for carrying out research and training in corporate governance
(CG) in the year 2006-07. As part of its agenda for promoting excellence in Corporate Governance,
SPJIMR had taken up in 2007 the present Study , ‘ Showcasing Corporate Governance Best Practices by
Medium Sized Family Managed Listed Companies – Three Case Studies. ‘ The Study was completed and
submitted to NFCG in Sept. 2008.
Objectives The following objectives were identified for the present study:
1. To assess and evaluate Best Practices in Corporate Governance adopted by selected
medium-sized family managed companies
2. To prepare Three Case Studies to showcase Best Practices in Corporate Governance by
these companies
3. To discuss these Case Studies in the National/International Convention/Round Table in the
presence of the CEOs of the companies
4. To document and publish the Case Studies along with the proceedings of the Convention /
Round Table for creating general awareness
The Study is presented in two parts. Part I presents an evaluation of the Corporate Governance
practices adopted by selected medium sized family managed companies with respect to the regulatory
norms including SEBI Clause 49 of the Listing Agreement. Part II presents Case Studies of three
companies which had displayed superior corporate governance standards while complying with the
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regulatory norms and had gone even beyond compliance having taken several other initiatives towards
enhancement of value for all stakeholders.
Corporate Governance by Family Managed Business – A Global Perspective (Chapter 1)
The study began with a review of the concept and evolution of CG practices in the developed countries,
particularly UK and USA. This included a study of the events which brought into focus the need for
better governance standards and the recommendations of various committees like the Cadbury
Committee in UK, the Cal PERS – California Public Employees Retirement System, the OECD Task Force
and the Sarbanes Oxley Act in USA.
Recent global developments in CG and the issues and constraints faced by family managed companies
were also studied through a review of published literature and empirical studies carried out by
academicians and financial analysts.
Corporate Governance by Family Managed Business – Indian Approach (Chapter 2)
The prevailing Corporate Governance practices in India were studied by reviewing the developments in
CG in India and the evolution of the regulatory framework, which was largely based on the
recommendations of various high level committees, notably the Kumar Mangalam Birla Committee, N R
Narayanmurthy Committee and the J J Irani Committee. The present regulatory framework for CG in
India viz. the Companies Act 1956 (together with its 24 amendments), the new bill (2008) for its re-
legislation, SEBI Clause 49 - of the listing agreement of the companies specifying detailed regulatory
norms of CG, etc have also been discussed and commented upon.
This was followed by a quick review of the studies on best practices in CG as well as the imperatives for
CG practices in the globalizing India.
Some of India’s family managed companies demonstrated excellent CG practices even going far beyond
mere compliance, while there were many companies which complied with regulatory CG norms only in
letter.
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The present SPJIMR study is unique in the sense that it has assessed CG practices of the selected
companies not only relating to regulatory norms but has also gone further and assessed several other
practices, which are beyond compliance norms.
Methodological Framework for Selection of three Companies for Case Studies Showcasing Best Practices in CG- (Chapter 3)
Definitions
Family Managed Companies - For the purpose of our study, family managed companies have been
defined as those with promoters’ shareholding of 25% and above in the total shareholding of the
company.
Medium-sized Companies – Medium-sized companies have been defined as those with value of total
assets between Rs. 200 cr. and Rs. 2000 cr. in 2005-06.
In order to prepare three Case Studies to showcase best practices in CG within this group of companies,
we selected three companies, which demonstrated visibly superior standards of CG compared to their
counterparts. Under the prevailing regulatory regime where all listed companies had to mandatorily
comply with the prescribed norms of CG, a well defined framework had to be evolved for selection of
the right companies.
Selection of Three companies
The selection of the three companies was based on a detailed examination of all information relating to
corporate governance practices and other related accounting, auditing and legal procedures as
published in the Annual Reports and other data sources available in the public domain. This was
followed up by personal interviews with the Chairmen/MDs/Company Secretaries of a selected sample
of companies with the help of a detailed structured questionnaire.
Sampling Procedure
From the database of 1,166 companies listed on both BSE and NSE in 2005-06, 531 companies in the
Western Region were identified forming the sampling base. Application of the above two definitional
criteria to these 531 companies threw up 173 medium sized family managed companies in the Western
Region. From this total, companies promoted by leading Business Houses like, Tatas, Birlas and
Ambanis were excluded. This reduced the base to 162 companies in the Western Region. As up-to-date
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information on Corporate Governance practices and performance parameters was not available for some
of the companies, these were dropped from the sample. The final sample thus reduced to 150
companies. All information relating to Corporate Governance practices of these 150 companies was
analysed on the basis of the information published in their Annual Reports.
Primary Survey
This analysis was followed by a primary survey of 109 companies which had their corporate offices in
Mumbai. For conducting the survey, questionnaires were sent to all the 109 companies by mail. After
persistent follow-up with all the companies, in-depth discussions could be held with 30 companies which
gave a positive response to our survey – success rate of 28%. These 30 were fairly equally spread over
three asset classes – Rs. 200-500 cr., Rs. 500-1000 cr. and Rs. 1000-2000 cr.
Based on the information gathered through secondary data and personal discussions, CG practices of
the 30 family managed medium sized companies were assessed.
Two main Criteria for Assessment
The following two criteria were determined for assessing and evaluating corporate governance
practices.
(i) Compliance (both Mandatory and Non- mandatory) with the Regulatory norms for Corporate
Governance as covered under the SEBI Clause 49 on Corporate Governance. Compliance was
assessed on the basis of 13 major Mandatory parameters with over 21 sub – parameters.
Similarly eight Non-mandatory compliance parameters (e.g. remuneration committee, whistle
bowler policy, etc) were also assessed.
(ii) Practices Beyond Compliance for which 23 parameters with 24 sub-parameters under each were
determined. These related to company philosophy, values and obligations, goals and objectives,
contribution of independent directors, role of promoter/ CMD/ MD in decision making, board
level/ other committees, company evaluation and board evaluation processes, risk management,
human resource development, environment protection, innovation, CSR, etc. were taken into
consideration for the purpose of assessment.
Data / information relating to CG practices obtained through the questionnaires, annual reports other
published sources and websites of all the 30 surveyed companies were analyzed. Based on this analysis,
eight companies were short-listed for more in-depth analysis
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A quantitative framework was devised for assessing the corporate governance practices of these eight
selected companies. This involved scoring the parameters under each of the above two criteria viz.
Compliance and Beyond Compliance. Scores were assigned to each of these parameters on a Ten
Point Scale to bring out the differences in the governance practices of the companies.
The scores obtained by each company, under each criterion were aggregated and appropriate weights
assigned to the total value. A higher weight of 0.7 was assigned to the criteria of Compliance and a
lower weight of 0.3 to Beyond Compliance.
Based on the total weighted average score obtained by each company and its percentage share to
overall (aggregate) weighted average score, the eight companies were graded.
Box : Eight Companies Showcasing Best Practices in Corporate Governance
1. Godrej Consumer Products Ltd. 5. Bajaj Electricals Ltd.
2. Asian Paints Ltd. 6. Marico Industries Ltd.
3. Hexaware Technologies Ltd. 7. Unichem Laboratories Ltd.
4. Crompton Greaves Ltd. 8. Joyti Structures Ltd.
These eight companies were selected from 30 Family Managed Medium-Sized Companies from Mumbai
which were intensively surveyed based on a structured questionnaire together with a detailed analysis
of information and data available from the survey and their Annual Reports. Since the scope of the
research project approved by NFCG was limited to the preparation of three case studies, it was decided
to approach the top five companies ( companies which had obtained relatively higher scores) from the
list above, for the preparation of three case studies.
Three of these five companies gave a prompt and positive response for the preparation of the case
studies. These are Godrej Consumer Products Ltd., Bajaj Electricals Ltd. and Hexaware Technologies
Ltd.
Case Studies (modeled on certain globally reputed studies by Harvard Business School and those
published by OECD) were prepared for these three companies after holding in-depth discussions with
their Chairmen, Executive Directors and Company Secretaries. Discussions were followed up with a
detailed analysis of all other information relating to the operations of the companies and their financial
performance as obtained from published sources.
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Case studies as included in Part II of this report were prepared in close collaboration with the
authorities in the respective companies and approved by the respective Chairmen.
