Corporate Governance

An Insight In Committee ReportOn Corporate Governance

By Naresh Chandra, Retired IAS

(Padma Vibhushan)

Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.

Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.

Evolution: Corporate GovernanceHistory records Pataliputra, the capital of the Mauryan Empire, as a city ‘ astonisningly

well organized and administered according to the best principles of governance’Writing about the ideal conduct of the king, Kautilya, an official says an ideal king is one

for whom-

“In the happiness & well being of the subjects, is the well being of the king, In the welfare of the subjects, lies the welfare of the king,What is desirable and beneficial to the subjects and not his personal desires and ambitions is desirable and beneficial to the king” (English Translation from the Sanskrit version of Arthasastra)

Kautilya elaborates on the fourfold duty of a king as-• Raksha or protection• Vruddi or enhancement• Palana or maintenance the substitution of the sate with the company, the king with the CEO or the Board of the

company and the subjects with the shareholders, brings out the sprit of the corporate governance.

So, the fourfold duties of the King/ CEO/ Board of a company can be interpreted to imply-

• Shareholders wealthRaksha or protection

• Wealth through proper utilization of assets

Vruddi or enhancement

• Of that wealthPalana or maintenance

• Interest of shareholdersYogakshema or safeguard

Naresh Chandra

Naresh Chandra (b. 1934) is an Indian Civil Servant who has served as the Cabinet Secretary  (1990-92) and the Indian Ambassador to the US (1996-2001). He was awarded the Padma Vibhushan for his service, in 2007.

INTRODUCTION CR reforms came into prominence for the first time after the south east and east asian crisis of 1997-98

India has not faced the CG crisis like other major Asian economics

Listed companies in india follow strict CG rules.

Enron debacle of 2001 triggered another phase of reforms in the US.

Naresh Mehta committee was setup by ministry of finance in 2002.

Major objectives of this committee are:

• The statutory auditor- company relationship, so as to further strengthen the professional nature of this interface

• The need, if any, for rotation of statutory audit firms or partners• The procedure for appointment of auditors and determinations of audit fees.• Restrictions, if necessary, on non audit fees• Independence of auditing functions.

Recommendations in chapter 2 : The auditor -company Relationship

• 2.1: Disqualifications for audit assignments– In line with international best practices, the

committee recommends an abbreviated list of disqualification for auditing assignments.

• 2.2: List of prohibited non-audit services– The committee recommends services which should

not be provided by an audit firm to any audit clients.• 2.3: Independence standards for consulting and

other entities that are affiliated to audit firms.• 2.4: Compulsory Audit partner rotation

Recommendations in chapter 2 : the auditor -company Relationship

2.5: Auditor’s disclosure of contingent liabilities.

2.6: Auditor’s disclosure of qualifications and consequent action

2.7: Management’s certification in the event of auditor’s replacements

2.8: Auditor’s annual certification of independence

2.9: Appointment of auditors

2.10: CEO and CFO certification of annual audited accounts.

Recommendations in chapter 3 : Auditing the auditors

3.1: Setting up of indepencent

Quality review Board

• Procedure for dealing with complaint cases• Disciplinary committee Council• Appellate body• Publication of decision of the Disciplinary committee• Funding

3.2: Proposed disciplinary

mechanism for auditors

Recommendations in chapter 4 : Independent Directors

4.1: Defining an Independent director

No material relationship with

company, its promoters or management

4.2: Percentage of Independent Directors

No less than 50% of directors should be

independent

4.3: Minimum Board size of listed companies

Minimum size of 7 with atleast 4

independent directors

4.4: Disclosure on duration of Board

meeting/committee meeting

Recommendations in chapter 4 : Independent Directors

4.5: Teleconferencing and video conferencing• Directors can attend

proceedings through vidoe conferencing if physical attendance is not possible

4.6: Additional disclosure to directors• All company press

releases should be presented to the board members

4.7: Independent directors on audit committees of listed companies

4.8: Audit committee charter

Recommendations in chapter 4 : Independent Directors

•Review

of statutory limit on sitti

ng fees•

No revision required on current provisions on stock option and 1%

com

mission on net profits

4.9: Remuneration of non-executive

directors

4.10: Exempting non-executive directors

from certain liabilities

•DCA should encourage prom

inent institution to conduct regular training program

s for independent directors•

independent directors should attend at least one such course before

assuming responsibilities

•A trainee appraisal system

should be used to judge quality of programs.

4.11: Training of independent directors

Recommendations in chapter 5 : Other Recommendations

• 5.1: SEBI and Subordinate Legislation• 5.2: Improving facilities in DCA offices• 5.3: Corporate Serious Fraud offices– Rationalization of penalties– Disqualification for serious offences– Strengthening of DCA’s prosecution wing– Managers/Promoters to be held personally liable

when found guilty of offences– Consolidated Financial Statements to be made

mandatory for companies having subsidiaries

Recommendations in chapter 5 : Other Recommendations

5.5: •Create a system of “Pre-certification” by company secretaries •Amend Companies Act to allow DCA TO conduct ‘compliance audits

5.6:•MAOCARO should be amended so that Auditor’s report contain violations•Introduce a system ‘random scrutiny’ of audited accounts as is done by the Accounting Foundation in the UK•Allow companies to establish an internal Code of Ethics DCA should sponsor research on corporate governance