board composition effectiveness and best...

Fairness & Corporate Sustainability

Is the company actively involved with

Corporate Social Responsibility

(CSR) activities?

Regulatory ComplianceAre companies structuring their boards and as per regulatory norms? Are the new compliance requirements seen as an irritant?

Discipline & Transparency

Is the company transparent in its

operations and declares its

financials asper regulations?

Accountability & Responsibilities

What are the key

responsibilities of corporate

boards in India?

Board Effectiveness

How do corporate

boards rate themselves on effectiveness? How can board effectiveness be increased?

IndependenceIs the Indian corporate board independent in its functioning?

Board CompositionEffectiveness and

Best Practices

The India Board Report 2009

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Corporate Address:412 B, Trade World, Kamala Mill, Mumbai - 400013, IndiaTel: +91 22 4340 1100Fax: +91 22 4340 1199

Corporate Address:23rd Floor, Express Towers,Nariman Point,Mumbai - 400 021,IndiaTel: +91 22 6639 6880Fax: +91 22 6639 6888

Corporate Address:Apeejay House, 4th Floor, 3 Dinshaw Wachha Road, Churchgate, Mumbai - 400 020IndiaTel: 91 22 6749 2222Fax: 91 22 6749 2299

Co-sponsor

Corporate Address:The Mantosh Sondhi Centre23 Institutional Area, Lodi Road,New Delhi - 110 003,IndiaTel: +91 11 24629994-7Fax: +91 11 24626149

Confederation of Indian Industry

With support form


Co-sponsor With support from


Foreword I 3

“It is only in the aftermath of a

crisis that we wonder, what

went wrong”

Prior to the governance scandals at Parmalat,Royal Ahold and Shell, few believed that suchfailures would ever occur in Europe. In India,nobody expected anything to go wrong atSatyam, one of India’s best known IT companies, which ironically received theGolden Peacock Award for Corporate Governance in 2008.

Questions have been raised about theperformance/effectiveness of directors on acompany’s board and the impact of regulations.The Satyam debacle is bound to lead to an era oftighter regulations, possibly as stringent as theSarbanes Oxley Act. One must, however, acceptthat no matter how strong a regulatory system is,it cannot always prevent frauds. The key lies inmanagement decisions and its commitment toestablish and follow rigorous governancesystems. The implementation must be in theletter and spirit, and one should recognise the responsibility of the company towards its stakeholders.

The AZB Hunt Partners India Board Report -2009, now in its second edition, continues itsfocus on the ‘State of Corporate Boards’ in India.The report aims to identify areas of improvement

which would enable the management to increase the board’s effectiveness and buildstakeholder confidence.

The findings highlight a great need for anincrease in board evaluation. Only a third ofcompany boards evaluate their own performance,and of these a majority do a self-assessment.Additionally, when 82.5% of directors indicatethat their roles and responsibilities are notclearly defined, it becomes difficult to assess theeffectiveness of the board as a whole. The reportalso indicates that important issues likeleadership development, succession planning,setting CEO objectives and reviewingperformance are not accorded due importance, asis the case in most Fortune 500 companies.

The current economic crisis increases the urgencyfor confidence building measures. We hope thatin light of the Satyam scandal, organisations willstrive for a deeper level of engagement betweenthe board and the management. The adoption ofsome core views expressed by IndependentDirectors in this report will be a step in the right direction.

Sunit Mehra l Zia Mody

FOREWORD

SCOPE AND METHODOLOGY . . . . . . . . . . . . . . . . . . . .6

CORPORATE GOVERNANCE: AN OVERVIEW . . . . . . . . .8

Global Governance Practices . . . . . . . . . . . . . . . . . . . .9

The Indian Scenario . . . . . . . . . . . . . . . . . . . . . . . . . .10

Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . .10

Government Initiatives . . . . . . . . . . . . . . . . . . . . . . . . .11

Changes in Company Law . . . . . . . . . . . . . . . . . . . . . . .11

Clause 49 of the Listing Agreement . . . . . . . . . . . . . . .12

Best Practice Implementations . . . . . . . . . . . . . . . . . .13

Nexen, Inc. (Canada) . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Infosys Technologies Ltd. (India) . . . . . . . . . . . . . . . . . .14

Royal Phillips Electronics (Netherlands) . . . . . . . . . . . .15

Mahindra & Mahindra Ltd. (India) . . . . . . . . . . . . . . . .15

FINDINGS FROM THE SURVEY . . . . . . . . . . . . . . . . . .16

Agenda No 1: Regulatory Compliance . . . . . . . . . . . . .16

Structure of the Indian Board . . . . . . . . . . . . . . . . . . .17

Changes Needed in the Board . . . . . . . . . . . . . . . . . . .18

The Average Number of Women

Directors Remains Constant . . . . . . . . . . . . . . . . . . . . .18

The Need for Foreign Directors . . . . . . . . . . . . . . . . . . .18

Challenges in Changing Board Structure . . . . . . . . . . .19

Age and Tenure of CEO/MD, Chairperson

and Non-Executive Directors . . . . . . . . . . . . . . . . . . . .20

Rise in the Number of Committees

Across Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Composition of Board Committees . . . . . . . . . . . . . . . .22

Opinion on Clause 49 & Related Regulations . . . . . . .22

Increasing Number of Companies

Providing D&O Insurance . . . . . . . . . . . . . . . . . . . . . . .23

Agenda No 2: Discipline & Transparency . . . . . . . . . . .24

Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Virtual Visibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Accessibility of Senior Management . . . . . . . . . . . . . .27

Agenda No 3: Board Effectiveness . . . . . . . . . . . . . . .28

Monitoring Performance: A Board Priority . . . . . . . . . .29

Regulatory Laws Are Effective . . . . . . . . . . . . . . . . . . .29

Impediments to Monitoring Business Performance . . .30

Tools for Monitoring Performance . . . . . . . . . . . . . . . .31

CONTENTS

Need for Third Party Ratings . . . . . . . . . . . . . . . . . . . .32

The Need for A Probing and Introspective

Board Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Frequency of Board Evaluations . . . . . . . . . . . . . . . . . .33

Agenda No 4: Accountability & Responsibility . . . . . . .34

No Clarity on Performance Requirements . . . . . . . . . .35

Increase in Demand for CEO/MD’s as Directors . . . . . .35

A Systematic Approach to Problem Solving . . . . . . . . .36

Board/Strategy Meetings . . . . . . . . . . . . . . . . . . . . . . .37

Agenda No 5: Independence . . . . . . . . . . . . . . . . . . .38

Number of Independent Directors Increases . . . . . . . .39

Lead Independent Directors . . . . . . . . . . . . . . . . . . . . .40

Director Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Independence of Board Committees . . . . . . . . . . . . . . .40

Increase in Companies Separating

the Role of CEO & Chairperson . . . . . . . . . . . . . . . . . .41

Agenda No 6: Fairness & Corporate Sustainability . . . .42

India Inc's Approach to CSR . . . . . . . . . . . . . . . . . . . . .43

Board Involvement: A Long Way to Go... . . . . . . . . . . .43

ISO’s CSR Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

ANNEXURE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Board Remuneration on the Rise . . . . . . . . . . . . .45

Increase in Sitting Fees . . . . . . . . . . . . . . . . . . . .46

Differential Fees For Committee Membership . . . .47

ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . .48

Knowledge Partner Co-sponsor

SCOPE AND METHODOLOGY

The report focuses on gauging the

effectiveness of corporate boards,

impact of regulations, and also

identifies the best practices followed

The India Board Report - 2009 (IBR 2009) is afirst of its kind, definitive survey on BoardComposition, Effectiveness and Best Practices.Through the medium of in-depth surveys andquestionnaires, the report aims to highlight thefunctioning of corporate boards in India.

The study consists of a two-part survey across:

Leading Indian companies (Survey I) Eminent Independent Directors (Survey II)

Survey I was aimed at studying statistical dataaround boards in India, and targeted over 400 companies. Selection of companies wasbased on the following criteria:

The top 350 companies by marketcapitalisation listed on the Bombay Stock Exchange25 emerging companies having high growth(measured by market capitalisation)25 companies that have attracted largeprivate equity investments

For every company, the survey included thefollowing topics:

Board demographics (age, size, diversity) Committees, board meetings and related workload Board evaluation and the procedure forselection of chairperson New committees including Corporate SocialResponsibility (CSR)Selection of Non-Executive DirectorsDirectors’ RemunerationD&O insurance

Survey II was aimed at obtaining the views ofover 100 eminent Independent Directorsregarding the functioning of Indian boards,including compliance, independence, and over allmanagement. They were also requested to ratetheir respective boards on effectiveness andidentify the boards’ priorities. The topics coveredin the survey include:

Compliance and satisfaction levels ofdirectors with the currentstructure/composition of their boards Time invested, and processes used for monitoring and evaluating boards' performanceCorporate issues reviewed by the board Accountability and accessibilityKey responsibilities and priorities for corporate boards in IndiaThe extent of directors’ involvement and effectiveness in meeting compliance requirements Effectiveness of corporate boards

IBR - 2009 is based on the responses to theabove two surveys. More than 80% of thedirectors participating in the survey have beenIndependent Directors for over 6 years and sit onan average of 9 company boards. Additionally, thereport highlights recent changes in the regulatoryenvironment in India and also discusses issuespertaining to corporate governance across the globe.