Findings of the Study (Chapter 4)
Our survey of 30 family managed companies has revealed that though the family owned companies are
progressing towards better governance practices and ensuring compliance with most of the provisions
of SEBI clause 49, there are as yet several areas of governance which need further strengthening.
(i) Compliance with SEBI Clause 49
All the surveyed companies had fully complied with all the mandatory provisions of the SEBI
Clause 49 relating to corporate governance, though compliance with non-mandatory
provisions, with the exception of the formation of the Remuneration committee, was observed
in case of only a few.
Again with respect to compliance, the measures adopted for adherence to various provisions
varied significantly across companies. Well governed companies had set up appropriate
systems, at times sophisticated IT related infrastructure and even appointed consultants and
specialists to derive maximum benefits out of them. The rest of them had declared compliance
in their corporate governance reports but the procedures adopted were not documented and
the responsibility was largely assigned to the respective committees or internal auditors.
(ii) Philosophy on corporate governance
Majority of the 30 surveyed companies i.e. 83% had emphasized good business ethics,
integrity, accountability, transparency and stakeholder value enhancement in their corporate
governance philosophy. The rest 17% had laid greater thrust on maximizing shareholder value
through higher growth in profits, product improvement, market leadership and increased
customer satisfaction.
(iii) Shareholding of Promoters
In nearly 60% of the surveyed companies, promoters held the majority shareholding of over
50%. The shareholding with the public was lower being less than 20% for majority of the
companies, while the shareholding of FIIs/NRIs/OCBs was comparatively higher, going up to
over 30% in some cases. This indicates the increasing interest of foreign investors in well
governed family managed companies.
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(iv) Constitution of the Board
All the surveyed companies had fulfilled the required norms for appointment of Independent
Directors. The average Board strength was 9.2 per company and the average number of
independent directors was 5.1 which at 55% of the total exceeded the minimum stipulated by
Clause 49. In nearly 43% of the companies the Chairman was non-executive. Irrespective of
whether the Chairman was Executive or Non-executive, the number of Independent Directors
exceeded the minimum stipulated in Clause 49. In the larger sized companies where the
Chairman was Executive, the number of independent directors was higher at 63% compared to
50% stipulated under the Clause.
(v) Promoters’ Influence on Boards
In majority of the companies (76%), the Chairman was either Executive Chairman or played
the dual role of Chairman and Managing Director.
With higher stakes in equity, there was a tendency for the promoters to exert greater influence
on the Board decisions. This was visible in nearly 40% of the surveyed companies particularly
the smaller sized promoter driven companies. Here, the Board played a more passive role and
the independent directors restricted their contributions essentially to issues relating to finance
and accounts, legal and compliance.
In contrast, in the remaining 60% of the companies, a consultative approach had been
adopted for all Board decisions. These were the companies where the Chairman or the CEO
encouraged active involvement of independent directors on all major issues – financial, legal
and even strategic, which indicates a positive shift towards better governance practices. A few
of these had appointed professional experts or independent directors as their CEO or Non-
Executive Chairman to lead the company. (See Graph I)
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Graph I - Influence of Promoters
(vi) Role and Functions of the Board
ad defined clearly the role and functions of the Board,
Graph II - Role & Functions of the Board
50%
10%
40%Collective Responsibility ofPromoter / CMD, supported byBoard
Managed by Professional Experts
Managed by CMD & supported byTop Mgmt.
Majority of the surveyed firms, 46% h
which were separate from managerial functions. The Board’s role was to set the goals and
targets, guide the management and supervise the direction in which the company was
headed. However, in one-third of the companies, essentially the smaller sized companies, the
Board apart from its supervisory role, was also actively involved in the management of the
company. (See Graph II)
0102030405060708090
100
1000-2000
500-1000 200-500 AllClasses
Asset Classes
Com
pani
es (%
) Promoter Managed
Managed Collectively byBoard & Sr MgmtClearly defined Roles ofBoard & Sr Mgmt
The remaining 21% of the companies were promoter managed companies, with the
Chairman and Executive Directors actively involved in the management.
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(vii)
oter driven companies, the major
Graph III - Contribution f Independent Directors
In the companies where the boards were more balanced the independent directors were also
involved in other functions like development of strategy and its execution, risk assessment,
lause 49, the independent directors are expected to perform multifarious activities as
embers of the Board and as members of various committees. Being on Boards and
Role of Independent Directors
In the family managed companies, especially the prom
contributions of the independent directors centered around maintaining transparency and
proper disclosures in financial statements, monitoring and oversight of financial and
accounting processes and ensuring their correctness, review of legal issues and compliance
with listing and other regulatory requirements aimed at enhancing shareholders’ value. (See
Graph III)
o (Based on Multiple Responses)
7.9%7.9%
8.3%
9.1%
7.9%
8.3%
50.6%
Protection of MinorityShareholders
Investors' Confidence
Review of Legal Compliance
Transperancy & Disclosures
Monitoring & Audit of Fin & A/c
Enhancement of Shareholder& Co. Value
Others(Dev.of Strategy,RiskAssessment, InternalControls,etc.)
supervision of internal controls, etc. This is an indication of the changing trends in the family
managed companies where the promoters are loosening their influence on their Boards and
are open to advice from outside experts keeping in view the long term benefits to company
value.
Under C
m
Committees of several companies, some of them have faced constraints of time and are
unable to attend to matters other than finance, accounting, legal and compliance with
regulatory requirements.
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Lack of adequate and timely information has also posed a major constraint. At times, their long
nure on the Boards, over 10-15 years, might have affected their role as watchdogs for the
(viii) ees
All the surveyed companies had set up the Audit Committee and the Shareholders’ Grievance
ot mandatory, 90% of them had also set up the Remuneration
(vii)
Training of Board members and evaluation of non-executive directors’ contributions, both non-
ajority of the companies.
is
heartening to know that at least 13 out of 30 companies, or 43% had gone beyond
s of evaluation were peer evaluation (15%), or informal evaluation by MD
(15%). Another 15% had assigned the task of evaluation to the Remuneration Committee.
ther
Directors) or by each director himself (self evaluation) based on some pre-determined criteria
te
company. Moreover, the dominance of promoters and at times family councils on the Boards,
especially in strategic and operational decisions, lack of proper demarcation of responsibilities
and the absence of a well communicated succession policy have posed major constraints to the
independent directors
Board Level Committ
Committee. Though it was n
Committee. The composition of the committees was in accordance with the stipulations of
Clause 49. The Audit committee constituted on an average 3.8 members with three being
Independent Directors. Though the Audit committee performed most of the financial and
supervisory functions, the functions relating to investigations of defaults and frauds and
performance monitoring of internal auditors was not carried out in most of the companies. The
Shareholders’ Grievances Committee constituted 2-3 directors usually independent directors
but the Chairman was by and large the promoter director or Chairman of the company.
Training and Evaluation of Board Members
mandatory provisions, were not undertaken by m
Though none of the surveyed companies had gone in for formal evaluation procedures, it
compliance and developed an informal structure for evaluating both the Executive and Non-
executive Directors. Some of them had even laid down the parameters for evaluating the
directors, which were later examined by the Remuneration committee These were based on
the contributions of the directors in the discussions and debates on key management
proposals, injection of fresh ideas, evaluation of new opportunities for the company, level of
interest shown in the operations of the company, attendance to Board and committee
meetings, etc.
The other mode
In the smaller sized firms evaluation was done more informally by the MD or by peers (o
for evaluation.
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(viii)
management framework was high on the agenda of majority of the surveyed
companies. The companies, particularly those operating in the global markets, had developed
constituted a separate Risk Management Dept.
e extra
Risk Management and Internal Controls
An effective risk
a formal Risk Management Model and had also
The others had identified the risks facing their companies and had at least framed a Risk
Management Policy for monitoring and mitigation. Formal risk management systems were
instituted by 23 or 77% of the companies. (See Graph IV). Over 25% of the responses
indicate that developing a Risk Management Model and setting up a Risk Management
Committee were the more commonly adopted practices for risk management among the
companies.
