various committees on corporate governance
TRANSCRIPT
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Various Committees on Corporate
Governance
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Various Committees onCorporate
Governance
With the CG reports of Adrian Cadbury in the United
Kingdom, Mervyn King in South Africa and
Kumarmangalam Birla in India the subject was
reduced to controlling shareholder operations andensure ethical practices in the financial sector.
From there, it has moved into other areas of the
organization but unfortunately restricts itself to themanagement and control of funds. The ambit of
significance of CG lies far beyond this.
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Cadbury Committee Report (1992)
The Cadbury Report, titled Financial Aspects of
Corporate Governance, is a report of a committeechaired by Sir. George Adrian Cadbury that sets outrecommendations on the arrangement of company
boards and accounting systems to mitigate corporate
governance risks and failures.
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Cadbury Committee Report (1992)
The 'Cadbury Committee' was set up in May1991 with a view to overcome the hugeproblems of scams and failures occurring inthe corporate sector worldwide in the late
1980s and the early 1990s. It was formed by the Financial Reporting
Council, the London Stock of Exchange andthe accountancy profession, with the main
aim of addressing the financial aspects ofCorporate Governance.
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Other objectives include :
i. uplift the low level of confidence both in financial
reporting and in the ability of auditors to provide thesafeguards which the users of company's reportssought and expected;
ii. review the structure, rights and roles of board of
directors, shareholders and auditors by making themmore effective and accountable;
iii. address various aspects of accountancy professionand make appropriate recommendations, wherever
necessary;iv. raise the standard of corporate governance; etc
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Keeping this in view, the Committee published its final
report on 1st December 1992.
The report was mainly divided into three parts:-I. Reviewing the structure and responsibilities of
Boards of Directors and recommending a Code of
Best Practice
I. Considering the role of Auditors and addressing a
number of recommendations to the Accountancy
Profession
II. Dealing with the Rights and Responsibilities of
Shareholders
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(I)Reviewing the
structure and
responsibilities of
Boards of Directors
and recommending aCode of Best Practice
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The boards of all listed companies
should comply with the Code of
Best Practice. All listed companies
should make a statement abouttheir compliance with the Code in
their report and accounts as well as
give reasons for any areas of non-
compliance.
The Code of Best Practice is
segregated into four sections and
their respective
recommendations are :-
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1. Board of Directors - The board should meetregularly, retain full and effective control over
the company and monitor the executivemanagement. There should be a clearly accepted
division of responsibilities at the head of acompany, which will ensure a balance of power
and authority, such that no one individual hasunfettered powers of decision. All directors
should have access to the advice and services ofthe company secretary, who is responsible to the
Board for ensuring that board procedures arefollowed and that applicable rules and
regulations are complied with.
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2. Non-Executive Directors - The non-executive
directors should bring an independent
judgement to bear on issues of strategy,
performance, resources, including key
appointments, and standards of conduct.
The majority of non-executive directorsshould be independent of management and
free from any business or other relationship
which could materially interfere with theexercise of their independent judgment,
apart from their fees and shareholding.
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3. Executive Directors
There should be full and clear disclosure
ofdirectors total emoluments and those
of the chairman and highest-paid
directors, including pension
contributions and stock options, in the
company's annual report, including
separate figures for salary and
performance-related pay.
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4. Financial Reporting and Controls - It is the duty
of the board to present a balanced and
understandable assessment of their companysposition, in reporting of financial statements,
for providing true and fair picture of financial
reporting. The directors should report that thebusiness is a going concern, with supporting
assumptions or qualifications as necessary. The
board should ensure that an objective and
professional relationship is maintained with the
auditors.
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(II)Considering the role ofAuditors and
addressing a numberof recommendationsto the Accountancy
Profession
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The Cadbury Committee recommended that aprofessional and objective relationship betweenthe board of directors and auditors should bemaintained, so as to provide to all a true and fairview of company's financial statements.Auditors' role is to design audit in such a manner
so that it provide a reasonable assurance thatthe financial statements are free of materialmisstatements. Further, there is a need todevelop more effective accounting standards,
which provide important reference pointsagainst which auditors exercise theirprofessional judgement.
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Secondly, every listed company shouldform an audit committee which gives the
auditors direct access to the non-executive members of the board. TheCommittee further recommended for a
regular rotation of audit partners toprevent unhealthy relationship betweenauditors and the management. It alsorecommended for disclosure of payments
to the auditors for non-audit services tothe company.
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The Accountancy Profession, in conjunction with
representatives of preparers of accounts, should take the
lead in:-
(i) developing a set of criteria for assessing
effectiveness;
(ii) developing guidance for companies on theform in which directors should report; and
(iii) developing guidance for auditors on
relevant audit procedures and the formin which auditors should report.
However, it should continue to improve its standards
and procedures.
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(III)
Dealing with the
Rights andResponsibilities of
Shareholders
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The Committee's report places particularemphasis on the need for fair and accuratereporting of a company's progress to its
shareholders, which is the responsibility of theboard.
It is encouraged that the institutionalinvestors/shareholders to make greater use of
their voting rights and take positive interest inthe board functioning. Both shareholders andboards of directors should consider how theeffectiveness of general meetings could be
increased as well as how to strengthen theaccountability of boards of directors toshareholders.