Scope and Methodology I 7Co-sponsor With support from

CORPORATE GOVERNANCE: AN OVERVIEW

While there seems to be a

convergence in the governance

principles being adopted, laws of

individual countries reflect variations

in the local cultural framework

GLOBAL GOVERNANCE PRACTICESIn the aftermath of the Enron and WorldComdebacle, there has been a concerted effort tostrengthen laws on corporate governance acrossthe globe. Several countries reviewed theirgovernance/regulatory systems, including theUSA, which implemented the Sarbanes Oxley Act,thereby imposing stricter regulations oncompanies listed in the country.

Other countries where policy makers havereviewed corporate governance codes include UK,South Africa, Italy and Japan. These countrieshave developed systems that monitor directorselection, compensation practices, accountingand audit policies. While there seems to be aconvergence in the governance principles beingadopted, laws of individual countries reflectvariations in the local framework.

The Financial Reporting Council (FRC) in the UKintroduced the Combined Code on CorporateGovernance for companies listed in the country. A key feature of this code is the ‘comply orexplain rule’ - companies must comply with thecode's detailed clauses or explain their reasonsfor non-compliance. The rule thus takes intoconsideration the individual circumstances that acompany may face. Derivatives of this rule arebeing used in many countries, especially inEurope. The ruling forms the basis of the European code-based approach to corporate governance.

Europe’s focus on corporate governance increasedwith the highly publicised failures at Parmalat(Italy) and Royal Ahold (Netherlands). In the caseof Parmalat, investigations revealedmismanagement of company funds by thepromoter family as one of the major reasons forthe collapse of the company. The ConferenceBoard1 cited that “Fraudulent transactions atParmalat were possible because of affiliations

between directors and owners, independent boardmembers’ lack of expertise in finance and riskmanagement, and corrupted entanglements withstatutory auditors and the investment banksengaged by the company to place risky debtsecurities among retail investors”. At the time ofthe scandal, Parmalat already had the lowestcorporate governance rating among 69 Italiancompanies rated by Institutional ShareholderServices (ISS).

In order to improve market perception and induceinvestor confidence, the European Unionapproved and adopted two directives. The Statutory Audit Directive, effective from June 2006, was designed to strengthenaccounting practices. It also enumerated ethicalprinciples to help ensure objectivity andindependence. The Company Reporting Directiveintroduced rules that required companies, whosesecurities are traded on a regulated market, toproduce a corporate governance statement intheir annual reports.

Global institutional investors from countries suchas the USA prefer investing in companies that arewell-governed, have transparent operations, andfollow good accounting standards. Fundmanagers that manage billions of dollars inassets also prefer to invest in companies withexcellent corporate governance practices. The US pension fund, California Public EmployeesRetirement System (CalPERS), and investmentmanager TIA CREF are among leading globalinstitutions that have emphasised transparencyand good accounting practices.

Corporate Governance in India I 9Co-sponsor With support from

1 The Conference Board, Inc. is a non-profit global businessorganisation that holds conferences, convenes executive meets andconducts business management research.

10 I Corporate Governance in India

THE INDIAN SCENARIOCorporate governance practices in India havebeen influenced by changes in the CompaniesAct, 1956, and demand for internationalcompliance norms, especially sought by globalinvestors. India has come a long way since the first corporate governance framework based on the Kumarmangalam Birla Committee’s recommendations.

As foreign investments increase in India,international investors demand theimplementation of improved corporategovernance norms, backed by sound accountingpractices. Clause 49 of the Listing Agreement,adopted in the year 2005, has heralded a numberof key changes in governance and disclosurepractices. The agreement primarily aims toprotect the rights of shareholders bystrengthening the role of Independent Directorson the company’s board.

INDEPENDENT DIRECTORSBoth, Clause 49 and the Companies Bill, 20082,specify the appointment of a minimum of 33%Independent Directors on a listed publiccompany’s board, subject to conditions. The Companies Bill, 2008 is expected to make the same clause mandatory for unlisted publiccompanies as well. The true independence ofdirectors, however, has often been questioneddue to India’s family/promoter based ownershipstructure. There is a perception that companieshire Independent Directors who rarely opposedecisions made by management/promoter.

In 2007, SEBI made a few mandatory changes toClause 49 with an aim to strengthen corporategovernance in India. The provisions called fordeclaration of any relation between Independent

Both, Clause 49 and the

Companies Bill, 2008, specify

the appointment of a minimum

of 33% Independent Directors

on a company's board

2 The Companies Bill, 2008 was meant to replace the Companies Act, 1956

Directors and the company. Companies are alsoexpected to ascertain that Independent Directorshave the requisite qualifications and experienceto effectively contribute to the company (this isnot mandatory).

GOVERNMENT INITIATIVESCorporate transparency and good accountingpractices act as a strong driver for foreigninvestments. In keeping with this philosophy, the Indian government has been proactive increating the right kind of norms and policies toattract greater foreign investment. Foreign DirectInvestment (FDI) in India increased by 45% fromUS$ 22 billion in FY2006-07 to US$ 32 billion in FY2007-08. FIIs invested approximately US$ 17.2 billion in the equity markets over thesame period. An increase in the inflow of foreigninvestments has spurred the cause of goodgovernance in the country, by motivatingnumerous companies to increase theirgovernance standards. India is consistently rankedamong the most preferred investmentdestinations for transnational corporations.

COPORATE GOVERNANCE TRAININGWith the increasing adoption of corporategovernance norms and processes, there is agreater demand for knowledgeable professionalsand research institutes in this field. The NationalFoundation for Corporate Governance (NFCG) wasset up by the Government with the goal ofpromoting better corporate governance practicein India. The Ministry of Company Affairs, CII, theInstitute of Chartered Accountants of India (ICAI),and the Institute of Company Secretaries of India(ICSI) are the trustees of the NFCG. In 2007, theGovernment began setting up the Indian Instituteof Corporate Affairs, a governance think-tank andtraining institute, to build knowledge andincrease the number of professionals.

THE MCA–21 E–GOVERNANCE INITIATIVEThe MCA–21 is India’s largest e-governanceinitiative and has been promoted by the Ministryof Corporate Affairs. The project aims to expeditethe entry and exit of companies in India andprovide for easier compliance monitoring underthe Companies Act, 1956. The MCA-21 solution isa web portal which can be used to resolvemultiple contract issues. The government intendsto use the e-governance solution to detect andprevent corporate fraud by electronicallymonitoring company financials.

As of 2008, the Ministry of Corporate Affairs wasin the process of revamping the portal. The portalwhich gets about 1.7 million hits a day is beingupgraded to provide analytical outputs throughthe use of XBRL (extensible business readinglanguage), an IT-based system that is becomingpopular globally. This initiative is expected to helpimprove a company's image before itsshareholders, creditors, business partners,customers and other stakeholders.

CHANGES IN COMPANY LAWIn 2004, the Indian Government embarked on acomprehensive review of the Companies Act,1956. The aim was to strengthen compliancenorms and provide a governance structure forunlisted firms. The Companies Bill, 2008 has beenbased on best international practices and fostersentrepreneurship. In August 2008, the UnionCabinet provided its assent for the introductionof the bill in the Lok Sabha, the lower house ofthe Indian Parliament. The bill has lapsed withthe dissolution of the house and it would have tobe re-introduced in the new regime with theapproval of the cabinet. Some of the features ofthe bill provide for the following:

Easy transition of companies operating underthe Companies Act, 1956 to the newframework, as also from one type of company



to anotherThe formation of a new entity in the form of One-Person Company (OPC) whileempowering the government to provide asimpler compliance regime for small companiesThe promotion of the Ministry of CorporateAffairs e-Governance (MCA-21) initiative,which enables the meeting of complianceobjectives through the electronic modeSpeedy incorporation process, with detaileddeclarations/disclosures about the promoters,directors, etc. at the time of incorporationitself - every company director would berequired to acquire a unique DirectorsIdentification Number (DIN)A more effective regime for inspections andinvestigations of companies while layingdown the maximum as well as minimumquantum of penalty for each offence, withsuitable deterrence for repeat offencesRestriction on corporations from issuingshares at a discount to prevent promotersfrom accumulating stake for a lesser priceSpecial Courts to deal with offences underthe bill. Company matters such as mergers &accquisitions, reduction of capital, insolvencyincluding rehabilitation, liquidations andwinding up are proposed to be addressed bythe National Company Law Tribunal/NationalCompany Law Appellate TribunalDuties and liabilities of the directors and forevery company to have at least one directorresident in India. The bill also provides forIndependent Directors to be appointed on the Boards of such companies as may beprescribed, along with attributes determining independence. The requirement is to ensure that Independent Directors form a minimum of 33% of the Board.

The law also enables ShareholdersAssociations/Group of Shareholders to take legal

action in case of any fraudulent activity on thepart of the company, and take part in investorprotection activities and ‘Class Action Suits’. TheCompanies Bill, 2008 is essentially a replacementof the Companies Act, 1956.