Graph IV - Risk Management
05
10152025
35
Risk Mgmt Policy Risk Mgmt Model Risk MgmtComm./Team
/Dept
Outsideconsultants
No separateframew ork butreview ed by
Board/AC
Modes of Risk Mgmt. (All Classes)
Res
pons
es (%
30)
The internal control framework in majority of the surveyed companies needed further
strengthening and this fact was recognized by most of them. Majority of the responses (42%)
indicate that the function of reviewing and monitoring of controls was assigned to independent
auditors. However over 30% of the responses show that some companies had mad
efforts for implementation of an ERP environment for this purpose. (See Graph V)
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Graph V - Internal Control Systems
(ix)
r for each group of
lated parties, declaring that they were in the normal course of business.
subsidiaries and associate companies and
mily holding companies which may not be listed.
ar informal
mechanism had been put in place for reporting of frauds and unethical practices.
for Stakeholders
05
101520253035404550
Appointment ofIndependentAuditors to
monitor & advise
ERP Environment- SAP
Implementation
PeriodicalReview s of each
Division'sResponsibilities
ComprehensiveComplianceReportingProcedure
Assistance ofoutside
professionalconsultants
Others
(All Classes)
Resp
onse
s (%
)
Transparency and Disclosures
Transparency in transactions results in increased accountability and this is another area of
concern in the family managed companies. Only around one-third of the surveyed companies
had gone beyond compliance and declared their material transactions in detail for each
individual party in their Annual Reports, along with their relationships with the parties. Majority
of the companies had presented their transactions in a combined manne
re
Global investors are looking for greater transparency in the balance sheets of family managed
companies, some of which have a large number of
fa
(x) Whistle Blower Policy
Family managed companies had begun to appreciate the benefits of this mechanism and one-
third of the companies surveyed confirmed that if not a formal policy, a simil
(xi) Value Creation
Majority of the surveyed companies had declared enhancement of company value and
shareholder value as the focus of their long term goals. While good financial performance
ensured shareholder value, specific initiatives had been taken by majority of the companies for
creating value for their customers, employees and society. These were reflected in their well
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conceived Human Resource policies aimed at retaining talent and upgrading their skills,
continuous product improvement, diversification and quality up-gradation for greater consumer
satisfaction, environment protection and welfare of the Society through various action-oriented
social service activities.
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Part II
Three Top rated Companies Showcasing Best Practices in CG
(Chapters 6 to 8) : Case Studies
All the eight companies as mentioned in Box 1, have stood out among the 30 surveyed companies for
compliance with Clause 49 as well as for practices beyond compliance. Relatively superior corporate
governance standards were reflected in their philosophy on Corporate Governance, focus of their goals
and objectives with emphasis on value creation for all stakeholders, greater independence of the board,
active involvement of independent directors in all issues concerning the company and various other
voluntarily adopted practices.
First five of these eight companies were approached seeking their association in preparation of case
studies. Of these three companies responded positively and extended full cooperation. These were
Godrej Consumer Products Ltd., Bajaj Electricals Ltd. and Hexaware Technologies Ltd. Thus,
Case studies were prepared for these three companies.
These are the companies which, apart from complying fully with Clause 49, had extended beyond
compliance by adopting more advanced systems and procedures like ERP, SAP for their core functions.
Initiatives taken by them for assessing Economic Value Added (EVA), obtaining Corporate Governance
rating from reputed agencies and acquiring national and international recognition for superior
governance practices are some of the achievements which have set them apart for best practices in
Corporate Governance.
These are also the companies, which had put up a good financial performance, creating value for their
shareholders and had also made commendable efforts for enhancing value for all other stakeholders
including employees, customers and society at large.
(i) Godrej Consumer Products Ltd.
In our Study, Godrej Consumer Products Ltd.(GCPL) has been ranked first among the 30 surveyed
companies.
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Historical Background
GCPL a leading FMCG company, is a major constituent of the 112 year old Godrej Group of companies.
The entire Godrej Group is committed to achieving and maintaining the highest standards of Corporate
Governance.
The founding fathers of the Group, Ardeshir and Pirojsha Godrej and later Pirojsha’s sons Sohrab, Naval
and Burjorji laid the foundation of two flagship companies, Godrej & Boyce Pvt. Ltd. and Godrej Soaps
on sound ethical lines with an emphasis on service to the consumer. Their philosophy on good
Corporate Governance was evident in their strong commitment to the manufacture of quality products,
sold at the best possible price backed by assured after-sales-service. Despite several hurdles that
industrialists faced during his period, Pirojsha Godrej firmly believed that the fundamental reasons for
the existence of an organization are to satisfy its customers, make profits and retain a motivated group
of employees. Conveying these ideals to his sons, he propagated the tenets of Value Creation for all
Stakeholders as is known today. He created a climate of openness and benevolence within the
organization by making himself and his management approachable to all his workers, providing them
with job security and other basic benefits like residential quarters, education for children, healthcare
and recreation facilities and a variety of other welfare activities which were well ahead of their time. His
commitments and beliefs have been carried forward by the following generations giving the Group its
brand value as a benevolent organization with a modern outlook and a zeal for innovation.
Godrej Soaps the parent company diversified from soaps and toiletries into a range of products like
edible oils, chemicals, animal feeds, etc. under the leadership of Burjorji Godrej, who was committed to
research and innovation. During the 1990s as the winds of liberalization started sweeping across all
Indian industries and competition mounted, Burjorji’s son Adi Godrej, the present Chairman of the
Godrej Group and Executive Chairman of GCPL decided to turn Godrej Soaps into a public limited
company in 1993. This enabled the company to enter into newer segments like foods and beverages,
agri inputs, household insecticides and others, which broadened its market base.
Adi Godrej who had been with Godrej Soaps since 1963 successfully steered the company to newer
heights in the highly competitive FMCG sector. He ushered in more aggressive marketing skills and
innovative strategies for the growth and diversification of his company while restructuring its existing
segments. Diversification he believes needs to be viewed in terms of values and vision ensuring synergy
in the diversified products.
At the beginning of the current decade, as the Indian economy opened up under the emerging WTO
regime with mounting competitive pressures from imports of consumer goods, a landmark decision was
taken by Adi Godrej to de-merge the company’s non-core business and concentrate on the core
business of soaps and toiletries and expand it systematically through organic and inorganic growth. On
April 1, 2001 the consumer products division of Godrej Soaps was de-merged and renamed as Godrej
Consumer Products Ltd.
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Compliance with CG Norms
GCPL has complied with all the mandatory as well as some of the non-mandatory requirements of
Clause 49 of the Listing Agreement. The company was rated topmost in Corporate Governance
practices particularly for its IT based systems and processes adopted for ensuring compliance with the
regulatory norms and various other initiatives going Beyond Compliance and measures taken for
creating value for its stakeholders.
Corporate Governance Philosophy
Keeping with the Godrej Group’s tradition, GCPL has declared its dedication not only to its customers
but to all stakeholders. The company’s thrust is on delivering superior stakeholder value through
Enduring Trust and Relentless Innovation delivered with Passion and Entrepreneurial Spirit. Mr. Adi
Godrej believes that Corporate Governance is all about promoting the interests of the company as what
is good for the company is also good for the wellbeing of all the stakeholders. GCPL’s Code of Conduct
embodies the principles of honesty and integrity, care and concern for people, greater consumer
orientation, commitment to quality and enhancement of skills through training and development and
openness and transparency
Role of the Board
GCPL is a Board Driven company with eight directors of which four are Independent directors, two non-
executive non-independent directors (promoter group), one Whole-time executive director and Adi
Godrej at the top as Executive Chairman. Recently the post of Chairman and Managing Director which
was held by Adi Godrej has been bifurcated with a professional Mr.Dalip Sehgal, taking over as
Managing Director. All the Independent Directors including stalwarts like Bharat Doshi, Rama Bijapurkar
and Prof. Bala Balachandran are experts in their own fields, willing to offer quality time to the company
and capable of giving sound and varied advice on all matters including strategic matters placed before
the Board. Though GCPL is a family owned company with promoters’ shareholding at 68% ( year ending
March 2007), the views and opinions of each independent director are given considerable weightage as
they are backed by a thorough scrutiny of supportive information. Proposals are even modified based
on their suggestions and guidance.
