Download - Corporate Governance Rating Final
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Corporate Governance Rating
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Corporate Governance (CG)
It is a set of processes, customs, policies, laws, and institutions
affecting the way a corporation is directed, administered and controlled.
Principal stakeholders which are affected by CG are the shareholders,
management,board of directors, employees, customers, creditors,
suppliers, regulators, and the community at large.
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About Reliance
Dhirubhai H. Ambani (1932-2002)
Reliance Industries Limited, is a Fortune Global 500 company and is
the largest private sector company in India.
Enjoys global leadership in its businesses.
Shares are listed in both BSE and NSE.
Major Group Companies are Reliance Industries Limited and Reliance
Industrial Infrastructure Limited
http://www.ril.com/http://www.ril.com/http://www.ril.com/http://www.ril.com/http://www.ril.com/http://www.ril.com/ -
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Businesses
Businesses
Capital
Communicati
on
Power
Infrastructure
Health
Entertainm
ent
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GMI
Governance Metrics International (GMI) is an independent ratings
agency formed in April 2000 which has designed a rating system that
creates a metric to compare companies corporate governance
characteristics.
GMI starts the rating process by developing a governance profile
incorporating hundreds of variables per company plus analysts
insights.
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Rating criteria
Financial Disclosure and Internal Controls
Market for Control
Shareholder Rights
Board Accountability
Executive Compensation
Corporate Behavior
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Red Flags
GMI issues red flags whenever there is a significant governance issue
or other issue of concern that might potentially affect shareholder value.
While flags may be attached to one or more research categories,companies with three or more flags are rare.
Red flags are assigned when GMI publishes its scheduled quarterly
rating releases, and in between the scheduled releases, on an as needed
basis.
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Interpret GMI Rating
Scored on a scale of 1.0 (lowest) to 10.0 (highest).
Companies in the same region or country of origin (the company's 'home
market' rating) or to the approximately 4,200 companies rated by GMI
worldwide ('global rating'). Thus, a company may have high overall ratings inits home market but fare less well on a global basis
GMI Rating Status
9.0 or above well above average
8.5 7.5 Above average7.0 6.0 Average
5.5 3.5 Below average
3.0 or less well below average
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Internal Parameter
Financial disclosure and InternalControls
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Criteria 1
Currently under formal investigation for accounting
Irregularities
Justification
The financial statements have been prepared in conformity with
the applicable accounting standards issued by the Institute of
Chartered Accountants of India and requirements of the
Companies Act, 1956
Total: 10 Score : 10
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Criteria 2
Audit committee wholly composed of independent members
Justification
The Audit Committee of the Board comprises three independent directors
namely
Shri Yogendra P. Trivedi,
Shri Mahesh P. Modi
Dr. Raghunath A.Mashelkar
Total: 10 Score : 10
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Criteria 3
At least one non-executive member of the audit committee has
expertise in accounting or financial management
Justification
All the members of the Audit Committee possess financial/accounting
expertise/Exposure
Total: 10 Score : 10
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Criteria 4
Non-executive members of the audit committee with expertise
in accounting or financial management form a majority of the
Committee
JustificationAll three non executive members of the audit committee
expertise in financial management.
Total: 10 Score : 10
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Criteria 5
Chair of the audit committee is non-executive and has expertise
in accounting or financial management
Justification
Chairman, Shri Yogendra P. Trivedi who is a non executive member has
expertise in financial management .
Total: 10 Score : 10
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Criteria 6
At least one non-executive member of the audit committee has substantial industryknowledge
Justification
1. Mahesh Prasad
Chairman of Telecom Commission & Secretary, Telecommunications Department
Director General, Telecommunications
Secretary, the Ministry of Coal; Special Secretary (Insurance), Economic Affairs Department
Joint Secretary, the Ministry of Petroleum, Chemicals and Fertilizers.
Director on the Board of Directors of many public sector and private sector companies, including:
GAIL (Founder Director), IPCL, BPCL, CRL, BRPL, Life Insurance Corporation of India, General
Insurance Corporation, Mangalore Refinery & Petrochemicals, Essar Shipping, BSES, ICICI
Prudential Life Insurance Co. ; India Advisory Board of BHP Billiton
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2. Raghunath A Mashelkar
The Director General of the Council of Scientific and Industrial Research
(CSIR) for over 11 years.