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KUMAR MANGALAM BIRLA COMMITTEE
REPORT
ONCORPORATE GOVERNANCE
Shri Kumar Mangalam Birla
Appointed by the SEBI
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It is almost a truism that the adequacy and thequality of corporate governance shape the
growth and the future of any capital market and
economy. The concept of corporate governance has been
attracting public attention for quite some time
in India. The topic is no longer confined to the
halls of academia and is increasingly finding
acceptance for its relevance and underlying
importance in the industry and capital markets.
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The Committees recommendations are not
based on any one model but are designed
for the Indian environment.
Corporate governance extends beyond
corporate law. Its fundamental objective is
not mere fulfillment of the requirements of
law but in ensuring commitment of the
board in managing the company in a
transparent manner for maximising long
term shareholder value.
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In early 1999, Securities and Exchange Board ofIndia (SEBI) had set up a committee under ShriKumar Mangalam Birla, member SEBI Board, topromote and raise the standards of good
corporate governance. The report submitted by the committee is the
first formal and comprehensive attempt to
evolve aCode of Corporate Governance', in thecontext of prevailing conditions of governance inIndian companies, as well as the state of capital
markets.
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The Committee's terms of the reference were to:
1) suggest suitable amendments to the listingagreement executed by the stock exchangeswith the companies and any other
measures to improve the standards ofcorporate governance in the listedcompanies, in areas such as continuousdisclosure of material information, both
financial and non-financial, manner andfrequency of such disclosures,responsibilities of independent and outsidedirectors;
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The Committee's terms of the reference
were to:
2) draft a code of corporate
best practices; and
3) suggest safeguards to be
instituted within the
companies to deal with
insider information and
insider trading.
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The primary objective of the committee wasto view corporate governance from the
perspective of the investors and shareholdersand to prepare a Code' to suit the Indiancorporate environment.
The committee had identified theShareholders, the Board of Directors and theManagement as the three key constituentsof corporate governance and attempted to
identify in respect of each of theseconstituents, their roles and responsibilitiesas also their rights in the context of goodcorporate governance.
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Corporate governance has several claimants
shareholders and other stakeholders -
which include suppliers, customers, creditors,and the bankers, the employees of the
company, the government and the society at
large. The Report had been prepared by the
committee, keeping in view primarily the
interests of a particular class of stakeholders,
namely, the shareholders, who together with
the investors form the principal constituency
of SEBI while not ignoring the needs of other
stakeholders
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Mandatory and non-mandatory
recommendations
The committee divided the recommendationsinto two categories, namely, mandatory andnon- mandatory. The recommendations which
are absolutely essential for corporategovernance can be defined with precision andwhich can be enforced through the amendmentof the listing agreement could be classified as
mandatory. Others, which are either desirableor which may require change of laws, may, forthe time being, be classified as non-mandatory.
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Mandatory Recommendations:
Applies To Listed Companies With Paid UpCapital Of Rs.3 Crore And Above
Composition Of Board Of Directors Optimum Combination Of Executive & Non-Executive Directors
Audit Committee With 3 IndependentDirectors with One Having Financial and
Accounting Knowledge. Remuneration Committee
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Board Procedures At least 4 Meetings Of The BoardIn A Year With Maximum Gap Of 4 Months Between 2
Meetings. To Review Operational Plans, Capital
Budgets, Quarterly Results, Minutes Of Committee's
Meeting. Director Shall Not Be A Member Of MoreThan 10 Committee And Shall Not Act As Chairman Of
More Than 5 Committees Across All Companies
Management Discussion And Analysis ReportCovering Industry Structure, Opportunities, Threats,
Risks, Outlook, Internal Control System
Information Sharing With Shareholders
Mandatory Recommendations:
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Non-Mandatory Recommendations:
Role Of Chairman
Remuneration Committee Of Board Shareholders' Right For Receiving Half Yearly
Financial Performance Postal Ballot Covering
Critical Matters Like Alteration InMemorandum Etc
Sale Of Whole Or Substantial Part Of TheUndertaking
Corporate Restructuring
Further Issue Of Capital
Venturing Into New Businesses
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As per the committee, the recommendationsshould be made applicable to the listedcompanies, their directors, management,
employees and professionals associated with suchcompanies, in accordance with the time tableproposed in the schedule given later in thissection. Compliance with the code should be bothin letter and spirit and should always be in amanner that gives precedence to substance overform.
The ultimate responsibility for putting therecommendations into practice lies directly withthe board of directors and the management of thecompany.
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The recommendations will apply to all the
listed private and public sector companies, in
accordance with the schedule ofimplementation. As for listed entities, which
are not companies, but body corporates (e.g.
private and public sector banks, financial
institutions, insurance companies etc.)
incorporated under other statutes, the
recommendations will apply to the extent
that they do not violate their respectivestatutes, and guidelines or directives issued by
the relevant regulatory authorities .
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The Committee recognizes that
compliance with the recommendations
would involve restructuring the existingboards of companies. It also recognizes
that some companies, especially the
smaller ones, may have difficulty inimmediately complying with these
conditions.
The recommendations were implementedthrough Clause 49 of the Listing
Agreements, in a phased manner by SEBI.