Board meetings at GCPL generally last for half a day. In addition every year the directors have a two
day off-site meeting for an informal exchange of ideas. The Group also has a Family Council which
meets twice a year to discuss the performance of each Group company and set out the guidelines for
their growth and governance. Though GCPL is a family owned company with promoters’ shareholding at
68% in the year ending March 2007, the views and opinions of each independent director is given
considerable weightage as they are backed by a thorough scrutiny of supportive information and
proposals are even modified based on their suggestions.
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Board Evaluation
GCPL is one of the few family managed companies which undertakes evaluation of its Board members in
an informal manner though it is not mandatory under Clause 49.
Board Level Committees
GCPL has set up the requisite number of Board Level Committees which are fully committed to all the
functions of monitoring and oversight as listed in Clause 49. In fact though not mandatory, all the
members of all the committees with the exception of Shareholders’ Grievances Committee are
independent directors. GCPL has a Nomination Committee, a Compensation Committee for Employee
Stock Option Scheme and a Human Resource Committee ( in place of a Remuneration committee) in
addition to the required number of committees.
The Audit Committee carries out all the functions relating to finance, accounting, internal and external
auditing including investigations of defaults. It also reviews the whistle blower policy mechanism.
Transparency and Disclosures
With its commitment to enhancement of shareholders’ trust and maximization of shareholder value,
GCPL complies with most of the provisions relating to disclosures in an effective manner.
Risk Management
As GCPL operates across various geographical boundaries with several collaborations and joint ventures,
it tends to face myriad risks – operational risks, financial risks emanating through fluctuations in
exchange rates and interest rates and other market related risks. Recognizing the importance of a
formal risk management system it has devised a formal risk management policy, and created a Risk
Management Committee. An independent consultancy firm has successfully created a SAP environment
for the company’s Risk Management Framework.
Internal Control Systems
GCPL’s Corporate Audit and Assurance Dept. is ISO-9001:2000 certified and issues all operating
procedures and authorizations which have adequate built-in controls. The company’s ERP system which
is MFGPro provides system based checks and controls. SAP has been implemented to ensure that the
existing processes are adequately captured with built-in control mechanisms. The internal control
system is supplemented by an extensive system of internal and external audit and periodic audit by
management.
Transactions with Related Parties
The Schedules giving transactions with related parties in GCPL’s Annual Reports are fairly detailed
unlike other family managed companies. The materially significant transactions, along with their nature
and value are presented separately for each related party individually including key management
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personnel, reflecting the company’s commitment towards a high degree of transparency in its balance
sheets.
Other Disclosures
Separate Schedules in the Annual report present all other items of disclosures like accounting policies,
remuneration of directors, contingent liabilities, investments, details of joint ventures, industry
performance, etc.
Whistle Blower Policy
With the objective of facilitating employees’ access to senior management and protecting those with the
courage to report unethical behavior, frauds and violations of the Company’s Code of Conduct, GCPL
has devised a Whistle Blower Policy, which is a non-mandatory provision. All letters received in this
respect, including anonymous letters are passed on to the internal audit department and thoroughly
investigated. For the wellbeing of its female employees the company has also introduced the Sexual
Harassment Policy.
Beyond Compliance and Value Creation for Stakeholders
Bifurcation of the Role of Chairman and Managing Director
Since April 2009, to bring in greater professionalism in the management of the company, Mr. Dalip
Sehgal has been appointed as MD of GCPL, while Mr. Adi Godrej continues as Executive Chairman.
Value Creation for Employees
The company has commissioned experts and consultants to undertake the exercise of evaluating and
assessing talent in the company and identifying competencies required at different levels. Training and
development and a well-communicated policy of succession planning has enabled the company to
identify and develop future leaders. GCPL has adopted the system of performance linked variable
remuneration wherein performance is linked to improvement in EVA. Peoplesoft a HRM software has
been installed which provides integrated solutions for performance and learning, evaluation and
deployment of employees, integrated career planning and reporting all of which are system driven and
completely transparent. A scheme of ESOPs for both employees and directors has been launched for
which the company bought shares from the secondary market. A Trust has been created for this
purpose.
Value Creation for Suppliers
The company has devised Feeder Wholesale Programs and City Wholesale Programs which ensure a
continuous line of communication between the supplier and the company which results in quicker
replenishment and fewer stock outs.
Economic Value Added ( EVA)
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GCPL has adopted the concept of Economic Value Added (EVA) as a measure of value creation for
shareholders. EVA is the excess of operating profit over cost of capital. It indicates to the management
whether the company generates enough returns to cover the opportunity cost of scarce capital. EVA has
also been used as a financial tool for structuring performance linked variable remuneration. With its
focus on increasing EVA, which has grown from Rs. 30.1 cr. in 2001-02 to 110.7 cr. in 2006-07, GCPL
has consistently attempted to enhance value for its shareholders.
Corporate Governance Rating from ICRA
ICRA’s Corporate Governance Rating seeks to examine whether the company has adopted and followed
such practices, conventions and codes as would provide its financial stakeholders a high level of
assurance on the quality of corporate governance. ICRA has assigned a CGR2+ rating to GCPL for the
quality of its Corporate Governance practices and SVG2+ for its stakeholder value creation activities.
This rating CGR2+ which was upgraded since 2002-03, implies that GCPL has adopted such practices
conventions and codes that would provide its financial stakeholders a high level of assurance on its
quality of Corporate Governance. SVG2+ implies that the company is rated highly on the composite
parameters of stakeholder value creation and management as also on Corporate Governance.
Social and Environmental Initiatives
GCPL has launched several initiatives for education, energy conservation, waste minimization,
improvements in safety and quality of its products and health of its employees. Skill development
programs have been organized to promote entrepreneurship among the youth in rural areas around its
factories.
Financial Performance
The concept of EVA which has been adopted as a measure of value creation for its stakeholders by
GCPL increased at an impressive rate of nearly 30% from Rs. 30.1 cr. in 2001-02 to Rs. 110.7 cr. in
2006-07. The company’s Market Capitalization escalated nearly 10 fold from Rs. 377.24 cr. in 2001-02
to Rs. 3320.40 cr. in 2006-07. Net profit recorded an impressive CAGR of 26% in the five year period
ending 2006-07.
(ii) Bajaj Electricals Ltd.
Based on the Bajaj Group’s values of striving for the common good and shared wealth, the corporate
governance philosophy of Bajaj Electricals Ltd. (BEL) emanates from a rich legacy of fair, ethical,
socially responsive and transparent governance practices, which while protecting the interests of all
stakeholders, ensures maximization of value for all shareholders.
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Historical Background
Jamnalal Bajaj the founding father of the Bajaj Group valued honesty over profit, actions over words
and common good over individual good. After him, his two sons Kamalnayan Bajaj and Ramkrishna
Bajaj continued their father’s legacy, upholding the strong Gandhian principle of striving for the
common good. Rahul Bajaj the elder son of Kamalnayan Bajaj is at the helm of the Bajaj Group which
has 27 companies under its fold and a combined turnover of Rs. 20,000 cr. today.
Bajaj Electricals Ltd., headed by Shekhar Bajaj, son of Ramkrishna Bajaj, was acquired by Kamalnayan
Bajaj in 1938 and was listed on the Bombay Stock Exchange as early as in 1956. The company assumed
its present name in 1960 and till 1980 was under the able stewardship of Ramkrishna Bajaj who
championed the cause of fair business practices. He was one of the founders of the Council for Fair
Business Practices and Advertising Standards Council of India.
Starting off as a marketing company, BEL became a trusted name in millions of households in India for
a range of consumer durables, lighting products, fans and luminaires. As these products were
manufactured for BEL by a large number of small scale manufacturers and carried the Bajaj brand, the
company actively took up the promotion and up gradation of the SSIs (now renamed as MSMEs ).Due
to its core philosophy of ‘ Inspiring Trust ‘ through unstinted emphasis on customer satisfaction and
impeccable after-sales-service, the company gained the trust and confidence of all its stakeholders.