3. Yogendra P. Trivedi
President of the Western India Automobile Association.
Member of the All India Association of Industries; W.I.A.A. CLUB, B.C.A. Club,
Orient Club, the Yachting Association of India and the Yacht Club. Chairman of the Audit Committee, Corporate Governance and Stakeholders
Interface Committee and the Employees Stock Compensation Committee of the
Company.
Member of Shareholders/Investors Grievance Committee and the Remuneration
Committee of the Company.
Chairman of the Audit Committee of Birla PowerSolutions Limited.
Member of the Audit Committee of Zodiac Clothing Company Limited, Sai Service
Station Limited and Seksaraia Biswan Sugar Factory Limited.
Total: 10 Score : 9
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Criteria 7
Non-executive members of the audit committee with substantialindustry knowledge form a majority of the committee
Justification
All the Non executive members of audit committee have
substantial industry knowledge
Total: 10 Score : 9
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Rating Summary
Criteria Rating
Criteria 1 10Criteria 2 10
Criteria 3 10
Criteria 4 10
Criteria 5 10
Criteria 6 09
Criteria 7 09
Total 68
Rating Total / 7 (criteria)= 68/7
= 9.71
The overall rating of Financial disclosure and Internal Controls is 9.71
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Internal Parameter
SHAREHOLDER RIGHTS
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Criteria 1
All the common or equity share holders have oneshare one vote
JustificationAs per companies act 1956 voting right on a poll
shall be in proportion to his share of the paid upequity capital of the company
Score- 10/10
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Criteria 2
Voting rights capped at a percentage no matterhow many shares the investor owns
Justification
The majority shareholders have the most votingrights as indicated by the governance report. Thisis not considered as a positive sign as it may act
as a deterrent to the minority share holders.
Score- 0/10
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Criteria 3
Voting rights are different for domestic and nonresident investors
JustificationAs specified in the companys governance
report. This provides an extra edge to thedomestic shareholders.
Score- 10/10
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Criteria 4
Voting is confidential
Justification
The Votes of the shareholders are strictlyconfidential- as per the governance report. Thispractice is encouraged in the company as itprotects the right of the shareholders to vote
without any undue pressure and influence
Score- 10/10
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Criteria 5
Cumulative voting in case of election ofdirectors
Justification
The election of directors can be done by passinga resolution in the AGM
Score- 5/10
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Criteria 6
Shareholders can act in concert way throughwritten communication
Justification
Use of the company website to postshareholders grievances. The company has
dedicated contact points for shareholders
Score- 10/10
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Criteria 7
Shareholders can convene an EGM with 10%or less of the shares
Justification
According to the provision of companies law1956 EGM can be held by shareholders with
10% or more of the sharesScore- 0/10
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Rating Summary
Criteria Rating
Criteria 1 10Criteria 2 00
Criteria 3 10
Criteria 4 10
Criteria 5 05
Criteria 6 10
Criteria 7 00
Total 45
Rating Total / 7 (criteria)= 45/7
= 6.428
The overall rating of Financial disclosure and Internal Controls is 6.428
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Internal Parameter
MARKET FOR CONTROL
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Criteria 1
The company has a single shareholding groupwith voting power in excess of 50%
Justification
The amount of shares held by the AMBANI familyis 44.44% of total shares which is still on the
higher side.
Score- 5/10
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Criteria 2
The company has a unilateral right to amend the by-laws/AOA/constitution without approval ofshareholders, which is positive for any company tohave strong market for control
Justification
Companys promoters, principal shareholders are ableto influence major policy decisions, including overallstrategic and investment decisions, decisions ondividend payments, approval of annual budgets,increase/ decrease in share capital, approvingmergers and acquisitions, disposals of assets andamending articles of association
Score- 06/10
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Criteria 3
Directors can be removed without cause
Justification
The reason for removal of directors is generallynot made public by the company
Score- 0/10
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Criteria 4
Has a CLASSIFIED board
Justification
The board does not believe in fixed tenure of thedirectors and thus having different tenures foreach director
Score- 10/10
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Criteria 5
Involved in a series of cross shareholding of other companies
Justification
The major shareholders are involved in cross shareholdings
in different companies which makes the shareholding patternscomplex
Score-05/10
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Criteria 6
Has adopted a Poison Pill Strategy
Justification
This strategy is generally followed in case ofhostile takeovers but in case of a bigconglomerate that is highly unlikely
Score- 05/10
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Criteria 7
Shareholders rights plan includes a TIDE planor 3 year sunset provision
Justification
The three year independent directorevaluation helps asses the currentshareholders rights plan. The company doesnot follow any such strategy which is in the
interest of the shareholders.