CLAUSE 49 OF THE LISTING AGREEMENTIn order to strengthen corporate governance inIndia, SEBI made certain amendments to Clause 49 of the Listing Agreement, in 2008.

MANDATORY PROVISIONS If the Non-Executive Chairman is a promoteror is related to promoters or personsoccupying management positions at the boardlevel or at one level below the board, at leastone-half of the board of the company shouldconsist of Independent DirectorsDisclosure of relationships between directorsinter se shall be made in the Annual Report,as also any notice of appointment of adirector, prospectus and letter of offer forissuances, and any related filings made to thestock exchanges where the company is listedThe gap between resignation/removal of anIndependent Director and appointment ofanother Independent Director in his placeshall not exceed 180 days. This provision,however, would not apply in case a companyfulfills the minimum requirement ofIndependent Directors in its board, i.e., one-third or one-half as the case may be,even without filling the vacancy created bysuch resignation/removalThe minimum age for Independent Directorsshall be 21 years

NON-MANDATORY PROVISIONSThe company shall ensure that the person who isbeing appointed as an Independent Director hasthe requisite qualifications and experience. Thesequalifications would be of use to the company,which in its opinion would enable the director to

contribute effectively to the company in hiscapacity as an Independent Director.

These provisions have increased the demand forqualified/experienced individuals who are capableof taking up this role. The number of suchindividuals, who are deemed qualified, is low inIndia. The position of Independent Directors alsoneeds to be strengthened in order to increase aboard’s efficiency. Mr. M. Damodaran, the formerChief of SEBI, stated that, ”It may be a good idea,to have a body of Independent Directors meetseparately outside the board meeting.”

BEST PRACTICE IMPLEMENTATIONSCorporate governance is best implemented whenthere is complete support from a company’smanagement and its promoters/majorityshareholders. It requires driving governanceinitiatives in a company’s day-to-day operationsthrough a disciplined approach in buildingtransparency. A few practices have emerged thatappear to be effective in meeting governanceobjectives. The following cases illustrate award-winning corporate governance practices:

NEXEN, INC. (CANADA)Nexen, Inc., formerly known as CanadianOccidental Petroleum (CanadianOxy), is an oil andgas and chemicals company based out of Canada.The company is also involved in power marketingin North America, Europe and Southeast Asia.Nexen reported revenues of US$ 6.64 billion inthe year 2007.Nexen is listed on both the Canadian (Toronto)and the US stock exchanges (NYSE) and has oftenbeen recognised as a leader in theimplementation of corporate governance andcompliance systems. The company is governed bythe US Sarbanes-Oxley Act, and the NYSE andCanadian stock exchange regulations.


Corporate governance is

best implemented when there is

complete support from a

company’s management and its

promoters/majority shareholders


NEXEN’S APPROACHNexen follows a well-defined corporate structurefocused on ethics, transparency and opencommunication across the organisation. Thecompany has a highly informative website thatincorporates all the aspects of corporategovernance and compliance systems. Nexen hasprovided detailed information about its board interms of the directors’ selection, independence,presence of committees, and board evaluationson its website.

Nexen’s Governance Committee assists the boardin overseeing the implementation of corporategovernance programmes, recommendingnominees for director appointments andevaluating the board, its committees and allindividual directors and chairs. The company hasmade available all documents and informationthat is required by law. It effectively uses itswebsite to communicate the progress of thecompany (business strategy, finances, newventures, etc.) to the stakeholders. As a result, thewebsite improvises stakeholder communication byenhancing information accessibility.

Nexen has received two awards - Excellence forElectronic Disclosure and honourable mention forExcellence in Corporate Governance Disclosure -at the 2007 Corporate Reporting Awards,presented by Canada's Chartered Accountants.The company was ranked first in the CanadianBusiness Magazine's 2007 Corporate Governancerankings with SNC-Lavalin Group Inc. (a leadingCanadian engineering and construction company).

INFOSYS TECHNOLOGIES LTD. (INDIA)Infosys Technologies Ltd. is one of the largest Indian IT services companies with revenue of US$ 4.17 billion in the year 2008. Mr. N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys, led key corporategovernance initiatives in India and his move to

adhere to the best global practices was driven bya vision to mould Infosys into a global player. Thecompany is listed on the NASDAQ (US), BombayStock Exchange (BSE - India) and the NationalStock Exchange (NSE - India).

The company's corporate governance practicesconform to the recommendations of theConfederation of Indian Industries (CII)committee and the Cadbury committee oncorporate governance, with a few exceptions.Infosys adheres to GAAP accounting standards ofseven major countries, providing financialtransparency in its operations. According to theNASDAQ, multinational companies in the USAtake up Infosys’ disclosure and corporategovernance practices as a role model.

THE INFOSYS APPROACHInfosys includes a report on its compliance withgovernance standards in six countries within itsannual report. The report is issued in each ofthese countries’ languages for the benefit oflocal shareholders. The company providesdetails on all relevant information regarding thefirm. Compliance initiatives of the companyreflect a transparent shareholding pattern,sound board practices, interactive decision-making processes, a high level of transparencyand disclosures encompassing all importantaspects of its operations.

Infosys has also undergone corporate governanceaudits by ICRA and CRISIL. The company’scorporate governance practices have been ratedas CGR 1 by ICRA, and CRISIL has bestowed thehighest GVC (Governance and Value Creation)rating of ’CRISIL GVC Level 1’. In 2008, the Assetmagazine declared Infosys as the best companyin India in corporate governance. Infosys was alsorecognised for best practices and onlinecommunication in Investor Relations (IR) GlobalRankings 2008 for the APAC region.

ROYAL PHILLIPS ELECTRONICS (NETHERLANDS)Royal Phillips Electronics is a provider ofelectronic systems and technology and is a leaderin healthcare, lifestyle and lighting products. Thecompany is headquartered in the Netherlands andis organised under Dutch law. Royal Phillipsreported revenues of US$ 37.19 billion in 2008. Itis listed on the New York (NYSE) and EuronextAmsterdam (PHI) stock exchanges. The companyhas actively pursued the implementation ofgovernance norms in conformity with the Dutch,the USA and international codes of best practices.Royal Phillips focuses on having an executivemanagement team that is accountable, anindependent board, and a fair disclosure practicein relation to its investors.

THE ROYAL PHILLIPS APPROACHThe company has a well-structured corporategovernance framework which also includes riskmanagement. Royal Phillips has a SupervisoryBoard, Audit Committees and internal auditorsthat monitor the quality of business, throughrisk-based operational audits, inspections offinancial reporting controls and complianceaudits. Royal Phillips has the ’One Phillips EthicsLine’ in place to deal with alleged violations, as apart of its whistleblower policy. The company hasin place many procedures/initiatives to maintaintransparency across its operations, which includesthe monitoring of any gifts given to third parties.

Royal Phillips has implemented Control Objectivesfor Information and Related Technology (COBIT)to manage its IT governance process, and toimprove its IT-related control framework. TheCOBIT framework also contributes at the businessmanagement level. The Reputation Institute hasrated Royal Phillips as the company with the bestreputation in the Netherlands in 2008.

MAHINDRA & MAHINDRA LTD. (INDIA)Mahindra & Mahindra (M&M) is one of India’sbest known industrial groups, with a presence infinancial services, trade, retail and logistics,automotive components, information technologyand infrastructure development. The US$ 6.7 billion group is listed on both, theNational Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

THE MAHINDRA & MAHINDRA APPROACHM&M is of the view that in order to achieve true transparency, it is necessary to imbibe the requisite governance principles in the beliefsystem of the organisation. For this purpose,M&M has developed an internal Code ofCorporate Governance, which affirms the totalcommitment of the management towardstransparency. The company has also prescribed aCode of Conduct for both the board of Directorsand senior management. M&M’s annual reportcontains detailed information concerning theoperations of the company and it’s board.

M&M is now known as an Indian conglomeratethat is well-regarded for transparency in itsoperations. The USA-based Reputation Institutehas ranked it among the top 10 Indian companiesin its ’Global 200: The World’s Best CorporateReputations list’. The company is also one of thefew Indian firms to receive an A+ GRI checkedrating for its Sustainability Report for the year2007-08. M&M received the ICSI National Awardfor Excellence in Corporate Governance for theyear 2008.


FINDINGS FROM THE SURVEY

AGENDA NO. 1REGULATORY COMPLIANCE

Among the changes needed in the

current board structure, directors

would like to see more diversity in

the board room

Investor confidence is built when companiescomply with requirements specified by thegovernment/regulators. These include boardcomposition & structure, accounting & reportingstandards, the presence of board committees andthe like. Compliance with these norms helpsorganisations to build confidence in itsoperations and profitability.

STRUCTURE OF THE INDIAN BOARDDirectors in India are broadly satisfied with thestructure of their boards–average rating of 3.32on a scale of 4. In 2007-08, the average numberof directors on a company’s board increased from9.74 (2006-07) to 9.87. In contrast this numberwas 10.83 in 2006-07 and 11.46 in 2007-08 forthe respondents that belong to the top 100companies of India. The board size of companiesin India generally ranges from 6 to 15 members.