Shekhar Bajaj took over as CEO of the company in 1980 and assumed office as Chairman and
Managing Director in 1994. Under his leadership BEL made its foray into manufacturing activities in
1997-98. Commencing with the production of fans, the company expanded into the manufacture of high
masts and transmission towers in 2001. The following two years were tough for BEL due to the high
capital cost of the new project and heavy long term borrowings. This was accentuated by the slowdown
in government spending on infrastructure, heavy input costs and import liberalization. The company
was faced with the dilemma of downsizing or drastic cost cutting. Under these circumstances true to its
reputation of giving high priority to the welfare of its employees, not a single job was lost and all
possible expenditure was reduced. This was followed by a process of financial restructuring and infusion
of long term funds by way of rights shares.
Corporate Governance at BEL
Corporate Governance was started by BEL way back in 1999, much before the present regulatory
framework and Clause 49 provisions came into force. A Report on Corporate Governance was annexed
to BEL’s Annual Report for the year 1999-2000. Corporate Governance at BEL is built on the strong
pillars of Transparency, Accountability and Equitable Treatment of all shareholders.
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Compliance with Corporate Governance Norms
Code of conduct
BEL’s Code of Conduct was documented as early as in 1999. The code states that all directors, officers
and employees should not only comply with all applicable laws and regulations but must also promote
honest and ethical standards and commitment to compliance. BEL’s norms for CG lay down the policies,
procedures and rules which are defined by the applicable laws, the corporate charter and the company’s
by-laws. Business is managed ethically with built-in checks and balances ensuring that senior executives
pursue strategies that are in accordance with the corporate mission.
Role of the Board
Since the early 1960s, majority of the members on the Board of BEL have been non-executive and
independent directors though the shareholding of the promoters at BEL is high at 67% (as on Dec. 31,
2007). At present the total number of directors is nine with 60% of them being independent directors.
The company has greatly benefited through the guidance and foresight of its independent directors
which include distinguished personalities like V B Haribhakti, A K Jalan and Ajit Gulabchand. All of them
have been closely involved with the appraisal and sanction of all major proposals, formulating long term
policies and procedures for the company’s diverse range of products, management of funds and
investments and guiding the management in all major decisions. The contribution of the independent
directors in the company’s turn around and financial restructuring has been invaluable.
BEL also has a Corporate Management Council represented by the heads of each SBU, two Executive
Directors, Head of Finance, Head of Human Resources and the Heads of each manufacturing plant.
Board Level Committees
At BEL, there are two mandatory committees namely the Audit Committee and the Shareholders’
Grievances Committee, apart from five other non-mandatory committees. These include the
Remuneration and Compensation Committee, the Finance Committee, the Risk Management Committee,
the Management Committee and the Project Management Committee. The Audit Committee was formed
way back in 1998 and historically all its four members have been independent directors. The committee
has been accorded all the powers to obtain and review all the financial and non-financial information as
stipulated in Clause 49. The Committee contributes towards improving the financial performance of the
company, evaluating operating results and setting targets for each SBU, ensuring better accounting
systems. It also reviews and suggests improvements in the Risk Management and Internal Control
Systems. All other committees have been given sufficient powers to devise policies and carry out their
functions effectively.
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Transparency and Disclosures
Risk Management
BEL has formulated a Risk Management Policy for understanding, controlling and communicating the
company’s risk exposures while achieving its objectives. A Risk Management Committee formed since
2006-07 regularly reviews the risks and threats faced by the company and recommends suitable steps
to safeguard the company’s interests. The Risk Management Dept. and the Internal Audit dept. are
together involved in identification, categorization and quantification of risks.
Internal Controls
As required under Clause 49, BEL has set up a well defined system of delegation of authority for
sanction of expenditure, budget approvals, and administrative expenses. This delegation clearly defines
the limits of monetary sanctions at each level. The MIS provides timely and accurate information for
effective controls. The company is in the process of implementing ERP to strengthen its internal
controls. (This has since been implemented).
Transactions with Related Parties
BEL enters into a number of sale and purchase transactions with other associate companies in the Bajaj
Group and other companies in which the promoters and EDs have significant influence. Unlike most
other family managed companies all material transactions with each associate or group company and
each of the other related parties are given separately in the Annual Reports. The details include nature
of transactions, value of transactions and amount outstanding with each party in the current and
previous years. BEL invariably takes the approval of the Audit Committee for all related party
transactions.
Other Disclosures
BEL is in the practice of disclosing all other information including accounting treatment, remuneration of
directors, proceeds from public issues, details of non-compliance, industry performance and all other
information relevant to the shareholders in its Annual Reports.
Non-mandatory Requirements
Except for the formation of the Remuneration Committee, no other non-mandatory requirement of
Clause 49 has been adopted by BEL.
Though there is no Whistle Blower Policy in place the Chairman and ED are always accessible to all the
employees of the company. It has been the company’s practice to hold meetings of CMD and Senior
Management with all the employees at its respective centers every year to discuss the performance of
the company in the previous year and set targets for the following year.
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Beyond Compliance and Value Creation for Stakeholders
Value Creation for Employees
The company has focused on good people related practices in terms of training, recruitment,
performance appraisal and rewards. It has a dedicated training centre at Pune. Every year BEL conducts
30-35 training programs for 800-900 employees throughout the country. BEL was the first company in
the Group to declare ESOPS for its employees in 2006-07. Two types of Schemes have been offered.
One is for the senior management personnel and the other is for all employees who have put in three
years of service. Together the schemes are applicable to nearly 500 of the 900 employees of the
company.
Value Creation for Customers and Suppliers
For the benefit of its suppliers the company has constantly introduced new product varieties and
attempted to increase its market shares. It has introduced a Dealer Privilege Club program to motivate
its suppliers.
The SBU for luminaires is committed to protecting the environment and has assisted its major vendors
to obtain ISO 14,001 certification. The SBU for Lighting has launched a dealer customer relationship
management program called JOSH which is quite successful.
Corporate Social Responsibility
In keeping with its tradition, BEL has been closely involved in several projects aimed at improving the
quality of life of people, recognition of women achievers (IMC Ladies Wing-Jankidevi Bajaj Puraskar,
empowering of rural women, poverty alleviation, environment protection (Paryavaran Mitra, a NGO) and
quality promotion(IMC Ramkrishna Bajaj National Quality Awards.
Financial Performance
After financial restructuring, BEL’s market capitalization has grown steadily from Rs. 433.44 cr. in 2005-
06 to Rs. 749.51 cr. in 2007-08. Its PAT has also more than doubled in the same period from Rs. 29.83
cr. to Rs. 71.49 cr. ROCE has jumped from 22.14% to nearly 33% in 2007-08. The normal dividend
payout has consistently been in the range of 25-30% but it increased significantly to 60% in 2006-07
and later to 80% in 2007-08. This is evident of the company’s successful turn around after its
restructuring, with due focus on shareholder value creation.
(iii) Hexaware Technologies Ltd.
At Hexaware Technologies Ltd. corporate governance is not just an objective in isolation but it is a
means to building a customer focused, value driven organization. CG is considered to be a key driver for
sustainable corporate growth and long term value creation for stakeholders.
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Hexaware is a customer-centric company with a mission to build value for customers through innovative
use of Technology and Talent.
Historical Background
Hexaware Technologies is a leading IT and BPO service provider. Ranked as the fastest growing mid-
sized company in India, Hexaware has attained market leadership in banking and financial services
sector, insurance, leasing, transportation and human resource development.
During 2001, Hexaware Technologies an unlisted company was merged with Aptech Ltd., a listed
company specializing in IT services and IT Training. The merged entity was named Hexaware
Technologies Ltd. Aptech’s Training division was later de-merged into another company called Aptech
Training Ltd. and subsequently Aptech Ltd. Since 2002, Hexaware has registered rapid growth with the
launch of its BPO division.
In the words of Atul Nishar, founder and Executive Chairman, the company’s growth journey has been
based on four principles of Innovation, Competencies, Relationships and Scalability.
Compliance with Corporate Governance Norms
Hexaware endeavors to maximize the wealth of its shareholders through superior levels of
accountability, integrity and transparency. It has gone a step further and adopted some of the practices
in International Corporate Governance. The company believes that the quality of governance is
influenced by integrity of its management, ability of its Board to carry out its fiduciary responsibilities,
adequacy of its management processes, quality of corporate reporting, commitment levels of individual
Board members and participation of stakeholders in management.