Score- 0/10
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Rating Summary
Criteria Rating
Criteria 1 05Criteria 2 06
Criteria 3 00
Criteria 4 10
Criteria 5 05
Criteria 6 05
Criteria 7 00
Total 31
Rating Total / 7 (criteria)= 31/7
= 4.43
The overall rating of Financial disclosure and Internal Controls is 4.43
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BOARD ACCOUNTABILITY
The Board of Directors is the apex body constituted by the shareholders foroverseeing the overall functioning of the Company.
The Board provides and evaluates the strategic direction of the Company,management policies and their effectiveness and ensures that the long-term
interests of the shareholders are being served.
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INDEPENDENT DIRECTORSDefinitionFor a director to be independent the director should not
have any direct or indirect material pecuniaryrelationship with the company.
Number..Non executive Chairman- 1/3rd of the Board
Executive Chairman- of the board
Role..Principles of Corporate Governance require
independent directors to review the overall strategy Oversee the performance of management and arriveat an independent judgement.Their key role is to provide unbiased and variedperspective to the board.
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BOARD COMPOSITION: RIL
Promoter Director Mukesh D. AmbaniChairman andManaging Director
Executive Directors Nikhil R. MeswaniHital R. MeswaniP.M.S. PrasadPawan Kumar Kapil1
Non-Executive Non- Ramniklal H. AmbaniIndependent Directors
Hardev Singh Kohli2Independent Directors Mansingh L. Bhakta
Yogendra P. TrivediDr. Dharam Vir KapurMahesh P. ModiProf. Ashok Misra
Prof. Dipak C. Jain
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Combined Chair/CEO/MD
Non-executive directors have a formal session without the executive membersat least once a year
Has a designated "lead" or senior non-executive director
Board policy is for the non-executive directors to meet in executive session before orafter every board meeting, time permitting
Non-executive Chair
PARAMETERS FOR RATING BOARD ACCOUNTABILITY UNDERGMI
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Within the last three years, company has failed to adopt the specificrecommendations (or a comparable alternative) of a shareholder proposalapproved by a majority vote
NET SCORE FOR THE BOARD ACCUOUNTABILITY= 7.65
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GMI RATINGS.
..\Board Accountability.docx Weightages and ratings on different parameters
under Board Accountability .
The methodology used for ratings is absolutelysubjective based on the data available on aaforesaid parameters.
http://board%20accountability.docx/http://board%20accountability.docx/http://board%20accountability.docx/http://board%20accountability.docx/http://board%20accountability.docx/ -
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REMUNERATIONThe Remuneration Committee is established to:
Ensure that remuneration arrangements support the strategic aims of the business
Comply with the requirements of regulatory and governance bodies
Satisfying the expectations of shareholders and remaining consistent with theexpectations of the wider employee population.
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COMPENSATION
Remuneration committee wholly composed of independent
members
Discloses stock ownership guidelines for CEO
Discloses ownership guidelines for the senior management
Shareholders has the say on pay of directors
Claw back of employee bonus/compensation etc. Based on a accounts whichare re-stated at a later date
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NET SCORE FOR THE COMPENSATION = 9.1
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Criteria Yes/N0 Score Criteria Yes/No Score
Remunerationcommittee wholly
composed ofindependent members
YES 10
Shareholders have the abilityto affect remuneration policy
through shareholderapproval of the remunerationcommittee report, the proxy'sCompensation Discussionand Analysis section orsomething comparable
NO 0
Discloses specificnumeric performancetargets for theupcoming fiscal year forat least one of theperformance objectives
YES 10
The remuneration committeehas discretion to alter thecriteria and/or incentivetargets for management afterbeing established or haspower to grant incentives orbonuses on a discretionarybasis.