FIGURE 1: AVERAGE SIZE OF BOARDS IN INDIAFIGURES REPRESENT BOARD SIZE

Agenda No. 1 I 17Co-sponsor With support from

0

2

4

6

8

10

12

14

2007-082006-07

All respondentsRespondents fromthe top 100

In 2007-08, the average number

of directors on a company’s

board increased from 9.74

in 2006-07 to 9.87

18 I Agenda No. 1

CHANGES NEEDED IN THE BOARD STRUCTUREAmong the changes needed in the current boardstructure, directors would like to see morediversity in the board room and an increase in thenumber of Independent Directors. Moreover,directors would like to see more qualifiedprofessionals who have experience in setting upand managing businesses, as directors.

FIGURE 2: DESIRED CHANGES IN BOARD STRUCTUREFIGURES REPRESENT RATINGS (4=MOST REQUIRED)

THE AVERAGE NUMBER OF WOMENDIRECTORS REMAINS CONSTANTThe need for diversity in the board room hasbrought about a demand for more womendirectors on a company’s board. The surveyindicates that approximately 40% of thecompanies had at least one woman director ontheir board in 2007-08.

While the number of Independent Directors onthe board has seen an upward trend in India, thesame cannot be said about women directors. The average number of women directors on acompany’s board has remained constant at 1.17

over the last two years. Research by HarvardBusiness Review indicates that women directorsare likely to make three main contributions to acompany’s board:

They broaden a board’s discussion to betterrepresent a wide set of stakeholders;including employees, customers, and thecommunity at largeThey are more persistent in pursuing solutionsto problemsThey tend to bring a more collaborativeapproach to leadership

Globally, there has been a visible trend ofincreasing the number of women on corporateboards. The proportion of women serving onFortune 500 boards was 15% in 2007, while inIndia they accounted only for 4.6% of boards in 2007-08.

THE NEED FOR FOREIGN DIRECTORSGlobalisation has led to companies expanding invarious sectors/countries across the world. It hasbecome a part of standard practice to haveforeign directors with significant experience inthe markets where those companies have apresence or intend to expand in. The surveyindicates that 52% of the companies had at leastone foreign director on their board in 2007-08.

FIGURE 3: COMPANIES ALTERING THE NUMBER OF FOREIGN DIRECTORSIN PERCENTAGE

Companies Decreasingthe Number of

Foreign Directors9.3

Companies Increasingthe Number of


Companies Not Alteringthe Number of


1

2

3

4

Morediversity onthe Board

MoreIndependent

Directors

MorequalifiedDirectors

Among the companies surveyed, 22.5% alteredthe number of foreign directors on their board,while 15% increased the same. The averagenumber of foreign directors on a company’s boardhas increased from 2.10 in 2006-07 to 2.25 in2007-08, a rise of 7.1%.

CHALLENGES IN CHANGING BOARD STRUCTUREA well-defined board is vital to manage, directand control the conduct and operations of acompany. The survey indicates that directors view the lack of talented Independent Directorsas a major hindrance to changing a company’sboard structure.

FIGURE 4: IMPEDIMENTS IN CHANGING BOARD STRUCTUREFIGURES REPRESENT RATING (4=MAX IMPEDIMENT)

Agenda No 1 I 19Co-sponsor With support from

1

2

3

4

Absence of a process to select capableIndependent Directors

Lack of willingness on part of existingBoard members to change

Limited talent pool of Independent Directors

20092007

The survey indicates that

directors view the lack of

talented Independent Directors

as a major hindrance to

changing a company’s

board structure

20 I Agenda No. 1

Contrary to the findings presented in IBR - 2007,the absence of a well-defined selection processfor Independent Directors was highlighted as agreater impediment to change in the boardstructure, vis-à-vis their unwillingness to change.

AGE AND TENURE OF CEO/MD, CHAIRPERSONAND NON-EXECUTIVE DIRECTORSThe survey indicates that the average tenure ofNon-Executive Directors is generally less thanthat of CEO/MDs and Chairpersons. In 2007-08,the maximum tenure for which an IndependentDirector had been on a company's board was 21.8years, while the maximum tenure for whichCEO/MDs and Chairpersons had served on anyboard was 40.9 and 47.9 years respectively.

FIGURE 5: MINIMUM & MAXIMUM AGE FOR DIRECTORSIFIGURES REPRESENT AGE

The average age of Chairpersons, CEO/MDs andNon-Executive Directors has remained constantat 60, 52 and 61 years, respectively, over the pasttwo years. However, it has been observed that nottoo many young entrepreneurs were holdingthese positions during 2006-07 and 2007-08.

0

10

20

30

40

50

60

70

80

90

100

Maximum Minimum

Non-ExecutiveDirectors

CEO/MDChairperson

However, it has been observed

that not too many young

entrepreneurs were holding these

positions during 2006-07

and 2007-08

The survey revealed the following specifics for theyears 2006-07 and 2007-08;

Chairpersons below the age of 60 wasconstant at 50%CEO/MDs below 50 years of age decreased by 13.2%Non-Executive Directors below the age of 55 saw a drop of 11.8%

RISE IN THE NUMBER OF COMMITTEES ACROSS COMPANIESThe survey has indicated that corporate boards inIndia have an average of 4 committees percompany. In 2007-08, the minimum number ofcommittees per company was 2, while themaximum was 8. Clause 49 of the ListingAgreement makes it mandatory for companies tohave an Audit and Shareholders' GrievanceCommittee. As of 2007-08, 100% of thecompanies surveyed had Audit and Shareholder Committees.

FIGURE 6: SPREAD OF COMMITTEES ACROSS COMPANIESIN PERCENTAGE

In most cases, ensuring regulatory compliance is

Agenda No 1 I 21Co-sponsor With support from

0

10

20

30

40

50

60

70

80

90

100

2007-08

2006-07

CSR

Com

plia

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Fina

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Biz.

Revi

ew

Com

pens

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Shar

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’

Audi

t

The survey has indicated that

corporate boards in India have an

average of 4 committees

per company

22 I Agenda No. 1

one of the responsibilities of an Audit Committee.However, 7.8% of companies in India had aseparate Compliance Committee to ensure thesame. Additionally, 81.8% of the companiessurveyed had a Remuneration Committee, 29.9%had a Finance/Biz Review Committee and 11.7%had a Nomination Committee.

The number of ’Other Committees’ increased from33.8% in 2006-07 to 39% in 2007-08. OtherCommittees included Investment, StrategicBusiness Development, Risk & Fraud Monitoring,etc. In 2007-08, an average of 16.3% companies introduced new committees with 3 being the maximum.

COMPOSITION OF BOARD COMMITTEESBoard committees had an average of 3.5 directorsper committee in 2007-08. They also had aminimum of 3 and maximum of 9 directors percommittee in 2007-08. The average number ofNon-Executive Directors per committee was 2.5in 2007-08. The survey revealed that in most ofthe committees, the number of Non-Executivedirectors exceeded the number of Executivedirectors. Finance/Biz Review, and CSR are theonly committees which showed a differentcomposition. Non-Executive Directors formedmore than 70% of the Audit, Compensation andNomination Committees each.

FIGURE 7: COMPOSITION OF COMMITTEESIN PERCENTAGE

OPINION ON CLAUSE 49 & RELATED REGULATIONSOpinion on the value of Clause 49 was mixed.Over 54% of directors believed that Clause 49 ofthe Listing Agreement enhances shareholdervalue. Around 33% of directors considered theclause to be moderately useful as it only enforcesfinancial control through periodic audits.

0

10

20

30

40

50

60

70

80

90

100

Non–ExecutiveExecutive

CSR

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FIGURE 8: OPINION ON CLAUSE 49IN PERCENTAGE

A majority of the directors are highly involved inensuring compliance with regulations, such asClause 49, SEBI Corporate Governance Code andListing Agreements. On an average they rated aboard’s involvement in such activities at 3.69 ona scale of 4.

INCREASING NUMBER OF COMPANIESPROVIDING D&O INSURANCEThe number of companies providing D&Oinsurance increased from 69% in 2006-07 to76% in 2007-08. Conversely, the averagepremium paid by companies declined from INR23.56 lakhs to INR 19.12 lakhs over the sameperiod. Similar trends were reported in the IBR - 2007.


Extremely useful;enhances

shareholder value54.1

Moderately useful;only financial control

33.3

An irritant;does notadd value

8.3

Only 45% of directors indicated that

their companies provide financials in

international GAAP where Indian

standards vary

AGENDA NO. 2DISCIPLINE & TRANSPARENCY

Companies that aim to attract investments andmaintain shareholder confidence are constantlyfocused on building a sustainable business model.With a goal of ensuring transparency, companiesshould focus on disclosing all required detailsabout their operations. Information pertaining toa company's board structure, governance andaudit mechanisms, financials etc. should be madeavailable in the public domain.

FINANCIAL DISCLOSURELaws determine the timeline and format for thedeclaration of a company’s financial statements.Presently, an Indian corporate entity is requiredto present quarterly and annual financials inIndian GAAP. Owing to the diverse and often,international nature of the investor community,companies may also be required to prepare theirfinancial statements as per international GAAP.