Code of Conduct
The code among other things, emphasizes the spirit of leadership among the directors in advancing the
vision and values of the company and an understanding of Hexaware’s business and competitive
environment, its strategies and business plans. The company gives maximum weightage to the
enhancement of value for all its stakeholders particularly its customers and strives to build their loyalty
through proactive customer acquisition, retention and value based partnerships.
Shareholding of Promoters
Unlike in most other Family/Promoter managed companies, HTL’s promoters held only 26% of its total
shareholding as on Dec. 31, 2006. FIIs/GDRs accounted for the highest 53.31% of shares.
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Role of the Board
Unlike in most other Family/Promoter managed companies, HTL’s promoters hold only 26% of its total
shareholding. (as on Dec. 31, 2006). FIIs/GDRs accounted for the highest 53.31% of shares.
Hexaware’s Board is made up of 11 directors (as on Dec. 31, 2006 ) with six independent directors
offering a broad spectrum of expertise in their specialized areas and rich corporate experience. All of
them including distinguished personalities like Shailesh Haribhakti, Bakul Dholakia (Director IIM,
Ahmedabad) and L S Sarma, a senior banker, are committed to taking dispassionate decisions on focal
issues. The role of the Board is defined clearly both collectively and severely. Collectively the Board
directs and supervises the company’s affairs, provides entrepreneurial leadership within a framework of
prudent controls, formulates the company’s strategies, reviews the performance of management while
ensuring that all resources are well in place. It also sets the company’s values and standards and is
accountable to the shareholders for aligning their interests with those of the company.
All the independent directors contribute to the development of the company’s strategies and ensure the
integrity of financial information and effectiveness of internal controls and risk management systems.
They are also involved in institutionalization of transparent procedures and processes and ensuring
compliance with statutory and non-statutory norms.
Apart from the Board the company also has a Management Council headed by the Chairman. The
Council examines the progress of the company’s operations in various sectors sets long term growth
targets and determines the future areas of operations.
Board Level Committees
HTL has three Board level committees – the Audit committee, the Remuneration and Compensation
committee and the Shareholders/Investors’ Grievances Committee.
The Audit Committee
The Audit Committee generally holds six meetings in a year. The role and powers of the Committee are
in accordance with the stipulations laid down in Clause 49, including review of risk management
framework, reasons for defaults in payments, reports of internal investigators on suspected frauds and
irregularities or failure of internal controls. Going beyond mere compliance, the committee also
compares the financial performance of Hexaware with its other competitors and the company’s
performance in different geographies. This enables the committee to contribute to the expansion plans
of the company in diverse areas.
The Remuneration and Compensation Committee
In keeping with the company’s principles of compensating and retaining best talents the company has
formulated a Remuneration policy based on
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Pay for Responsibility, Pay for Performance and Potential and pay for Growth. Apart from determining
and disclosing the remuneration of all Directors and
Senior management, the committee also approves and administers the Employee Stock Option Scheme
of the company.
Shareholders’ Investors’ Grievances Committee
The committee carries out all the functions as given in Clause 49 and also continuously communicates
with the shareholders regarding the company’s services and conducts on-line surveys of the
shareholders/investors to assess their satisfaction with the company’s services.
Board Evaluation and Training
The Nomination (Remuneration) Committee conducts interviews of the directors to elicit their
observations, suggestions and preferences regarding the effectiveness of the Board’s performance. The
evaluation is carried out based on the EVA approach. Some of the evaluation parameters applied are
contribution to and monitoring of CG practices, participation in long term strategic planning,
commitment towards the fulfillment of their obligations and fiduciary responsibilities.
Hexaware undertakes regular training sessions of the Board by inviting specialists and consultants like
Deloitte Haskins and Sells and Axis Risk Consulting Services to make presentations to the Board on
various topical subjects like risk management, matters relating to Company Law amendments and
taxation, stock options, etc. These have helped the Board to take informed decisions on the proposals
presented.
Transparency and Disclosures
Risk Management
Hexaware has framed appropriate policies and procedures for mitigating all the risks arising out of its
domestic and international operations. The company has identified internal and environmental risk
factors and devised the necessary steps to mitigate them. The Head of each Customer Business Unit
along with the accounts manager is responsible for managing the transactional risks. This is done by
focusing on major business objectives of the company and management of operations and alliances in
key global markets in relation to these objectives.
The Board of Hexaware is responsible for monitoring the risk levels on various parameters and the
management team ensures the implementation of risk mitigation measures.
The various risks identified by Hexaware are Revenue Concentration Risk, Foreign Currency Risk,
Litigation Risk, Legal and Contractual Compliance and Regulatory Risks arising out of global operations,
Disaster risks, Competition Risks, Obsolescence Risks, Human Behavior Risks and Reputation Risk.
xxviiiNFCG
Internal Control Systems
Internal Controls at Hexaware involves safeguarding the interests of the company and all its assets,
discipline in the day to day functions of the company and ensuring the accuracy and reliability of data
with suitable checks and balances. The Audit committee has appointed KPMG as the Internal Audit firm
since 2007 to ensure that all internal controls are adequate and suitably implemented.
Transactions with Subsidiaries and Related Parties
Hexaware has 15 subsidiaries of which 12 are spread over various international locations with three in
USA. All operations of the subsidiaries including loans, investments, disinvestments, transfer pricing
transactions, and action taken reports are placed before the Audit committee and the Board.
The Annual Reports of Hexaware present the nature and value of transactions for each group of related
parties i.e. subsidiaries and key management personnel. As required under Clause 49, the transactions
which are in excess of 10% of the total are given separately for each entity with details of the amount
transacted including loans, income, guarantees, investments, equity, etc.
Other Disclosures
All other disclosures required under Clause 49, like remuneration of directors, review of the industry and
outlook, effectiveness of internal controls, review of internal investigations, etc. are made in the Annual
Reports of Hexaware.
Compliance with Non-mandatory Requirements
Hexaware is one of the few companies which has complied with most of the non-mandatory
requirements.
A Remuneration and Compensation Committee has been set up. Regular training and evaluation of
Board members is taken up as mentioned above.
Quarterly financial statements are sent to the residence of the shareholders
Being listed on the London Stock Exchange, Hexaware also complies with the norms of the Blue ribbon
Committee.
Beyond Compliance and Value Creation for Stakeholders
Value Creation for Employees
Hexaware is ranked among India’s best employees and is among top 20 IT employers. An innovative
compensation structure, effective performance evaluation and development plan for employees,
conducive organizational culture, a good rewards and recognition program and net wealth creation
program through ESOPs are some of the measures to keep employee turnover at the minimum. Besides
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Hexaware conducts regular training programs and seminars through its training arm ‘Hexavarsity’. An
intensive Workforce Competency Model improves the competency and technical proficiency of the
employees on a continuous basis. Employee performance management, succession planning and
leadership development are some of the other measures undertaken by Hexaware for its employees.
Value Creation for Customers
Hexaware has adopted a customer-centric philosophy in its growth momentum and this is reflected in
its differentiated product offerings, regular diversification into new segments, flexible deliveries, cost
effective offshore facilities, acquisition of specialized service providers and quest for continuous
customer satisfaction.
Value Creation for Society
Hexaware has lined up a range of services for the upliftment of poor and needy children through
various NGOs. Its special program Helping Hand from Hexaware (H3O) which is an outreach program,
takes up health and educational activities for underprivileged children in Mumbai and Chennai.
Financial Performance
The market capitalization of Hexaware has escalated 10 fold from Rs. 258.4 cr. in 2002 to Rs. 2630 cr.
2006, with the annualized dividend pay out increasing from 50% in 2004 to 80% in 2006. With its gross
revenue rising nearly four fold since 2002, its gross profit has also risen almost four times to reach Rs.
316.44 cr. in 2006. The company has maintained a steady growth in its PAT of 68% since 2003 due to
its expansion in overseas business.
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Part III
Proceedings of the Round Table on Excellence in Corporate
Governance (based on the Study - Chapters 9 & 10)
SPJIMR has been accredited by National Foundation for Corporate Governance (NFCG) as a National
Centre for Corporate Governance. Partnering with NFCG in its mission for promoting good corporate
governance practices in India, SPJIMR conducted in 2007, an empirical research study, ‘Showcasing
Corporate Governance Best Practices by Medium sized Family Managed Listed Companies –
Three Case Studies’.