YES 9
Discloses a policyrequiring companyexecutives to retainsome or all of theshares acquiredthrough stock optionsfor a period of time
after the options havebeen exercised
NO 0
Claw back policy for anybonuses, options and/orother compensation basedon accounts that end upbeing restated at a later date NO 0
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The retention period forsome or all shares issuedupon exercise of stockoptions is 3 years or longer
YES 3Discloses stockownership guidelinesfor the CEO
YES 10
Some or all shares issued
upon exercise of stockoptions are required to beheld until retirement
NO 0
Discloses stock
ownership guidelinesfor the rest of seniormanagement
YES 6
Discloses a policy requiringcompany executives toretain some or all ofrestricted shares for some
time after they havecompleted theirperformance conditions
NO 0
Discloses stockownership guidelinesfor non-executivedirectors
YES 7
The retention period forsome or all restrictedshares that have met allperformance conditions is 3
years or longer
YES 3
Percent potentialdilution as a result ofstock optionsoutstanding
YES 6
Some or all restrictedshares that have met allperformance conditions arerequired to be held untilretirement
NO 0
Percent potentialdilution as a result ofstock optionsoutstanding, plus stockoptions approved forgrant but not yet
granted
NO 0
RATING 9.1
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CORPORATE BEHAVIOUR
Corporate behaviour is the behaviour of anorganisation when considered as a single body
A hundred years ago, resources were unlimited
Today we consume 20 billion gallons of water fromthe ground daily
We lose 25 billion tons of topsoil every year
There is no polite way to say that business isdestroying the world
CORPORATE SOCIAL
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CORPORATE SOCIALRESPONSIBILITY
The contributions which the company can make tothe
community can be in the areas of
-health-education
-infrastructure development (drinking water,construction of schools, etc.)
-environment (effluent treatment, treeplantation, treatment of hazardous waste, etc.)
-contributions to other social organisations
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Accountingfrauds Common red flagsARAMETERS FOR RATING CORPORATE BEHAVIOUR
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CORPORATE BEHAVIOUR
Corporate Behavior
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Parameter Value Weight
Company (or a current or former senior executive) has pending criminal litigation against it, has been
found guilty within the last 3 years, or has pled the equivalent of no contest in such litigation in the past
three years, or has been under criminal investigation within the last 3 years
No (1) 0.85
Company (or a current or former senior executive) has been cited, settled, or been found guilty of by
either national or supranational authorities for some breach of law involving non-accounting issues
within the last year
No (1) 0.6
Discloses its environmental policies Yes (1) 0.75
The company has in place a code of conduct (or equivalent) on environmental issues Yes (1) 0.8
Alleged by a responsible party that the company caused or substantially contributed to serious
environmental damage within the last three years
ND 0.4
Discloses its environmental performance Yes (1) 0.85
The company specifically discloses its Greenhouse Gas (GHG) emissions Yes (1) 0.75
Specific targets for reducing environmental exposures are disclose Yes (1) 0.7
Company (or a current or former senior executive) has been subject to a formal regulatory investigation
for a material issue other than for accounting irregularities within the last year
No (1) 0.5
Discloses its policy regarding corporate level political donations No (0) 0.7
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Has a policy addressing workplace safety Yes (1) 0.75
Discloses its workplace safety record in the annual report or in another form accessible to shareholders Yes (1) 0.7
Has been charged with three or more serious workplace safety violations within the last two years No (1) 0.75
Alleged by a responsible party that the company used child labor (under 14 or the minimum in market,
whichever is higher) within the last three years
ND 0.3
Alleged by a responsible party that the company used sweat shops as sub-contractors within the last three
years
ND 0.3
Alleged by a responsible party that the company used child labor as a source for sub-contracted work withinthe last three years
ND 0.3
SCORE: The score has been calculated by multiplying Values with Weights.(1*0.85 + 1*0.6 + 1*0.75 + 1*0.8 + 1*0.85 + 1*0.75 + 1*0.7 + 1*0.5 + 0*0.7 + 1*0.75 + 1*0.7 + 1*0.75 ) = 8.0
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Rating RIL :
Financial Disclosure and Internal Controls9.71/10
Market for Control-4.43/10
Shareholder Rights-6.42/10
Board Accountability-7.65/10
Executive Compensation-9.1/10
Corporate Behavior-8/10
Thus, on the scale of 10 we would give reliance
7.55.
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Thank You