FIGURE 9: ACCOUNTING STANDARDS FOLLOWED IN PERCENTAGE


Only Indian GAAP55

International &Indian GAAP

45

With a goal of ensuring

transparency, companies should

focus on disclosing all required

details about their operations

26 I Agenda No. 2

Only 45% of directors indicated that theircompanies provide financials in internationalGAAP where Indian standards vary. However, withIndia scheduled to adopt the InternationalFinancial Reporting Standards (IFRS) by the year2011, this issue is expected to be resolved.Directors have rated the representation ofaccounts and financial statements in a company’s annual report at 3.68 on a scale of 4.

VIRTUAL VISIBILITYThe penetration of the Internet has increasedmanifold over the past few years. Retail andinstitutional investors are basing their investmentdecisions on information available in the onlinespace. The online space includes the informationavailable on a company’s website, its annualreports, analyst views and the financial media.Consequently, it is important that a disciplinedapproach be taken towards the declaration ofrelevant information on a company’s website. This information constitutes company financials,operating and governance structures, strategicinitiatives and CSR activities.

Clause 49 of the Listing Agreement stipulatesthat quarterly results and presentations made bya company be displayed on its website, and/or bemade available to the stock exchange on whichthey are listed. With more Indian corporationsgoing global, a company’s website is the ideallocation to display information pertaining to its practices. The clause also requires thatcompanies present a corporate governancestatement in their annual reports.

Directors have rated the

representation of accounts and

financial statements in a

company’s annual report at

3.68 on a scale of 4

ACCESSIBILITY OF SENIOR MANAGEMENTAnalysts and company watchers generally havequeries to ask of the senior management,especially when results are declared. Mostsurveyed directors believed that seniormanagement was adequately accessible toanalysts after the announcement of results.

Over 70% of directors also believe that the seniormanagement readily shares information throughopen discussions on risk/return in investormeetings. They indicated that the managementhelps guide market expectations aboutfundamentals in the right direction.

Increasing or maintaining adequate levels ofinformation in the open market helpsanalysts/third party rating agencies inestablishing the right valuations for a company.This in return helps build investor and market confidence in the company’s management and the way in which it performsits day-to-day operations.


There is a nascent, albeit

growing demand for Indian boards

to be more open to self

evaluation/third party reviews

AGENDA NO. 3BOARD EFFECTIVENESS

Boards are meant to act as governancemechanisms that guide the functioning of acompany’s operations. A company’s board hasresponsibilities that include the monitoring ofbusiness and operating performance, theestablishment of financial standards, ensuringcompliance, guiding the management, andreviewing management performance. As theseissues are key to the operations of a company itis imperative that a company’s board is effectiveat executing their responsibilities.

MONITORING PERFORMANCE: A BOARD PRIORITYFor the second time in a row, the IBR surveyindicates that monitoring of business andoperating performance has emerged as the topmost priority of the board. Other objectives thatare high on the priority list include ensuringoverall corporate compliance in addition toestablishing and monitoring financial standards.In comparison to the results published in IBR–2007, establishing board structure andresponsibility has now moved up the priority list.

FIGURE 10: PRIORITIES OF THE BOARDFIGURES REPRESENT RATING (4=VERY CRITICAL )

Directors believe that boards accord relatively lowpriority to many key issues. These issues includeguiding leadership development and successionplanning, selection of board members and seniormanagement, and setting CEO objectives andreviewing performance. In such a scenario, it isdifficult to ascertain how boards relate to anddeal with such issues as they are vital to theoperations of a company.

REGULATORY LAWS ARE EFFECTIVEThe survey indicates that directors believe thatthey are most effective in ensuring compliancewith regulations, which figures second on theirpriority list. In most of the other areas, theranking for effectiveness coincide with the


1

2

3

4

Management of company risks

Guiding shareholder information and communication

Ensuring overall corporate compliance

Setting CEO objectives and reviewing performance

Guiding leadership development and succession planning

Selection of Board members and senior management

Establishing Board structure and responsibility

Establishing and monitoring financial standards

Monitoring business and operating performance

2009'2007'

30 I Agenda No. 3

priority of the directors. Other areas wheredirectors view the board as being relatively moreeffective include monitoring of business andoperating performance, as well as establishingand maintaining financial standards.

FIGURE 11: BOARD EFFECTIVENESS RATINGSFIGURES REPRESENT RATINGS (4=MOST EFFECTIVE)

In comparison to the last survey, boards haveshown maximum improvement in ensuring overall corporate compliance and managingcompany risk.

IMPEDIMENTS TO MONITORING BUSINESS PERFORMANCE The directors surveyed are of the view that thereare several major impediments to monitoring business performance. Some of the key issues highlighted are:

1

2

3

4

Management of company risks

Guiding shareholder information and communication

Ensuring overall corporate compliance

Setting CEO objectives and reviewing performance

Guiding leadership development and succession planning

Selection of Board members and senior management

Establishing Board structure and responsibility

Establishing and monitoring financial standards

Monitoring business and operating performance

20092007

In comparison to the last

survey, boards have shown

maximum improvement in

ensuring overall corporate

compliance and managing

company risk

Lack of adequate time devoted towards Board responsibilities Lack of tools/processes to provide earlywarning signs for situations that mightaffect performance Inadequate information from third partysources to help monitor performanceAdditionally, several of them mentioned thatit would be preferable to have separatemeetings with senior management

On the positive side, they were relatively pleasedwith their company’s board culture and the capabilities of its members.

FIGURE 12: IMPEDIMENTS TO MONITORINGBUSINESS PERFORMANCEFIGURES REPRESENT RATINGS (4=GREATEST IMPEDIMENT)

TOOLS FOR MONITORING PERFORMANCEMost directors rely largely on managementreports for monitoring board performance.Directors base most of their decisions on thesereports which are provided to them only a fewdays prior to a board meeting or just a few hoursbefore the meeting commences. The survey indicates that only 52% of directors heldinformal discussions with management to track acompany’s performance. Unlike in developedmarkets, the use of third party reports andstakeholder reviews as a source for performanceevaluation is relatively low at 22%. This can leadto Independent Directors getting blindsided onoccasion, and is a major risk.

FIGURE 13: TOOLS FOR MONITORING PERFORMANCE IN PERCENTAGE


1

2

3

4

Lack of capabilities within the director group

Directors lack sufficient time to devote toBoard responsibilities

Absence of discussions with senior management

Lack of tools/processes to provide early warning signs

Willingness of directors to change

Inadequate company information from 3rd party sources

Lack of transparent and timely informationfrom the company

Board culture

2009

0

20

40

60

80

100

3rd Party reports and stakeholder views

Informal management discussions

Electronic dashboards

Management reports

2009'

32 I Agenda No. 3

NEED FOR THIRD PARTY RATINGSThird party ratings and analyst views can be usedas independent barometers for measuring acompany’s performance. This is needed, especiallyin India, where a majority of companies arepromoter owned and an independent ratificationwill only add credibility to the company’sevaluation process and governance practices.

S&P (Standard & Poors) and Moody’s InvestorServices are well-known rating agencies whoseIndian affiliates, CRISIL and ICRA, providegovernance rating services. They, along with CARE(Credit Analysis & Research Ltd.), have rated over50 Indian firms who had approached them to gettheir corporate governance systems evaluated.Infosys Technologies is one such company thathas been highly rated by both ICRA and CRISIL.However, it is important to note that such ratingscan only be used as an indicator to a company'scorporate governance systems and cannot beviewed in isolation.

Ownership and board structure, managementprocesses and governance structure, relationshipwith the stakeholders, transparency anddisclosures, financials and ethical practices aresome of the key factors considered while rating acompany’s Corporate Governance system.

THE NEED FOR A PROBING ANDINTROSPECTIVE BOARD CULTUREThere is a nascent, albeit growing demand forIndian boards to be more open to selfevaluation/third party reviews. Directors haveidentified the need to establish a boardevaluation process as an important criterion thatwill help improve board performance.

Board evaluations help a company's board toreview the performance of both the managementand the board as a whole. It also helps identifyimportant issues that may have been placed on

Third party ratings and analyst

views can be used as independent

barometers for measuring a

company’s performance

the backburner. This aligns a board to issues thatneed attention, thereby increasing effectiveness.Such evaluations are a key requirement forcompanies listed on the New York StockExchange as well as those that are registeredunder the Combined Code in the UK.

Even though a board may feel that it isfunctioning well, it is important to translate thatinto perception. The survey shows that mostdirectors believe that a board's effectiveness canbe improved by conducting a self-evaluation ofperformance at regular intervals as well asindependent evaluation via third party sources.

FIGURE 14: CHANGES TO IMPROVE BOARD PERFORMANCEFIGURES REPRESENT RATINGS (4=MOST NEEDED)

FREQUENCY OF BOARD EVALUATIONSAnnual board evaluations are a part of goodcorporate governance practices and many leadingcorporations across the world rely on externalconsultants for the assessment. The need for anincrease in board evaluations has been furthersubstantiated by the results of the survey.

FIGURE 15: BOARD EVALUATION FREQUENCYIN PERCENTAGE

With respect to the frequency of boardevaluations, 60% of directors said that theirboards do not evaluate their own performance. Of the remaining, 35% of directors confirmedthat their boards perform an annual evaluationwhile 5% said that they evaluate theirperformance every two years. However, it isimportant to note that a majority of the boardevaluations are done via self-assessment and notvia third party consultants.