The Study involved an assessment of the corporate governance practices of a selected sample of 30
family managed companies, through an analysis of their annual reports and personal interviews with the
CEOs. To showcase excellence in Corporate Governance, Case studies of three companies, which stood
out for their governance practices have been prepared.
The Report, prepared by Prof. Jiban K Mukhopadhyay (in-charge of the project) and Ms. Dolly
Dhamodiwala, Sr. Researcher, SPJIMR was submitted to NFCG in Sept. 2008.
To disseminate the findings of the Study and initiate interactions among the selected family managed
companies, NFCG and other experts in corporate governance, a Round Table was organized by the
Centre for Family Managed Business of SPJIMR in association with NFCG. The half day Round Table
organized on April 27, 2009, in the afternoon at Hotel Grand Hyatt, Mumbai, was attended by over 60
participants, including CEOs and Company Secretaries of the Family Managed Companies,
Representatives of NFCG, Mentors of Family Managed Business Centre, SPJIMR, Corporate Governance
experts and SPJIMR faculty members.
Session I of the Round Table which started after lunch was chaired by Mr. Gopal Chalam, Dean,
Centre for Corporate Research and Training, Institute of Company Secretaries of India. Prof. Sesha
Iyer, Director, SPJIMR welcomed the participants and familiarized them with the management
programs conducted by SPJIMR and the various other activities of the Institute. Prof. Parimal Merchant,
Chairperson, Family Managed Business Centre then spoke about the activities of the Centre for Family
Managed Businesses pioneered by SPJIMR, since 1997. This was followed by the Keynote address by
Mr. Vijay Kapur, Director, Institute of Chartered Accountants of India. After explaining the role &
functions of NFCG, Mr. Kapoor spoke on several important issues relating to Corporate Governance in
India & abroad. Emphasizing that he is an advocate of free market, he explained the concept of
Corporate Governance with reference to Cadbury Committee, focused on the governance issue in Indian
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companies through three specific periods since independence. Focusing on the post reform period, he
mentioned that there were a number of regulatory failures rather than ethical failures (e.g. Harshad
Mehta scam etc). He also mentioned that issues relating to Corporate Governance in Family Managed
Business essentially focus on ownership & control in the hands of the promoter rather than the so called
Independent Directors. He said that the best way to improve Corporate Governance in Family Managed
Businesses is to involve the owner director himself rather than the independent directors. He
emphasized that the regulatory system should incorporate suitable incentives to do the right thing along
with appropriate accountability for failures to do the right thing. According, to him Corporate
Governance should evolve as an academic Normative science.
Prof. Jiban Mukhopadhyay made a presentation on the Findings of the Study. He highlighted the
corporate governance practices of 30 surveyed companies with regard to their compliance with the
prescribed regulatory norms and also described several other initiatives taken by the companies which
went beyond the mandatory requirements of compliance and enhanced value for all the stakeholders of
the company. He also elaborated the methodology adopted for rating and identifying three companies
with relatively superior corporate governance practices, which were finally selected for the Case Studies.
He discussed the major issues arising out of the Study, such as the factors which motivated the family
managed companies to pursue better governance practices, the contribution of the independent
directors and the need to strengthen their role, the areas of governance which needed further
strengthening like risk management, internal controls and disclosures, the constraints of these
companies while complying with the regulatory requirements, etc. The session ended with questions on
the findings of the Study.
The second session was chaired by Mr. Vijay Kapur. This session commenced with a presentation of
the Corporate Governance practices of Godrej Consumer Products Ltd. (GCPL) by Mr. Adi Godrej,
the then Chairman and Managing Director, and presently Executive Chairman. Mr. Godrej advocated
principle based governance system, which, in his opinion, would be more effective than a rule based
system. He emphasized that one of the most important principles of corporate governance is strong
performance of the company. His company’s policy has been to invite highly professional persons on
the Board as independent directors and take advantage of their expertise in specialized areas like
finance and accounting, strategy formulation, legal issues, etc.
One of the most important principles of Corporate Governance, according to Mr. Godrej, was
Performance – Financial, Operational & Strategic. For this a strong link had been evolved between the
interest of the company & the interest of the employees. This was carried out by :
a) A system of Performance linked Variable Remuneration for which a concept of Economic Value
Added (EVA) was used and
b) A well structured system of incentives through ESOPs.
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He went on to elaborate his company’s policy of appointing only independent directors on all his board
level committees, the remuneration policy laid down for the independent directors, the Corporate
Governance Rating received by GCPL from ICRA and the Godrej Group’s policy on creation of value for
the Society through various philanthropic activities.
Mr. R Ramakrishnan, Executive Director, Bajaj Electricals Ltd. (BEL) made a detailed presentation
on the Corporate Governance initiatives of his company. Tracing the history of the Bajaj Group of
companies since the early 1900s, he explained how Shri Jamnalal Bajaj and his successors had built the
relationship of trust and respect between providers and users of goods and services. He explained that
his company had adopted three basic principles of good governance, which are Transparency,
Accountability and Equitable Treatment. He observed that BEL had an embedded culture of having truly
independent directors who supported the promoters in upholding these principles, while helping them in
strategy formulation and also execution. He went on to describe the formation of the company’s
Consumer Grievance Cell, which had generated a great deal of trust and goodwill among the
consumers. Value creation for employees was through ESOPs, which covered majority of their
employees. He then highlighted some of the issues relating to CG in India like the need for greater
shareholder activism, lack of formal evaluation of the Board, need for the Board to have greater access
to senior management, need for better internal vigilance and the strong role to be played by
institutional directors on the Board to improve corporate governance .
Mr. Deependra Chumble, Chief People Officer, Hexaware Technologies Ltd., in his presentation,
described the CG practices of Hexaware. He explained his company’s policy of openness and
transparency and the continuous access his Board has with the company’s Senior Management. At
Hexaware he mentioned that the Board and senior management are together involved in the process of
strategic planning and risk management. Being an IT company Hexaware had the unique advantage of
putting in place appropriate processes and technologies for monitoring and control on a real time basis.
The employees of the company are being encouraged to keep in mind a longer perspective even in a
period of slowdown through continuous communication from the top. The company has also invested in
an elaborate program of training and development through its concept of Hexavarsity.
During the Question-Answer sessions there were questions from the audience on a range of issues
(Chapter 10) like separation of roles of Chairman and MD, rotation of auditing firms of companies or
rotation of engagement partners, peer reviews of Licensing of qualified accountants and auditors, etc.
The need to carry out an empirical study to establish a link between corporate governance and
company’s performance, the need for training and evaluation of board members, better contribution
from independent directors in important board decisions, and other related issues were brought into
focus.
The vote of thanks was given by Prof. Jiban K Mukhopadhyay.
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Part IV
Concluding Observations and Recommendations based on the Study and Round Table
Concluding Observations based on the Study (Chapter 5)
i) Our study of the 30 Family Managed Medium sized Companies has brought to light several
disparities in the responses of the companies to the increasing emphasis on better Corporate
Governance practices. While some companies (essentially the eight selected companies) have
already showcased best corporate governance practices, there are others which are yet to fully
recognize the benefits of good governance, which has to go beyond mere mandatory
compliance.
At the same time, an increasing number of Family Managed Medium sized Companies have
realized that it is not the financial compliance alone but also the enhancement of company
value and value for all its stakeholders that will earn them greater investor confidence.
ii) A major motivating factor behind the adoption of better Corporate Governance Practices is the
growing global exposure of these companies.
iii) Our study has shown that the relatively larger sized firms which have gone in for expansion
through global acquisitions and diversification into advanced/emerging markets through
subsidiaries and joint ventures, have developed sophisticated models for risk management,
information dissemination and internal controls.
iv) It was also observed that the majority of the surveyed companies had commenced Corporate
Governance Practices in a formal manner only after the first announcement of SEBI Clause 49
in 2000 and completed the process only after compliance was made compulsory since January
2006.
Prior to this however, some of the larger sized Family Managed Companies had taken some
initiatives like setting up an audit committee or appointing independent directors on their
Boards or restriction of insider trading.
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v) The survey has brought to light the frequently discussed issue of the relationship of the
promoters – usually Chairman and Managing Director – with the other Board members,
essentially the independent directors. Balanced Boards with active independent directors have
been able to steer their company towards its identified goals in an effective and ethical
manner.
vi) In some companies, the longer tenure of all the directors including the Chairman and
Independent Directors, spanning 10-15 years has deprived the Boards of fresh ideas which
might have, at least to some extent, slowed down the improvements in governance practices.
Training and evaluation of Board members is hardly visible except in an informal manner by a
few companies.
vii) Due to the absence of a succession policy and well-defined criteria for appointment of
successors, the senior management personnel and independent directors refrain from
proposing long term policies, which would have an impact on company’s operations.
vii) It was only in a few larger sized companies that the Chairman had engaged the independent
directors in strategic decisions relating to the growth and expansion of the company. At the
Round Table it was agreed that the Independent Directors should give frank and unbiased
advice to the promoters and the Board on all issues including strategic issues. They should
preferably be all professionals and should be able to spare quality time for the company.
viii) Companies in which the Chairman had reduced his influence on Board decisions and imbibed a
consultative board culture were able to record a better performance – both financial and
operational. These were also the companies which had attracted global investments at a
higher premium.
ix) The shareholding pattern in Family Managed Companies surveyed has been more skewed in
favor of the promoters. Due to their higher shareholding, promoters are able to exert
significant control in the company at times to the detriment of minority shareholders. As the
shareholding with the public is small and shares are not frequently traded in the market, there
is a dearth of vigilant and active shareholders.
x) Some of the more serious governance concerns in family managed companies surveyed were
lack of clarity regarding the ownership of the company, its relations with other unlisted
companies in the Group or holding companies, the dominant influence of family councils on
board decisions, the tendency of the promoter CEO to avoid losing control on the Board and
the difficulty in ascertaining the actual status of independent directors.
xi) Inadequate information regarding the company and its operational strategies, lack of
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transparency and inadequate disclosure of transactions with related parties including
subsidiaries and associate companies were other major factors impacting on corporate
governance.
xii) The role of the Institutional investors and analysts has gained significant importance with more
detailed information being demanded by them which is a healthy trend and has lead to greater
transparency.
xiii) The Corporate Governance Practices which need further strengthening by the Family Managed
Companies are risk management, internal controls and disclosures of transactions with related
parties. An IT based system of real time checks and a good MIS system needs to be put in
place for this purpose.
xiv) Some of the non-mandatory provisions of Clause 49, like the Remuneration Committee,
Whistle Blower Policy, Training and Evaluation of Non-Executive Board members have been
complied with by some of the companies at least in an informal manner and have had a
positive impact on the overall governance of the company. Training and evaluation would place
greater responsibilities and commitment on the non-executive directors.
xv) Finally, compliance is important and is ensured but when there is a slippage there is no
mechanism for holding the errant person accountable. Continuous monitoring of compliance
procedures is required and offenders need to be held responsible for non-compliance. The
family managed companies need to strengthen their accountability norms.
Some Pertinent Issues and Recommendations
In SEBI Clause 49, there are a large number of parameters of Corporate Governance, including the
mandatory and non-mandatory ones. These are to be complied with by all listed companies. As a result,
some of the smaller sized companies are not able to comply with all the stipulations of this ‘One Size fits
all’ type of Clause. Smaller sized companies having asset size of say Rs. 3 cr. may not be able to invest
in the type of systems, procedures and manpower required to comply with all the requirements in the
same manner as done by large companies.
The study has also highlighted the problems relating to compliance with all the stipulations by the
medium-sized companies.
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A detailed study of the application of Clause 49 with a differential approach for companies in smaller
size groups, or age or types of operations needs to be carried out. NFCG may also consider organizing
a brainstorming seminar or workshop on this issue.
,
Issues regarding the role of the independent directors on the Boards of listed companies were discussed
at length. These have also been brought out in our Study. Issues regarding the role and responsibilities
of independent directors and the effectiveness of their contributions need to be further looked into.
NFCG may consider sponsoring a study to assess the contributions of the independent directors on
Boards of listed companies through a survey of independent directors.
Disclosures and related party transactions in family managed businesses, where other unlisted
companies or holding companies control the listed companies, the concept of lead independent
directors, or greater involvement of independent directors is called for. This could be facilitated by
dissemination of detailed information on all relevant issues to the independent directors. Besides, the
training and evaluation procedures of the independent directors also need to be strengthened.
Succession policy related issues are also important.
Some Recommendations based on the Proceedings of the Round Table
(Chapter 11)
A number of issues relating to Corporate Governance practices have been raised in the Study (as
already discussed) as well as at the Round Table. Certain recommendations specifically arising from the
proceedings of Round Table are mentioned below:
• As there are large numbers of small size listed companies in India, it needs to be considered
whether Uniform Application of Clause 49 to all listed companies should be suitable for small
sized companies. Such companies may not be in a position to incur additional cost for installing
necessary infrastructure or invest in the requisite systems etc. for introducing elaborate CG
practices. In the light of the above, a differential approach relating to the application of Clause
49 may be considered to be adopted for small sized / newly listed companies towards
compliance with CG norms. NFCG may consider organizing a study / seminar on this important
issue.
• There are number of Non-Mandatory Provisions relating to CG compliance under Clause 49 like
Remuneration Committee, Training & Evaluation of Non-Executive Directors. It is
recommended that there should be a relook at the non-mandatory CG practices particularly
relating to Training & Evaluation, Remuneration Committee etc. A formal system of Board
Evaluation may be considered to be made mandatory.
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• At the Round Table, several eminent participants discussed about Company Performance and
CG Practices and their relationship. It was recommended that a study needs to be undertaken
to assess this relationship (incidentally, SPJIMR is already conducting such a study, sponsored
by NFCG).
• Issues relating to Higher Shareholding of Promoters have been discussed at the Round Table
at length. While Mr. Adi Godrej explained his view that higher promoter shareholding is not
detrimental to the interest of minority shareholders, there are reports that the listed Indian
companies may have to increase their public shareholding upto 25 % of the total. It is time
that the regulatory authorities should come out with a well thought out approach on this issue.
• There is a need for clearly defining Independent Directors and prescribe how exactly they
should be empowered, particularly after the Satyam episode. NCFG may consider sponsoring a
study on these issues.
• There is a need for strengthening Risk Management & Internal Control System like installing a
system of real time checks, an ERP – SAP solutions as well as suitable MIS in all listed
companies.
• There is a great deal of variation between companies, irrespective of their size, regarding
Disclosure of Related Parties Transactions. The nature of transactions made between related
parties should be defined not only in quantitative terms but also in qualitative terms.
• Issues relating to Rotation of Auditors & Auditing Partners also have been discussed. It was
agreed that rotation of engagement partners and not auditing firms after a certain period
would prove to be a better option for solving the problems of audit complacency.
• Clause 49 does not give any guidelines relating to succession planning, which could be a very
critical issue. Certain regulatory framework needs to be laid down providing the minimum
guidelines for drawing up the Succession Policy based on the company value, its mission &
objectives.
Ministry of Corporate Affairs and the SEBI may consider bringing out a document highlighting the needs
for implementing the spirit of Corporate Governance Practices as a Responsibility by all corporate
entities, listed, about-to-be listed, PSUs etc.
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Future Outlook
At present SEBI Clause 49 and the Companies Act 1956 form the architecture for Corporate Governance
norms. The overall regulatory structure relating to Corporate Governance has been evolving since 2006.
It is yet too soon to evaluate whether all the listed companies are able to comply with all the regulations
of SEBI.
Meanwhile, some regulations with respect to Clause 49 are also being reviewed by experts. The
Bill(2010) for re-legislation of Companies Act 1956 has been placed before the Parliament, but is yet to
be enacted. After the Satyam debacle, there is a need for more carefully looking into Corporate
Governance regulatory processes as well as their implementation. Our study and the Round Table have
suggested a number of points on these pertinent issues.
Thus, there is a need to evaluate the existing mechanism for compliance so as to add value and bring in
greater flexibility and hence, compliance in spirit, and not just in letter.
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