1

2

3

4

Improve calibre of individual directors

Establish processes for Board’s evaluation

Improve management support to probe concerns

Develop a more active/probing Board culture

Differentiate director compensation byresponsibility and risk

Increase director compensation

Increase opportunities to shape meeting agendas

Change Board meeting requirements

Separate CEO and Chair positions

2009

0

10

20

30

40

50

60

70

Rarely/NeverAnnuallyEvery 2 Years

2009'

Over 82% of the directors are

of the opinion that the roles

and responsibilities for

Non-Executive Directors are not

clearly defined and documented

AGENDA NO. 4ACCOUNTABILITY & RESPONSIBILITY

Defining directors’ roles and responsibilities helpsincrease their efficiency. It also indicates whatshareholders can expect from their directors. Intimes of crisis, it is the trust built betweendirectors and shareholders that could help thecompany wade through difficult times.

NO CLARITY ON PERFORMANCE REQUIREMENTSOver 82% of directors are of the opinion that theroles and responsibilities for Non-ExecutiveDirectors are not clearly defined and documented.In the survey held in 2007, this number stood at37.5%. This indicates a stark rise in the numberof directors not knowing what is expected ofthem, as a part of a company’s board.

FIGURE 16: DIRECTORIAL ROLES & RESPONSIBILITIESIN PERCENTAGE

Some of the roles & responsibilities for directors as specified by companies across the globe include:

The dedication of time, effort and intellectualknowledge to the boardTo provide strategic guidance and thedevelopment of business plansEnsuring the implementation of corporategovernance practicesTo act in the interest of shareholders bymonitoring and evaluating performance.

INCREASE IN DEMAND FOR CEO/MD’S AS DIRECTORSThere was a 17.9% increase in CEO/MDs whoheld external Non-Executive board positions in2007-08, (over 2006-07). This can be attributedto a spurt in demand for directors who have anentrepreneurial/managerial background. On anaverage, CEO/MDs sat on 6.33 boards in 2007-08.In contrast, the average Chairperson sat on 8boards in 2007-08, representing an increase of9.1% over the previous year. Non-ExecutiveDirectors sit on an average 6 boards and this hasremained flat over the past 2 years.


0

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30

40

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80

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20092007

Directors saying that Roles & Responsibilities are Not Defined

36 I Agenda No. 4

FIGURE 17: DIRECTOR REPRESENTATION ONEXTERNAL BOARDSFIGURES REPRESENT NUMBER OF EXTERNAL BOARDS

A SYSTEMATIC APPROACH TO PROBLEM SOLVINGThe survey highlighted numerous areas which stillneed to gain more attention in terms of having asystematic approach to problem solving. Theseinclude, succession planning, CSR, strategicplanning and M&A and risk management. Ingeneral, directors are more focused on issuessuch as statutory compliance, accounts, budgetsand risk management. The focus on statutorycompliance can be credited to Clause 49 whichstipulates that Independent Directors periodicallyreview legal compliance reports prepared by their company.

0

1

2

3

4

5

6

7

8

9

2007-082006-07

Non ExecutiveDirectors

CEO/MDChairperson

In general, directors are more

focussed on issues such as

statutory compliance, accounts,

budgets and risk management

FIGURE 18: PLANNED APPROACH TO PROBLEM SOLVINGFIGURES REPRESENT RATINGS (4=MOST ADDRESSED)

BOARD/STRATEGY MEETINGSIndia Inc. has seen a significant increase in thenumber of strategic mergers, acquisitions andinvestments over the past few years. In retrospect, this was one of the key drivers forthe rise in the number of board/strategicmeetings held during 2006-07 and 2007-08. Aminimum of 4 board meetings were held in theyear 2007-08 while the maximum was 15.Similarly, the maximum number ofstrategy/business review meetings where Non-Executive Directors were invited, was 9 in 2006-07 while this number stood at 12 in 2007-08.

Over 90% of directors said that documentsrelated to issues which are to be discussed areprovided to them before meetings. This indicatesthat companies provide directors with thenecessary information to enable them toeffectively contribute at board meetings.Additionally, the concept of Non-ExecutiveDirectors meeting regularly in the absence of themanagement is yet to catch on within Indianboards. This is considered very essential in thewest. Only 34.7% of directors confirm that thispractice is being followed in India.

FIGURE 19: TIME SPENT ON BOARDSIN PERCENTAGE

According to the survey, 87% of directors saidthat there was an increase in the time they haveinvested on boards. Of these, 48% said that therewas a moderate increase and 39% said that therewas a significant increase in the time they invest.Ideally, an increase in the time spent by directorson the board should lead to an increase in itseffectiveness. The survey indicates that directorshave rated the effectiveness of the time spent oncompany boards at 3.19 on a scale of 4, inmeeting expectations.


1

2

3

4

CSR

Impact of Accounting Standards and Policies

Governance Structure of Subsidiary andAssociate Companies

Statutory Compliance

Internal Controls & Checks

Risk Management

Raising of Resources

Capital and Revenue Budgets

Strategic Plans & M/A

Talent & Compensation Structure

Succession Planning

2009'

0

10

20

30

40

50

60

No increase in time invested

Moderate increase in time invested

Significant increase in time invested

2009

The periodic rotation of committee

members, which could ensure the

committee’s independent

functioning, is not followed in

72% of the cases

AGENDA NO. 5INDEPENDENCE

Laws and regulations are designed to ensure theindependent functioning of companies. Theimpending Companies Bill, 2008 and Clause 49 ofthe Listing Agreement make certain thatcorporate boards are empowered to question andprobe the functioning of a company’s operations.This will be achieved by strengthening the role ofaudit committees and ensuring the trueindependence of Independent Directors on acompany’s board.

NUMBER OF INDEPENDENT DIRECTORS INCREASESBringing about an optimum balance of Executiveand Non-Executive Directors was one of theobjectives of the amendments made in Clause 49.An increase in the number of IndependentDirectors, seen in the past few years, is areflection of the companies moving towards thisdirection. There was a 2.1% increase in thenumber of Independent Directors in 2007-08 over2006-07, while there was a correspondingincrease of 5.1% in 2005-06 over 2004-05.

FIGURE 20: COMPOSITION OF THE INDIAN BOARDIN PERCENTAGE


IndependentDirectors

50.6

NomineeDirectors

23.4

ExecutiveDirectors

25.9

There was a 2.1% increase in

the number of Independent

Directors in 2007-08 over

2006-07, while there was a

corresponding increase of 5.1%

in 2005-06 over 2004-05

40 I Agenda No. 5

Independent Directors formed 50.6% of theaverage board size which was 9.87 in 2007-08.Clause 49 states that if a board has a Non-Executive Chairman then the board shouldhave one third of its members as IndependentDirectors; a condition fulfilled by 98% of thesurvey respondents. Around 36% of thecompanies changed the number of IndependentDirectors present on their boards in 2007-08while it remained the same in 27.3% of the cases.

Approximately 78% of the companies had morethan 4 Independent Directors on their board, in2007-08. Of these, 67.6% had IndependentDirectors in the range of 4 to 7 directors, while10.4% companies had them in the range of 8 to10 directors. In 2007-08, the minimum number ofIndependent Directors on a company’s board was2 and the maximum 10.

FIGURE 21: NUMBER OF INDEPENDENT DIRECTORS IN A COMPANYIN PERCENTAGE

LEAD INDEPENDENT DIRECTORSA Lead Independent Director performs thefunctions of providing leadership and guidance toNon-Executive Directors and acts as an advisor tothe board chairperson. The role holds great valueespecially when a company’s board is led by anexecutive chairperson. In such cases, the positionholds authority that is similar to the functioningof the chairperson.

The practice of having a Lead IndependentDirector is prevalent in the USA with a majorityof the companies having such a position on theirboards. However, the concept of LeadIndependent Directors is yet to catch on in India.Only 8% of the respondents say that they hadsuch a position on their board.

DIRECTOR SELECTIONIn India, regulations do not define any formalprocedure for the selection of a director on acompany’s board. These regulations only state therequirements, while the procedure and selectionitself are left to the purview of a company’sboard. Generally, selection is carried out using thepersonal network of the CEO or the boardmembers. Of the companies that responded, 94% stated that they use the personal network oftheir CEO/Chairperson for the appointment ofnew directors on their board while 6% usedexecutive search firms.

INDEPENDENCE OF BOARD COMMITTEES The survey shows that 60% of board committeeswere chaired by Independent Directors in 2007-08. Clause 49 requires an Audit Committeeto be chaired by an Independent Director. Thesurvey results indicate that only 96% of thecompanies are compliant. The clause also clearlystipulates the composition, roles andresponsibilities of an Audit Committee.

0

10

20

30

40

50

60

70

80

Range of Independent Directors

8 to 104 to 71 to 3

FIGURE 22: PERCENTAGE OF INDEPENDENTCOMMITTEE CHAIRPERSONIN PERCENTAGE

An Audit Committee is entrusted with monitoringa company’s business and financial operations. As such it needs to be independent in terms of itsconstituents and operations. The directors thatresponded to the survey believe that theircompany’s auditors are entirely independent.

The survey has also revealed that over 80% ofdirectors believe that the Chairman of the AuditCommittee does have an opportunity toseparately discuss concerns with a company’ssenior management or its auditors. On the whole,directors are satisfied with the functioning of theAudit Committee across companies.

Unlike the Audit Committee, Clause 49 does notmake it mandatory for a company to have aCompensation Committee. However, to ensurethat some individuals do not receive preferentialtreatment, the clause prefers to have only Non-Executive Directors in the CompensationCommittee, a majority of whom should beindependent. The committee could also bechaired by an Independent Director; a conditionfollowed by all companies that participated in thesurvey and have a Compensation Committee.

The survey further reveals that the periodicrotation of committee members, which couldensure the committee’s independent functioning,is not followed in 72% of the cases.

INCREASE IN COMPANIES SEPARATING THEROLE OF CEO & CHAIRPERSONThe survey has revealed that there has been anincrease of 7.8% in the number of companiesthat have separated the roles of CEO &Chairperson, in 2007-08 over 2006-07. A similarpractice is also followed in the UK as they havefewer Independent Directors on their boards.However, in the USA, most of the companies have a common role for the position of CEO & Chairperson. These companies appointLead Independent Directors to balance thepresence of a common CEO & Chairperson ontheir board.

The number of companies having a separateposition for CEO & Chairperson was 68.8%, in2007-08. 60% of the companies surveyed hadNon-Executive Directors as Chairpersons.


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50

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2007-08'2006-07'

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Even though a majority of companies

are actively pursuing CSR agendas, the

function needs to get greater

representation at the board level

AGENDA NO 6FAIRNESS & CORPORATE SUSTAINABILITY

Fairness and sustainability is a responsibility thatextends beyond statutory compliance.Organisations are expected to work towardsimproving the quality of life for employees andtheir families, the local community and society atlarge. Today, the pursuit of societal goals relatedto sustainability of environmental protection,social justice and economics are as important ascorporate growth and profitability.

INDIA INC’S APPROACH TO CSRIndian companies have been involved in non-profit activities in effective, but limitedways. They have taken up charitable initiativeslike establishing trusts and foundations that buildhospitals and schools.

CSR activities are not additional costs butinvestments that can help enhance overallcorporate growth. A majority of the companiessurveyed indicated that they are involved in CSRactivities through a dedicated CSRindividual/team. In most cases, the CSR activitiesare reported to the board but do not undergo anyperformance review by a third party.

Around 65% of the companies surveyed as partof the study have a well-defined CSR agenda andhave published their activities on their website orin their annual report in 2007-08, a 14% increaseover the previous year.

FIGURE 23: CSR ACTIVITIES IN COMPANIESIN PERCENTAGE

BOARD INVOLVEMENT: A LONG WAY TO GO...Even though a majority of companies are activelypursuing CSR agendas, the function needs to getgreater representation at the board level. This isvisible in the survey results, which clearlyindicate that most boards do not have a CSRCommittee. During the last two years, thenumber of companies with CSR committees hasremained constant at 3.9%. CSR committees onaverage comprise 4 directors with equalrepresentations from Executive and Non-Executive Directors.

ISO'S CSR RATINGISO, the International Organization forStandardization, has decided to launch anInternational Standard to provide guidelines forsocial responsibility. Indian companies canachieve this certification to indicate theacceptability of their CSR contributions. Theguidance standard will be published as ISO 26000in 2010 and will be a voluntary exercise.


0

10

20

30

40

50

60

70

80

90

100

Performance Review of CSR Committees by Third Party

CSR Individual/Committees that report to the Board

Presence of Individual/Committee for CSR activities

2009'

ANNEXURE IREMUNERATION

Board remuneration at leading Indian

companies and multinationals, was

dramatically higher than companies

that fell in the lower quartile of

the survey

BOARD REMUNERATION ON THE RISE Major components of a director’s annualcompensation include Sitting Fees, ConsultancyFees, Profit Share and Commissions. In the caseof Non-Executive Chairpersons, a major part ofthe compensation is being paid in the form ofcommissions. The survey indicates that there iswide disparity in Director’s remuneration acrossIndian boards. Board remuneration at leadingIndian companies and multinationals, wasdramatically higher than companies that fell inthe lower quartile of the survey.

Additionally, this year, there is a marked increasein the remuneration being paid to Non-ExecutiveChairpersons. The total annual compensation forNon-Executive Chairpersons has increased fromINR 8.22 lakhs in 2006-07 to INR 12.4 lakhs in2007-08, a growth of 51%. This was primarilydriven by high commissions, on account ofexcellent corporate results in 2007-08.Approximately 25% of the companies gave outcommissions to Non-Executive Chairpersons in2007-08. The average annual compensationprovided to Non-Executive Chairpersons was inthe range of INR 20,000 to INR 101 lakhs in2007-08. The profit share given to Non-ExecutiveChairpersons by companies, in 2007-08, wasincreased by 9.5% over 2006-07.

FIGURE 24: AVERAGE ANNUAL COMPENSATION FOR NON-EXECUTIVE CHAIRPERSONSIN INR LAKHS

The survey showed that Non-Executive Directorsremuneration increased from INR 12.41 lakhs in2006-07 to INR 14.43 lakhs in 2007-08, a rise of16.3%. Approximately 30% of the companiesprovided Non-Executive Directors with a 45.2%increase in commission over the previous year.There was also a 7% increase in profit sharegiven to Non-Executive Directors in 2007-08 over2006 - 07. The annual compensation provided toNon-Executive Directors was in the range of INR15000 to INR 160.8 lakhs in 2007-08.

Annexure I I 45Co-sponsor With support from

0

2

4

6

8

10

12

14

16

18

Compensation (Including Commission)

Compensation (Excluding Commission)

2007-08'2006 -07'

46 I Annexure I

FIGURE 25: AVERAGE ANNUAL COMPENSATION FORNON-EXECUTIVE DIRECTORSIN INR LAKHS

INCREASE IN SITTING FEESThe average annual sitting fees for Non-ExecutiveChairpersons grew from INR 1.41 lakhs in 2006-07 to INR 1.48 lakhs in 2007-08, anincrease of 5%. On the other hand, there was anincrease of 19% in the average annual sitting feefor Non-Executive Directors. The average annualsitting fee for Non-Executive Directors was INR 2.89 lakhs in 2007-08 as compared to INR 2.43 lakhs in 2006-07.

0

2

4

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8

10

12

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16

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Compensation (Including Commission)

Compensation (Excluding Commission)

2007-082006-07

The average annual sitting fees

for Non-Executive Chairpersons

grew from INR 1.41 lakhs in

2006-07 to INR 1.48 lakhs in

2007-08, an increase of 5%

FIGURE 26: AVERAGE ANNUAL SITTING FEES FOR NON-EXECUTIVE DIRECTORSIN INR LAKHS

In 2007-08, 30% of the companies thatparticipated in the survey paid additionalremuneration to directors for committeemembership. This number stood at 27.3% in2006-07, showing an increase of 9.8%.

DIFFERENTIAL FEES FOR COMMITTEE MEMBERSHIPThere has been a decrease of 13.3% in thenumber of companies providing differential feesfor committee membership in 2007-08 over2006-07. This number fell from 19.7% in 2006-07 to 17.1% in 2007-08. The maximumdifferential fee was paid to members of the Audit Committee.

FIGURE 27: AVERAGE DIFFERENTIAL FEES ACROSS COMMITTEESIN INR THOUSANDS

The average differential fee given to Non-Executive Directors across committees wasINR 26,576 in 2007-08, an increase of 23.7%over INR 21,484 in 2006-07.

Annexure I I 47Co-sponsor With support from

0

5000

10000

15000

20000

25000

30000

2007-082006-07

Avg. Differential Fees Across Committeesfor Non-Executive Directors

1

2

3

4

2007-082006-07

Sitting Fees

Mr. Amal Ganguli

Mr. Anil Harish

Mr. Ashok Jhunjhunwala

Mr. Ashok Sekhar Ganguly

Mr. Atul C. Choksey

Mr. Bharat Doshi

Mr. Chaitan Maniar

Mr. Kantikumar R. Podar

Mr. Nabankar Gupta

Mr. Nadir Godrej

Mr. Nawshir Hoshang Mirza

Mr. Pradeep Bhandari

Mr. Pradeep Mallick

Mr. Pradeep Poddar

Mr. Priya Mohan Sinha

Mr. R. C. Bhargava

Mr. Shailesh V. Haribhakti

Mr. Shobhan Thakore

Mr. Subhash Chandra Bhargava

Mr. Surendra K. Tuteja

Mr. Suresh N. Talwar

Mr. Uday M. Chitale

Mr. Vimal Bhandari

Mr. Vindi Banga

48 I Acknowledgements

ACKNOWLEDGEMENTS

We would like to acknowledge and thank the belowmentioned individuals for their participation in this study.Without their consent and personal inputs the study wouldnever have been successful.


Acknowledgements I 49

ACC Ltd.Allied Digital Services Ltd.Areva T&D India Ltd.Bajaj Finserv Ltd.Bata India Ltd.Blue Dart Express Ltd.Bosch Chassis Systems India Ltd.Cadila Healthcare Ltd.DLF Ltd.Dynamatic Technologies Ltd.Ess Dee Aluminium Ltd.Geojit Financial Services Ltd.GlaxoSmithKline Pharmaceuticals Ltd.Great Eastern Shipping Company Ltd.HBL Power Systems Ltd.HDFC Bank Ltd.Hindustan Constructions Ltd.Hotel Leelaventure Ltd.ICI India Ltd.Indian Hotels Company Ltd.ING Vysya Bank Ltd.Jagran Prakashan Ltd.Jain Irrigation Systems Ltd.Jyoti Structures Ltd.Kirloskar Brothers Ltd.Lakshmi Machine Works Ltd.Alfa Laval India Ltd.Alok Industries Ltd.Bajaj Auto Ltd.Bajaj Holdings & Investment Ltd.Berger Paints India Ltd.Bombay Dyeing & Manufacturing Company Ltd.Brigade Enterprises Ltd.Chambal Fertilizers & Chemicals Ltd.DRS Warehousing (P) Ltd.Elecon Engineering Company Ltd.Firstsource Solutions Ltd.GHCL Ltd.GMR Infrastructure Ltd.GTL Infrastructure Ltd.

HCL Infosystems Ltd.HDFC Ltd.Honeywell Automation India Ltd.Housing Development & Infrastructure Ltd.India Infoline Ltd.Info Edge India Ltd.IVRCL Infrastructures & Projects LtdJai Corp Ltd.JSW Steel Ltd.Kansai Nerolac Paints Ltd.Kotak Mahindra Bank Ltd.Larsen & Toubro Ltd.Lupin Ltd.Maharashtra Seamless Ltd.Maruti Suzuki India Ltd.MindTree Ltd.Oracle Financial Services Software Ltd.Petronet LNG Ltd.Satyam Computer Services Ltd.Shiv Vani Gas & Oil Exploration Services Ltd.Tanla Solutions Ltd.Tata Steel Ltd.Tech Mahindra Ltd.Thermax Ltd.Unichem Laboratories Ltd.Wipro Ltd.Madhucon Projects Ltd.Mahindra & Mahindra Financial Services Ltd.Matrix Laboratories Ltd.Moser Baer IndiaOrchid Chemicals & Pharmaceuticals Ltd.Praj Industries Ltd.Sharekhan Ltd.Shopper’s Stop Ltd.Tata Motors Ltd.TCS Ltd.Techno Electric & Engineering company Ltd.Titagarh Wagons Ltd.United Breweries Ltd.Yes Bank Ltd.

Special thanks to the following companies and to those who wish to remainanonymous, for responding to our endless queries.

50 I

AZB & Partners ('the Firm') is one of the prominent lawfirms in India with offices in Mumbai, New Delhi andBangalore. The legal services rendered by the Firm coverthe corporate, commercial, regulatory, financial and tax planning aspects of modern businesses. The Firm has a strength of approximately 150 personnel, whichincludes an integrated team of approximately 85 legal professionals.

The Firm's domestic and international clients range fromprivately owned to publicly listed companies, includingFortune 500 entities, multinationals, investment banksand private equity funds. In the course of its practice,the Firm and its members have built close workingrelationships with specialists, agencies and authoritiesand several international law firms.

The Firm advises and assists its overseas clients inestablishing of and operating their business in India. TheFirm has extensively advised overseas investors in settingup an Indian presence through representative/liaison orbranch offices, joint ventures and subsidiary companies.The Firm has also extensively advised Indian corporatesin their overseas acquisitions.

The Firm has been involved in the field of mergers &acquisitions, capital markets, venture capital/privateequity funds, mutual funds, banking and finance,securities laws, litigation and arbitration, taxation,power projects, oil and gas, government disinvestments,real estate, infrastructure, information technology,telecommunications, intellectual property, businessprocess outsourcing (including call centres) and mediaand entertainment.

The Firm has been presented with the Indian NationalLaw Firm of the Year 2006 award at the InternationalFinancial Law Review Asian Awards 2006, which are anaccepted benchmark for legal practice in Asia.


I 51

The Confederation of Indian Industry (CII) works tocreate and sustain an environment conducive to thegrowth of industry in India, partnering industry andgovernment alike through advisory and consultativeprocesses.

CII is a non-government, not-for-profit, industry led andindustry managed organisation, playing a proactive rolein India's development process. Founded over 114 yearsago, it is India's premier business association, with adirect membership of over 7500 organisations from theprivate as well as public sectors, including SMEs andMNCs, and an indirect membership of over 83,000companies from around 380 national and regionalsectoral associations.

CII catalyses change by working closely with governmenton policy issues, enhancing efficiency, competitivenessand expanding business opportunities for industrythrough a range of specialised services and globallinkages. It also provides a platform for sectoralconsensus building and networking. Major emphasis islaid on projecting a positive image of business, assistingindustry to identify and execute corporate citizenshipprogrammes. Partnerships with over 120 NGOs acrossthe country carry forward our initiatives in integratedand inclusive development, which include health,education, livelihood, diversity management, skilldevelopment and water, to name a few.

Complementing this vision, CII's theme "India@75: TheEmerging Agenda", reflects its aspirational role tofacilitate the acceleration in India's transformation intoan economically vital, technologically innovative, sociallyand ethically vibrant global leader by year 2022.

With 64 offices in India, 9 overseas in Australia, Austria,China, France, Germany, Japan, Singapore, UK, USA andinstitutional partnerships with 211 counterpartorganisations in 87 countries, CII serves as a referencepoint for Indian industry and the international businesscommunity.

52 I

Hunt Partners is a leading boutique executive-searchfirm in Asia. The firm was founded in 2004 in Hong Kong& Mumbai, and it has since grown to establish 6 directoffices across 4 countries. Prior to coming together tostart the firm, the founders had successful careers ascorporate general managers, executive searchconsultants and entrepreneurs. The firm has witnessedrapid growth of people, offices, industry practices andrevenue, and is now repeatedly recognized within thetop-10 retained search firms.

Hunt Partners is a uniquely structured firm, being theonly reputed executive-level search firm operatingthrough an integrated structure of directly-owned &managed offices. As a true partnership, all the firm’sPartners have ownership and are committed to fosteringan environment that produces results and therefore asolid reputation.

Hunt Partners operates from principal offices inBangalore, Beijing, Hong Kong, Mumbai, Shanghai andSingapore. The firm also has an exclusive relationshipwith Paul Lawrence Associates, a Cleveland, OHheadquartered executive search firm. Future plansinclude continued expansion via new offices in South East Asia and West Asia, and a continuouslyexpanding partnership.


I 53

SAS is the leader in business analytics software andservices and the largest independent vendor in thebusiness intelligence market. Through innovativesolutions, SAS helps customers improve performance anddeliver value by making better decisions faster. With45,000 customers–including 96 of the top 100companies on the FORTUNE Global 500®–SAS developmore profitable relationships with customers andsuppliers; to enable better, more accurate and informeddecisions; and to drive organizations forward. SAS offersleading data integration, storage, analytics and businessintelligence applications within a comprehensivebusiness analytics framework. Since 1976, SAS has beengiving customers around the world THE POWER TOKNOW®.

SAS Institute (India) Pvt. Ltd. is a wholly ownedsubsidiary of SAS Institute Inc. SAS India operations areheadquartered in Mumbai with regional offices inBangalore, New Delhi and Pune with a structureencompassing Sales, Marketing and Professional Servicesi.e. Consulting, Training & Technical Support. SAS alsohas an R&D Centre in Pune, which is a key resource armfor the global SAS community and focuses on R&D andIndustry Intelligence Solutions Development.

SAS India was rated as the leader in Advanced Analyticsmarket in India as well as the most preferred vendor inBusiness Intelligence in 2008.

Fairness & Corporate Sustainability

Is the company actively involved with

Corporate Social Responsibility

(CSR) activities?

Regulatory ComplianceAre companies structuring their boards and as per regulatory norms? Are the new compliance requirements seen as an irritant?

Discipline & Transparency

Is the company transparent in its

operations and declares its

financials asper regulations?

Accountability & Responsibilities

What are the key

responsibilities of corporate

boards in India?

Board Effectiveness

How do corporate

boards rate themselves on effectiveness? How can board effectiveness be increased?

IndependenceIs the Indian corporate board independent in its functioning?

Board CompositionEffectiveness and

Best Practices

The India Board Report 2009

prep

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Corporate Address:412 B, Trade World, Kamala Mill, Mumbai - 400013, IndiaTel: +91 22 4340 1100Fax: +91 22 4340 1199

Corporate Address:23rd Floor, Express Towers,Nariman Point,Mumbai - 400 021,IndiaTel: +91 22 6639 6880Fax: +91 22 6639 6888

Corporate Address:Apeejay House, 4th Floor, 3 Dinshaw Wachha Road, Churchgate, Mumbai - 400 020IndiaTel: 91 22 6749 2222Fax: 91 22 6749 2299

Co-sponsor

Corporate Address:The Mantosh Sondhi Centre23 Institutional Area, Lodi Road,New Delhi - 110 003,IndiaTel: +91 11 24629994-7Fax: +91 11 24626149


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